Knowing the value of your claim – rejecting offers and cost consequences (Blackpool Borough Council v VolkerFitzpatrick Limited & Ors)

In our previous blog (What is meant by "design life"?: Blackpool Borough Council v VolkerFitzpatrick Limited & Ors), we discussed issues arising from the case, in which Fieldfisher represented VolkerFitzpatrick (VFL), relating to design life.


  Re-cap of the facts and principle judgment

Blackpool Borough Council (Blackpool) engaged VFL to construct a new tram depot as a landmark building on the Blackpool seafront, under an amended NEC3 standard form design and build contract. The construction was completed in 2011. In 2015, a section of the roof detached during high winds.

Blackpool brought a claim against VFL for failing to meet design life requirements, contending that various elements of the tram depot were corroding prematurely. Blackpool said the design life of the tram depot should be 50 years, rather than 25 years as argued by VFL. The court disagreed with Blackpool and ruled in favour of VFL on this critical issue.

The High Court judgment, handed down on 15 June 2020, awarded Blackpool only 16% of its pleaded claim of £6.7 million for remedial works. A hearing was subsequently held on 14 July 2020 to deal with consequential matters, including the parties' respective liabilities for costs.

The Part 36 offer

VFL made a Part 36 Offer in August 2019, more than six months in advance of the scheduled trial. The offer of £750,000 covered elements of the claim valued by Blackpool at circa £6 million and was available for acceptance for over five months until it was withdrawn, having not been accepted by Blackpool, on 27 January 2020 shortly before trial.

One element of the claim covered by the Part 36 Offer was Blackpool's primary claim for replacement of cold formed secondary steelwork, which it claimed would cost approximately £3.2 million to replace on the basis of its primary case that the steelwork was required to meet a 50-year design life.
 
At the trial, the court awarded Blackpool approximately £631,000 (including on costs) for the five items covered by the offer.

A significant factor in the modest award was the court's rejection of Blackpool 's claim that the cold formed secondary steelwork was corroding prematurely and that it was required to meet a 50-year design life.
the Judge noted the modest difference between VFL's Part 36 Offer and the corresponding award for the claims covered by the offer, stating:

"it can be now seen from the principal judgment that with the benefit of hindsight the offer was extremely well judged because, in the context of a multi-million pound case, the offer was just under £120,000 more generous than the judgment for those five items.

I do not think it unfair to conclude, given the many decisions I had to make along the way to reach my individual awards for these items, that the defendant’s solicitors could not possibly have anticipated my decision on each of those issues so as to reach their offer figure by the same or even a similar approach. Instead the offer must have been made on the basis of a broad-brush gut instinct which proved to be an extremely impressive prediction of the eventual outcome."

The fact that the Part 36 Offer was withdrawn prior to trial meant that the automatic cost consequences of a claimant failing to beat a defendant's Part 36 Offer would not apply. The Judge, therefore, needed to consider the impact of the offer having regard to all the circumstances of the case in exercising his general discretion on costs under CPR Part 44.2.

Withdrawn Part 36 offer as a factor in determining cost liability

Under general principles, a successful party to litigation should recover its costs, save in cases where it  acted unreasonably or where the unsuccessful party has put its money where its mouth is by making a well-judged Part 36 Offer or without prejudice save as to costs (WPSATC) offer. 

Reviewing the outcome of the case, the Judge commented that Blackpool:

"failed to achieve anything like the amount it was inviting the court to award on its primary case and it failed completely on the cold formed components claim, which was the largest claim in money terms and which took the largest amount of time and effort both in relation to the expert evidence and at the trial itself, including the argument as to whether or not the contractual design life was 50 years or 25 years. 

It also failed substantially in money terms on the two other big-ticket items, the roof components claim and the wall cladding claim. Significant amounts of court time and overall cost were taken up on these issues". 

Notwithstanding this assessment of a relative lack of success, the Judge had no hesitation in determining that Blackpool should properly be regarded as the successful party.

Factors in Blackpool's favour in this regard were that it succeeded on six of the seven claims it advanced and objectively recovered a substantial sum, even though it was substantially less than the sum claimed. This may appear to be a surprising decision, but demonstrates the relatively low threshold to be met by a claimant in terms of defining whether or not it has been successful in litigation.

Having established that Blackpool was the successful party the question for the Judge was to consider whether, in applying his discretion under CPR Part 44.2, there should be any deviation from the principle that the successful party recovers its costs of the proceedings. A key factor in this was the impact of the withdrawn Part 36 Offer.

In a significant finding, the Judge criticised Blackpool for acting unreasonably in rejecting the Part 36 Offer when it was available for acceptance.

He also commented that there was no basis for thinking that the offer would have been accepted by Blackpool after its withdrawal. In terms of assessing reasonableness the Judge, having regard to the relevant authorities[1], determined the correct approach to be as follows:

1. the court must put itself into the position of the claimant at the time and not simply decide the case by reference to hindsight; but
2. the focus must be on the reasonableness of the refusal by reference to the facts and matters relevant to the merits of the claim as they ought reasonably to have appeared to the claimant at that time, not by reference to wider commercial factors.

As at August and September 2019, Blackpool was in a position to know, in light of its own investigations and testing results obtained jointly by experts pursuant to an agreed testing regime, that its case had been significantly weakened and there was, therefore, a real risk that it would not recover more than the offer at trial. Even after acquiring such crucial knowledge, Blackpool took a significant commercial risk by proceeding to trial rather than accepting VFL's Part 36 Offer.

Application to cost liability

Due to all of the above factors, the court ordered Blackpool to pay 80% of VFL's costs of the claim incurred from 6 September 2019, which was 21 days after service of the Part 36 Offer, up until the date of court judgment. This 20% deduction reflected the fact that the Part 36 Offer omitted elements of Blackpool's claims. 

In addition, Blackpool was ordered to pay, from the same date, costs incurred by Caunton, the subcontractor responsible for the cold formed secondary steelwork who had been joined as a party to the proceedings by VFL. VFL was responsible for 80% of Blackpool's costs and Caunton's costs incurred prior to 6 September 2019. 

On any view, Blackpool would have been substantially better off financially had VFL's Part 36 Offer been accepted in August 2019 and it had substantial information available to it for valuing the claim in August and September 2019. Instead, it appears to have gambled that it could beat VFL's offer. 

This course of action was clearly a significant commercial risk. The ultimate outcome demonstrates the importance of applying experience in risk analysis to focus on early and realistic assessments of claim value to inform strategy and the level of risk a party to litigation is willing to bear having regard to the very substantial costs generally incurred in multi-party TCC litigation.

In this case, Blackpool had a court approved cost budget of £2 million and probably incurred substantially more than that sum.  Assessing claim value is not always straightforward in advance of trial but getting it wrong can be costly.

This article was authored by Fieldfisher construction partner David Thorne and trainee Yin Yee Ng who along with Legal Director Samantha Thompson, and associates Shannon Hellyer and Craig Longhurst, represented VolkerFitzpatrick.