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Part 36 Offers in the IPEC: Indemnity Costs Trump Scale Costs

In the recent decision of Phonographic Performance Ltd v Hagan t/a The Brent Tavern & Ors [2016] EWHC 3076 (IPEC), HHJ Hacon in the Intellectual Property Enterprise Court (IPEC) held that neither the stage costs, as set out in Table A in Section IV of Practice Direction 45, nor the overall cost cap set out in CPR 45.31(1), displace the rules relating to Part 36 Offers.

In the recent decision of Phonographic Performance Ltd v Hagan t/a The Brent Tavern & Ors [2016] EWHC 3076 (IPEC), HHJ Hacon in the Intellectual Property Enterprise Court (IPEC) held that neither the stage costs, as set out in Table A in Section IV of Practice Direction 45, nor the overall cost cap set out in CPR 45.31(1), displace the rules relating to Part 36 Offers.

Part 36 Offers

Either a claimant or defendant engaged in litigation can make an offer to their opponent to settle the whole or part of the claim, or any specific issue arising in the claim. In most instances, the offer is for the payment of a monetary sum. The offeror must be clear that the offer is being made under CPR 36, it must be in writing and must specify a period of 21 days within which the defendant will be liable for the claimant's costs if the offer is accepted. The offer may be made at any time by either party.

A Part 36 Offer is advantageous because it gives a tactical advantage to the offeree. Where the offer is accepted, the claimant is entitled to the costs of the proceedings, including pre-action costs, up to the date that notice of acceptance was served, to be assessed on the standard basis. Where the offer is rejected, CPR 36.17 states that:

  1. If the claimant fails to obtain a judgment at least as advantageous as a defendant's Part 36 Offer, the defendant can recover its costs from the date of expiry of the relevant period for accepting the offer on the standard basis and interest on those costs.

  2. If the claimant obtains a judgment at least as advantageous as their Part 36 Offer, the claimant can recover interest on the judgment at a rate not exceeding 10% above base rate, its costs from the date of expiry of the relevant period for accepting the offer on an indemnity basis and interest on those costs at a rate not exceeding 10% above base rate. Alternatively, the claimant may recover an additional award calculated as a percentage of the judgment (not exceeding £75,000).

As such, a Part 36 Offer can put significant pressure on the offeree to settle the claim due to the financial consequences of failing to beat the offer at trial.

Fixed Costs in the IPEC

CPR 45.31 states that, in the IPEC, the court will not order a party to pay their opponent's costs exceeding £50,000 for determination of a trial on liability and £25,000 for an inquiry as to damages or account of profits. In addition to this overall costs cap, the court will apply a maximum scale cost to each stage of the litigation process. The scale costs are set out in Table A and B at Section IV of Practice Direction 45. In addition to the scale costs, a party may recover court fees, costs relating to the enforcement of a court order or wasted costs as a result of their opponent's conduct.

The cost of litigating in the IPEC will nearly always exceed the scale costs for each stage and the overall costs cap. However, the rules provide a litigant with certainty as to their maximum exposure to costs liability should their case fail. As a result, the IPEC has proved highly valuable for giving parties access to expert intellectual property judges and certainty by preventing the recovery of unwieldy legal costs.

Facts of the case

The claimant issued proceedings in 2012 for infringement of the copyright subsisting in sound recordings. The defendant was playing the relevant sound recordings in two bars in North London, The Lower Ground and The Brent Tavern, without a licence to do so. There were issues as to the defendant's true identity and, following various unless orders made by the court, the defendant's Defence was struck out. HHJ Hacon made an Order for an inquiry as to damages and injunctive relief against the defendant.

At the damages inquiry, it was revealed that the claimant had made a Part 36 Offer. It further transpired that the defendant had fabricated an email accepting that offer, so as to present it to the court at the hearing. The defendant was ordered to pay £13,783.12 in damages and £44,587.01 as an interim payment of costs owed to the claimant.

The issues of interest on these sums and additional damages flowing from the Part 36 Offer were adjourned whilst the defendant exhausted his routes of appeal.

The claimant's Part 36 Offer was made on 2 October 2013, meaning that the CPRs predating 06 April 2015 applied (formerly CPR 36.14). The claimant had offered to settle the claim on the basis that (1) the defendant agreed to an injunction in the same form as that sought in the Particulars of Claim and (2) the defendant paid the sum of £5,000 in respect of damages, additional damages and interest. The claimant had clearly obtained a more advantageous judgment at trial.

Judgment

HHJ Hacon awarded the claimant an additional £2,000 for flagrancy under s.97 of the Copyright, Designs and Patents Act 1988.

HHJ Hacon turned to the tension between CPR 36 and the IPEC costs cap in CPR 45 and considered the recent decision of the Court of Appeal in Broadhurst v Tan [2016] EWCA Civ 94, a case relating to fixed costs in personal injury cases. There is no express provision in CPR 36 for the costs consequences of a Part 36 Offer where Section IV of CPR 45 applies. However, where the fixed costs regime in question is intended to prevail, CPR 36 expressly says so. Similarly, the Explanatory Memorandum which serves as an aid to construing CPR 36 states that where a claimant makes a successful Part 36 Offer, they are not limited to receiving their fixed costs.

As such, it was concluded that CPR 36.14 (now CPR 36.17) overrides CPR 45.31, including stage costs and the overall costs cap. HHJ Hacon awarded:

  1. Interest at 4% above base rate on the damages awarded from the expiry of the Part 36 Offer and at 2% above base rate prior to that date;

  2. Costs on an indemnity basis from the expiry of the Part 36 Offer outside the stage costs and overall costs cap;

  3. An additional award of 10% of the damages awarded;

  4. Costs on a standard basis prior to the expiry of the Part 36 Offer, subject to the stage costs but falling outside the overall cap due to the unreasonableness of the defendant in concealing his true identity; and

  5. Interest on non-indemnity costs at 2% above base rate. 

Comment

The ability to recover legal costs on an indemnity basis, rather than under the stage costs and costs cap, will have a significant effect on litigation strategy in the IPEC. Given that CPR 36.7 permits a Part 36 Offer to be made at any time, including before proceedings are issued, a claimant may effectively circumvent the fixed costs regime in its entirety by making a Part 36 Offer in their letter of claim. However, the rules do give the court discretion to consider the information available to the parties at the time the Part 36 Offer was made in making an order under CPR 36.17. A defendant offeror will benefit less from the decision, as the costs of a defendant's Part 36 Offer are assessed on a standard basis and will only be awarded where the claimant fails to beat the offer at trial.

In many intellectual property claims, injunctive relief to restrain future infringement is the most valuable remedy sought by the claimant, which can give the claimant significant bargaining power in pre-trial negotiations to settle. As such, it is less clear whether a claimant has obtained a judgment as advantageous as the Part 36 Offer, particularly where the wording of any order made by the court differs to that sought in Particulars of Claim or offered in the Part 36 Offer. Similarly, it is less clear whether a pecuniary award (whether damages or an account of profit) in a judgment is more or less advantageous than an undertaking not to infringe in the future contained in a Part 36 Offer.

The decision should increase the dialogue between parties so as to encourage settlement prior to trial. Often in IPEC proceedings litigants are aware that the successful party will be out of pocket, even after costs shifting, due to the cap. As a result, the prosecution of a claim does not always reflect the merits of the parties' respective cases. This decision provides litigants with a means of circumventing the default costs rules and, therefore, should be beneficial in focusing the parties' minds on the merits and overall value of the claim.

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