Qualified One-Way Costs Shifting (QOCS) and “late” acceptance

The Court of Appeal recently handed down judgment in University Hospitals of Derby & Burton NHS Foundation Trust v Harrison [2022] EWCA Civ 1660.

The case concerns the proper application of the Qualified One-Way Costs Shifting (QOCS) regime to personal injury litigation where a claimant elects to accept a defendant’s CPR, Part 36 offer late, i.e. only after expiry of the offer’s “relevant period”.

In summary, the Court of Appeal held that:

• A claimant’s late acceptance of defendant’s CPR, Part 36 would not give rise to an order for damages and interest within the meaning of the QOCS regime;
• Consequently, a defendant was not entitled to set off its costs against the claimant’s damages despite the claimant’s late acceptance;
• Nonetheless, a claimant would not recover their own costs from expiry of an offer’s relevant period until late acceptance;

Defendants and their compensators may wish to now consider whether the facts of any individual case warrants a variation of existing CPR, Part 36 offers.

Qualified One-Way Costs Shifting (QOCS)

QOCS was introduced in April 2013 for personal injury and clinical negligence cases and intended to provide an overall net benefit to defendants 1]. The rationale was that the burden on defendants and their insurers, in terms of the recoverable success fees and After The Event (ATE) premiums, could be removed in exchange for defendants forgoing costs recovery against claimants where a personal injury claim was unsuccessful, albeit subject to a number of limited exceptions.

However, a defendant’s entitlement to recover costs was not entirely eliminated because the Ministry of Justice (MOJ) acknowledged there could otherwise be no constraints on claimants pursuing hopeless or dishonest claims and little incentive to settle. In order to ensure claimants had sufficient ‘skin in the game’, where a defendant had obtained a costs order in its favour, e.g. following trial, an interlocutory hearing or late acceptance of CPR, Part 36 offer, a claimant could still be liable for a defendant’s costs up to the aggregate amount of their damages.

As an illustration, if a claimant was awarded damages of £50,000 but the defendant’s costs were £75,000, the maximum that could be recovered from the claimant was £50,000, which would leave the claimant without any damages and the defendant with a £25,000 shortfall.

The QOCS rule(s), which were the subject of this appeal, are found at r. 44.14:

(1) Subject to rules 44.15 and 44.16, orders for costs made against a claimant may be enforced without the permission of the court but only to the extent that the aggregate amount in money terms of such orders does not exceed the aggregate amount in money terms of any orders for damages and interest made in favour of the claimant. 

The Court of Appeal’s judgment

In Harrison, the claimant accepted the defendant’s CPR, Part 36 offer almost two years after expiry of the relevant period. The settlement sum was c. 10% of the pleaded sum.

On the basis additional deductible amounts payable to the Compensation Recovery Unit (CRU) had accrued since the offer had been made, the claimant was required to obtain the court’s permission to accept the offer. In granting permission, the court made an order in terms that identified the total deductible amount payable to the CRU and the balance payable to the claimant. The defendant submitted this comprised an order for “damages and interest” within the meaning of r. 44.14, against which it was entitled it to set off some of its costs.

LJ Coulson, giving the judgment of the Court, held that the judge below in (a) granting permission for the offer to be accepted and (b) directing the amount of the deduction payable to CRU “was not carrying out any evaluation or assessment of what was due or to be paid. He was not, therefore, making an order for damages in favour of the claimant”. To find otherwise would be to elevate for over substance; instead, the court was simply recording the parties’ agreement.

The Court of Appeal held, in obiter comments, that the following were also unlikely to be considered “orders for damages and interest”, therefore, unlikely to entitle a defendant to exercise a right of set off: 

1. Approval hearings – r.36.14(2)
2. Orders for Periodical Payments – r.36.18(7)
3. Disputes over CRU – r.36.22(9)(b)
4. Judgment where, following acceptance of a CPR, Part 36 offer, payment is not made within 14 days – r.36.14(7)

What does this mean for you?

Harrison turns accepted convention about what comprises an order for “damages and interest” within the meaning of the QOCS regime on its head. Only a few short months ago, the High Court determined that an order made following approval comprised a relevant order against which a defendant was entitled to set off any costs orders in its favour: Head over heart: late acceptance of Part 36 Claims in MRA -v- Education Fellowship Ltd [2022] EWHC 1069 (QB).

Undoubtedly, QOCS does not operate as intended and, in its current form, seriously disadvantages defendants. It is also worth highlighting that the current status of the law is entirely at odds with the policy aims underpinning QOCS:

As to the second scenario (claimant fails to beat defendant’s offer), the defendant will have adequate protection: the court will be likely to make a costs order against the claimant in respect of the post-offer period in circumstances where (a) the claimant was acting unreasonably in rejecting a proper offer and (b) the costs in respect of the pre-offer period plus the damages recovered by the claimant provide sufficient funds out of which the claimant can reasonably be expected to pay at least some costs. [2]

The MOJ recently consulted on changing the rules following the Supreme Court’s judgment in Ho v Adelekun [2021] UKSC 43, albeit any changes are unlikely to be implemented before April 2023 and it is unclear whether changes would have retrospective effect.

Save for not recovering their own costs from expiry of an offer’s relevant period until late acceptance, there appears to be no real penalty for claimants who benefit from QOCS protection and elect to accept offers out of time. As a result, it is perfectly possible there could be a sharp uptick in late acceptances of CPR, Part 36 offers between now and the date of any rule changes, given how favourable the current QOCS regime operates for personal injury claimants.

Compensators may wish to consider whether the facts of any individual case warrants a variation of existing offers, however, as with all variations or withdrawals, a cautious and well informed approach should be adopted.

Early and well-pitched CPR, Part 36 offers continue to limit a claimant’s entitlement to recover their own costs in the event of late acceptance.

Additionally, the existing exceptions within rr. 44.15[3] and 44.16[4] may now require (even) further scrutiny.

Please do not hesitate to communicate our costs practice, or your usual contact, should you wish to explore any issues arising.