Should you settle a claim early to restrict costs?

Litigation is a very expensive way of resolving disputes and it is not uncommon for the cost of issuing, or defending, a claim to exceed the damages. One way of trying to limit your exposure to costs is to use Part 36 of the Civil Procedure Rules.

Under this rule one party makes a formal without prejudice offer to the other party to settle the dispute. It can be made at any time, whether or not proceedings have been issued. If the offer is accepted, the defendant is required to pay the claimant’s costs up to the date of acceptance. However if an offer is not accepted you should consider the cost consequences bulleted below.

Note that costs are awarded on either a standard or an indemnity basis. In the case of the former, the party receiving their costs must prove the reasonableness and proportionality of the amount claimed. In the case of the latter, there is no requirement for the costs to be proportionate, which means that it is for the paying party to show that the costs claimed are unreasonable.

• The claimant succeeds but fails to beat his own offer – the claimant is awarded costs on the standard basis
• The claimant equals or beats his own offer – from the expiry of the relevant period the claimant is likely to be awarded interest on the whole or part of the sum awarded to him; costs on the indemnity basis; interest on those costs and (as a penalty) an additional percentage of the amount awarded
• The claimant loses – the claimant pays the defendant’s costs on the standard basis plus interest from expiry of the relevant period until judgement
• The claimant beats the defendant’s offer – the claimant is awarded costs on the standard basis
• The claimant fails to beat the defendant’s offer – the defendant pays the claimant’s costs on the standard basis up to the expiry of the offer; thereafter the claimant pays the defendant’s costs on the standard basis plus interest
• The claimant loses at trial – the defendant is awarded costs on the standard basis plus interest from the expiry of the relevant period until judgement

For the defendant in particular, where there is a concern over liability, and in order to protect their position on costs, it is important to put forward a reasonable offer to settle the claim in accordance with Part 36 as soon as possible.