In this post, Daniel Saul, an associate at CMS, comments on the UK Supreme Court’s decision in Ho v Adelekun  UKSC 43, an important decision on the scope of Qualified One-Way Costs Shifting.
The Supreme Court has allowed an appeal which determined that the ‘setting off’ of the costs payable to a defendant against costs owed to the claimant is a method of enforcement and therefore not within the intentions of Qualified One-Way Costs Shifting (‘QOCS’). This further restricts the avenues open to a defendant to recover costs awarded to it by the court.
QOCS came into force on 1 April 2013 as part of a host of changes implemented to try and curtail the rising cost of litigation, predominantly in relatively low value personal injury claims. QOCS meant that a defendant who successfully defended a claim brought by a claimant under a Conditional Fee Agreement dated post 1 April 2013 would only be able to recover costs from the claimant in specific circumstances, rather than receiving an automatic entitlement to its costs following a discontinuance or success at trial. The trade-off was that successful claimants were no longer entitled to a success fee on their base costs or recover the After the Event insurance premiums which were regularly taken out by claimants. It was considered that far more claims are successful than are not and the savings those unsuccessful defendants would see on not paying success fees would outweigh the costs which successful defendants could no longer recover.
Under QOCS, the intended avenue for costs recovery for a defendant would be an offset from damages and interest ordered to the be paid to the claimant under CPR 44.14. However, the courts developed the position to allow defendants to offset costs owed to them from costs they owed to the claimant. The Court of Appeal was at odds on whether offset in this way amounted to enforcement of the defendant’s costs. The Supreme Court therefore considered whether the true interpretation of QOCS was to constrain defendants so that only following an order for damages and costs could costs be offset.
The substantive matter involved a road traffic accident in respect of which Ms Adelekun accepted a Part 36 offer of £30,000 for her damages. However, a dispute arose as to whether fixed costs were payable under CPR 45 or whether this was a matter to which standard costs applied.
At first instance, the court found in favour of Ms Ho and awarded fixed costs. This decision was reversed on appeal but then subsequently overturned by the Court of Appeal on a further appeal, leaving fixed costs to be paid to Ms Adelekun and Ms Ho being awarded her costs of the appeal.
Decisions of the lower courts
It was agreed between the parties that as a personal injury claim this was a matter to which QOCS applied and as settlement of damages had taken place by way of Part 36 there was no ‘order for damages’ within the meaning of the QOCS regime. Following Cartwright v Venduct Engineering Ltd  EWCA Civ 1654 an order for damages and interest was necessary for a defendant to offset any costs it was owed under CPR 44.14 leaving no scope for Ms Ho to offset her owed costs from the damages payable.
Ms Ho therefore accepted that she could not recover her costs which were in excess of the fixed costs which she owed the claimant, £16,700, but asked the court to offset, under CPR 44.12, the fixed costs payable in relation to the substantive action from the significant costs she was owed in relation to the appeal. Noting Ms Ho accepted she could not recover costs in excess of £16,700, this would lead to no actual payment being made by either party in respect of costs.
The Court of Appeal found in favour of Ms Ho following its own decision in the unreported case of Howe v Motor Insurers’ Bureau  Costs LR 297 which found that set off is not a type of enforcement and as such was not impacted by QOCS. However, Sir Geoffrey Vos C, Newey and Males LJJ sitting in the Court of Appeal in this case indicated they were inclined to take the opposite view but considered they were bound by Howe. The Court of Appeal therefore gave permission to appeal to the Supreme Court on the set off availability issue.
Summary of Supreme Court’s findings
The Supreme Court allowed the appeal, determining that the set off of costs owed to the defendant as against costs owed to the claimant was a method of enforcement and so was contrary to the intention of QOCS. This followed a consideration of the construction of both CPR 44.12 and 44.14. Although neither amounted to a complete code, it was apparent to the Supreme Court that it was the clear intention of QOCS for defendants only to be able to set off costs owed to it as against the totality of damages and interest which have been awarded by the court. No such order was present in this case and accordingly Ms Ho had no order under which her appeal costs could be offset.
In making the decision the Supreme Court recognised the potentially adverse policy consequences of its determination. Finding in favour of the claimant would prevent a defendant (in a no court order for damages case) from recovering any costs which could lead to claimants’ taking weak or unmeritorious applications/points or unreasonably opposing meritorious points brought by defendants. In the alternate, finding for the defendant would deprive the claimant’s solicitor of costs incurred in parts of the case where it had been successful.
For this reason, the Supreme Court commented that it did not feel appropriately placed to comment upon the issue but had to reach a decision as permission for the appeal had been given. It recognised the decision may appear “counterintuitive and unfair”, but considered it had found the proper construction of QOCS as intended by the wording of the CPR and invited the CPR Committee to consider any imbalance to QOCS caused as a result of the decision.
The implications for defendants are stark, with their ability to recover any costs constrained even further against a backdrop of growing numbers of weak or unmeritorious claims.
Costs owed to defendants for successful interim applications can only be enforced against an order for damages and, not following settlement before trial, and not against costs owed to the claimant. Late acceptance of a Part 36 offer by a claimant will not lead to the defendant benefitting from a costs order which can be enforced, as there will be no order for damages.
Neither of these consequences are satisfactory for defendants. The former will limit the impact of actual or threatened applications by defendants, hindering sensible case management and matter progression. The latter arguably discourages claimants from accepting reasonable offers, knowing that they can apply costs pressure to the defendant to elicit higher offers and potentially accept the Part 36 offer at a later stage with only the limited consequence of not being able to recover the costs of the attempt to induce a higher offer. This would seem to go against the purpose of the CPR, by actively discouraging settlement and cooperation between the parties.
In addition to the existing encouragement to make sensible early Part 36 offers, defendants in PI claims where QOCS applies will now often be faced with the decision of whether to stick with their best offer and accept that the costs of trial will be incurred, or whether to increase the offer by the amount of the costs that would be incurred to see an earlier end to the claim. The knock-on effect for insurers funding claims in excess of any deductibles will be potential higher exposure from irrecoverable defence costs and higher damages payments if made to reach earlier resolution of the claim.
It remains to be seen whether the CPR Committee will accept the Supreme Court’s invitation to consider this issue further and make any revisions to the CPR.