It’s not over until the fat lady sings – Curtain call for Florence Foster Jenkins grapples with a thorny issue around cost caps

The operatic saga in Martin v Kogan couldn’t resist returning to the stage for a final curtain call, in Hacon J’s decision on costs. The court found itself grappling with a dilemma – should the costs caps applicable in the Intellectual Property Enterprise Court (IPEC) be disregarded if a successful Part 36 offer has been made?

The problem goes something like this: costs in IPEC are usually capped at £50,000. But if either party makes a settlement offer under Part 36 of the CPR and then goes on to obtain a more advantageous judgement at trial, the other party can be ordered to pay the offeror’s costs on an indemnity basis from the date on which the offer should have been accepted, plus interest on those costs and any sum in damages, and a further percentage uplift. That will very likely add up to a sum far in excess of £50,000. Should the cap be lifted in these circumstances?

If the cap always remains in place, there may be little motivation for a party to accept a settlement offer, and the incentives to settle out of court which the Part 36 regime provides would be very much reduced. On the other hand, if the cap can be lifted, parties could unexpectedly find themselves facing the risk of a much higher costs award than they had thought was on the cards when proceedings were commenced, and might even be put off commencing proceedings altogether. The certainty around costs which the cap provides has been key to the success of IPEC. There’s also a risk, as pointed out in the judgment, that this might be turned into a tactical weapon, allowing ‘a well-funded claimant with a weak case to put unfair pressure on a defendant by making a Part 36 offer. It forces the defendant to accept the offer rather than risk losing the benefit of the cap.’ (paragraph 21)

Hacon J has previously made a decision on the interplay between the IPEC cap and a Part 36 offer in Phonographic Performance Limited v Hagan [2016] EWHC 3076 (IPEC). In that decision, he decided that the rules on Part 36 offers should override the IPEC costs cap, and awarded costs on an indemnity basis. In this decision, Hacon J declined to reverse this judgment, but didn’t completely remove the costs cap, either.

Since Hagan, the Review of Civil Litigation Costs: Supplemental Report, Fixed Recoverable Costs has been published (‘the Jackson Supplemental Report’). In this, Jackson LJ suggested that in these circumstances, indemnity costs should be replaced with a percentage uplift of 30% or 40%. On the back of this report, a capped costs pilot scheme was launched in the London Circuit Commercial Court, coincidentally starting on the same day as the hearing on costs in this case. In the pilot scheme, a percentage uplift is applied, but there are still stage and overall caps. Hacon J suggested that it would be right to apply the same rules in IPEC. If that is the case, the usual result would be that the cap at each stage is raised by 25%, and the overall cap is raised to £62,500.

However, the pilot scheme is still in its early stages, and there is a long way to go before the recommendations set out in the report are likely to turn into anything concrete. As such, Hacon J fell back on the freedom which Part 36 provides for the court to exercise its discretion in order to avoid injustice. In this instance, the Claimants were awarded costs up to the normal IPEC cap of £50,000, and the Part 20 Defendants were separately awarded costs of just under £26,000.

It seems like we may have to wait for further reform following the Jackson Supplemental Report before the courts provide complete certainty on the interplay between Part 36 and the IPEC costs caps. As this decision leaves matters, it seems open to the court to retain the cap, remove it entirely, or apply a percentage uplift. It is at the court’s discretion to make a decision. Whilst the standard of decision making in IPEC is very high, and there’s no reason to expect that the court would ever make an unfair award of costs, this still leaves an element of uncertainty in the system, which can have a significant role in deterring parties from initiating proceedings, or create pressure to settle when a party might otherwise find themselves vindicated at trial.

However, the discussion of percentage uplifts in this decision perhaps suggests a direction of travel, and would seem to be a preferable middle ground between either always maintaining the cap, or removing it entirely. In a system where the costs cap could be increased but not removed altogether, parties would retain some degree of certainty as to the potential costs award that could be made, but there would still be some incentive for parties to settle.

More broadly, this decision highlights the role which cost and certainty have to play in litigation – not just the costs that can be awarded at the end of a case, but the overall sums which a party can pay throughout the whole proceeding. At Stobbs we like to think we do things differently, and our approach to providing clarity and certainty around costs applies to everything we do, including litigation. We understand that having certainty around costs is as important as overall spend. Get in touch to find out more.

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