England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		4th July 2013

 


Mr Justice Akenhead:

Introduction

1. At the 11th hour before the trial in this case was due to start on 17 May 2013, the parties very sensibly settled a relatively modest claim relating to delay and related costs on a civil engineering project. The litigation was commenced by the losing party in an adjudication which wished to recover back what was paid out pursuant to the adjudicator's decision in relation to prolongation. The eventual settlement was for £146,953 but the combined costs have been somewhat over £1 million. In settling the case, the parties could not agree as to who should pay the costs and so they have left that issue to be resolved by the Court. Much depends on the impact of a Part 36 offer in the sum of £1 made by the Defendant, albeit in satisfaction of the claim and counterclaims made by it.
2. I am grateful to both Counsel for their lucid explanations both in writing and orally and as will be seen below I have borrowed some of their skeleton submissions in relation to the history.

The History

3. Bellway Homes Ltd ("Bellway") was involved in a new housing development known as Northumberland Park near Shiremoor, a large village within the Metropolitan Borough of North Tyneside. Bellway was also responsible to the local authority for the execution of substantial road works. The Defendant ("Seymour") is a civil engineering company operating in the North-East of England. By a contract made in 2007, Bellway engaged Seymour to carry out the construction of Shiremoor Bypass linking Whitley Bay with the A19 trunk road in connection with this development. The agreed contract sum was £3,724,267.50 and the Contract Administrator was WA Fairhurst & Partners ("Fairhurst"). The Works were carried out between 20 August 2007 and 18 December 2008, that being 31½ weeks later than had been agreed.
4. It was Seymour's position that the delays arose as a result of events arising under Bellway's control and various claims were made by it against Bellway. Seymour also claimed additional sums as part of its Final Account as a result of the delays (including preliminaries, direct costs and disruption). Prior to the subsequent adjudication, Seymour claimed that the overall Final Account should be valued at £6,678,148 broken down into the agreed contract sum of £3,724,267.50 and other sums claimed for re-measurement variations and delay and disruption related losses. Fairhurst valued the Final Account at £4,807,220. There was a failed mediation.
5. Seymour referred its disputed claims to adjudication in April 2010. Mr Christopher Dancaster appointed as adjudicator. The claims were variations (£101,506), re-measurement (£815,808), prolongation costs (£443,849), increased costs (£54,942), disruption/loss of productivity (£151,828), interest on late payments (£19,757) and interest on reduced certification (283,000 £250,000. Seymour claimed the total (£1,870,929 less retention of 2.5%). As for the delay of 31½ weeks, it was Seymour's case that 11 weeks were caused by late information, 3½ weeks by additional services at the "Grey Horse Junction" and the balance of 17 weeks caused by delays relating to the 315 mm Gas Main Diversion. Mr Dancaster produced his decision in June 2010 awarding Seymour, net of retention, £1,045,358.04. This allowed within it different sums including £401,103.39 for prolongation costs, £45,128 for increased costs and various sums for interest. Bellway complied with this decision and paid the sum awarded to Seymour. However it was dissatisfied with the decision reached by the adjudicator, and in particular with his decisions relating to prolongation and related increased costs and in connection with the 315 mm gas Main Diversion.
6. Bellway wrote to Seymour on 25 June 2010 advising of its intention to commence court proceedings in relation to the prolongation costs. It referred to the fact that minimal documentation had been produced in the adjudication and it sought early disclosure of back up costs documentation. Seymour's response on 5 July 2010 was to request a Letter of Claim in accordance with the Protocol. Although compliance with the Pre-Action protocol was not necessary Bellway proceeded down the Pre-Action Protocol route and submitted a Letter of Claim which included a draft expert report prepared by an expert instructed by Bellway following the Adjudication, Mr Blinkhorn. This sought to undermine Seymour's claimed basis for prolongation costs arising out of the 315mm Gas Main diversion. The Letter of Claim was also sent to Fairhurst, albeit that no proceedings were ultimately taken against that firm. It was Bellway's primary case that, in relation to the 17 weeks in dispute, the maximum delay relating to the 315mm Gas Main services works was only 3 weeks and that the remaining 14 weeks delay was not caused by such works. The letter also asserted that the burden of proof as to delay and costs relating thereto was on Seymour, highlighting that little if any back up documentation had yet been provided. The attached calculation of entitlement was net of retention (no other retention amounts having fallen due at that time).
7. There followed various correspondence about early disclosure of actual cost information. Seymour's substantive Letter of Response was dated 21 February 2010 (with actual costs information outstanding). Seymour disagreed with the findings in the report of Mr Blinkhorn but said that irrespective of his analysis relating to the 315 mm Gas Main it completed the works "within a reasonable timescale, particularly given the increased scope and quantity of variations that were ordered". Emphatically however, Seymour made it clear that it was entitled at least to the sums which had been awarded to it by the adjudicator and indeed that it reserved its position as to those parts of its claim which had not been allowed by the adjudicator. There was no mention by Seymour at this stage of retention falling due or to be credited. Later in March 2011 Seymour did provide some costs information, albeit subject to a confidentiality agreement.
8. On 11 May 2011, Bellway sent a "Without Prejudice Save as to Costs" offer that it would accept £360,000 inclusive of interest but plus costs on a standard basis in settlement of its claim the recovery of the amounts awarded by the adjudicator. A Pre-action Protocol meeting took place on 23 May 2011 which obviously did not achieve a settlement. It was becoming apparent by then that Seymour's programming expert was coming round to the view that the 315 mm Gas Main Diversion works did not contribute materially to the overall delay but that the delays were attributable to other matters such as variations.
9. On 24 June 2011, Seymour wrote to Fairhurst in its capacity as the Contract Administrator seeking the release of the second half of retention money in the sum of £146,955.07 plus VAT. It referred to the fact that completion had been achieved on 18 December 2008, that consequently the 30 month defects liability period expired on 17 June 2011 and the second half of the retention money would become due for payment on or by 1 July 2011. This provoked a response from Bellway on 5 July 2011 which referred to "a substantial number of unresolved defects" and to Bellway's intention to withhold payment of the whole of the retention money, saying:

"The grounds for our withholding payment are firstly that [there] do exist a substantial number of defects in the works which presently remain unresolved. These items are more particularly described in the Schedule enclosed herewith, and in respect of each item, we have provided an indication as to the estimated cost we would be likely to incur in engaging a third party contractor to attend to these unresolved defects should that prove necessary in due course. The sum of these estimated remedial costs amounts to £177,750 excluding VAT.

Secondly, as you well know, we have by letter of claim dated 16 November 2010 advised you of our intention to issue formal litigation proceedings against your Company for the recovery of certain of the monies previously paid to you in consequence of the decision of Mr Dancaster…The value of our intended claim, as detailed in Appendix V to our letter of 16 November 2010 totals £518,060.03, plus interest which continues to accrue.

Clearly this sum alone eclipses the value of retention held in relation to the Project, even before it is aggregated with the monies we intend to withhold by reason of the unresolved defects.

Accordingly, we confirm it is our intention to make payment of £NIL in respect of your recent application for retention release…"

The attached schedule was a letter dated 20 May 2011 from Bellway to North Tyneside Council which set out some 60 items of work or defect that might remain to be carried out with handwritten costings which excluding extras came to £176,750.

10. On 21 July 2011, Seymour responded, suggesting that the schedule was "evidently incorrect and inaccurate" and that the grounds for withholding money in this regard were invalid.
11. On 18 August 2011, Seymour's solicitors sent on a "without prejudice save as to costs" basis a draft report from its programming expert which acknowledged that the Gas Main Diversion work had not caused delay other than three weeks' worth.
12. On 27 March 2012, Bellway's solicitors served its Claim form and Particulars of Claim.

The Proceedings

13. The Particulars of Claim referred to the background and the Contract and identified the "ongoing dispute" as relating to the gross sum of £526,840.78 "gross of retention" made up from prolongation costs (£401,103.39), increased costs (£45,128) and associated interest (£80,609.39). It asserted that the burden of proof in respect of these claims remained with Seymour both as to liability and quantum. Liability was accepted for 12 weeks' worth of prolongation costs, although Seymour was put to proof of what those costs were. Issue was raised in respect of any entitlement to further extension of time or prolongation in respect of the remaining 19½ weeks. What was claimed back was £513,669.76 to the extent that Seymour was unable to demonstrate an entitlement to it. Given that Bellway accepted liability for 12 weeks of prolongation, the claim was foreseeably likely to net somewhat less than claimed. It was accordingly, by the standards of the TCC at least, a relatively modest claim.
14. The Defence and Counterclaim was served on 24 May 2012. It identified an entitlement to prolongation costs for delay which was about £11,000 more than the adjudicator had allowed. In addition at Paragraphs 46 to 48 Seymour claimed for the repayment of the second half of the retention, namely £146,955.07 and stating that it remained "ready and willing to return to remedy any genuine defects in the works".
15. Bellway served its Reply and Defence to Counterclaim on 5 July 2012 taking issue with Seymour's analysis of delay and setting out in some more detail what its own case on delay was. It was accepted that an additional 15 days entitlement to prolongation costs was established. In relation to the retention, it was asserted that, although it would have fallen due in July 2011, Bellway was entitled to set off against it both the sums claimed in the Particulars of Claim and also against the cost of rectifying defects which were listed in Attachment 8 to the pleading. That Attachment identified by reference to the different Sectors of work some 70 defects which were described and photographs were attached. Apart from a few which had a nil cost attached to them an estimated cost rectification was spelt out with the total coming to £101,370. Whilst there is some overlap with the Schedule produced in June 2011, some of these alleged defects had not been mentioned before.
16. At the first Case Management Conference in November 2012, Bellway submitted a cost estimate of £614,086.27 with £316,438 shown as already incurred. The equivalent from Seymour showed a total of £605,556.57 of which either about £100,000 or some £173,000 (it is unclear which) was said to have been incurred. Mr Justice Coulson fixed a trial date for 17 June 2013 albeit that the costs estimates were not approved and costs Management Orders were made.
17. Seymour served a Reply to Defence to Counterclaim which pleaded to Attachment 8 asserting that a large number of the alleged defects had been actioned in July and August 2012 or at some other time (some 47 out of the 70 items), irrespective of whether they were matters for which Seymour was liable and that some of the alleged defects and remedial work amounted to additional or varied work. Other items were identified as being agreed by both parties as not being a defect for which Seymour was responsible. Liability was not accepted. Seymour attached a letter from Fairhurst to it of 22 November 2012 and a letter in reply from Seymour of 19 December 2012; Seymour accepted that there were only two genuine defects remaining uncorrected, one of which was said to involve a "minimal repair to a footpath surface course" and the other which could not be proceeded with for reasons at least temporarily beyond the control of Seymour.
18. The parties agreed an order for further directions including the Defendant being given permission to serve its Amended Defence and Counterclaim. Seymour identified a somewhat different delay case which reflected what the programming experts had agreed but Seymour maintained its case that it was still entitled to full prolongation costs. By this stage Bellway's costs estimate had gone up to £715,665.77 and Seymour's stood at £621,267.61.
19. On 17 June 2013 the parties filed a Tomlin Order by consent which identified that the Defendant was to pay to the Claimant in full and final settlement of all claims and counterclaims £146,953 inclusive of interest except interest since 10 November 2012. Costs and interest since 10 November 2012 were left to be dealt with by the trial judge.

The Offers

20. After proceedings were commenced, Seymour through it solicitors made a Part 36 offer on 18 October 2012 which followed an unsuccessful mediation. It prefaced the offer by making it clear that its offer was a commercial one taking into account irrecoverable costs and management time:

"…this letter contains an offer to settle that is intended to have the consequences of Part 36 of the Civil Procedure Rules.

Seymour as the claimant in respect of its counterclaim is prepared to accept a payment of £1.00…from Bellway on the following basis:

1. The sum of £1 is to be paid by Bellway in full and final settlement of all claims and counter claims by Bellway and Seymour in the Proceedings including interest and VAT (if any).

2. For the avoidance of any doubt Seymour will rectify item no.8 ("Block paving to roundabout Chevron blocks is badly stained") identified at Attachment 8 to the Reply and Defence to Counterclaim at its own cost and as soon as reasonably practicable.

3. This offer is open for acceptance for 21 days (the "Relevant Period") from the date of service of this letter on the terms set out in Part 36. Thereafter the offer will continue to remain open for acceptance on the terms set out in Part 36…

7. If the offer to settle is accepted within the Relevant Period Seymour will be entitled to its costs of the Proceedings up to the date on which the notice of acceptance is served, such costs will be subject to detailed assessment on the standard basis by the court if not agreed, and to be paid by Bellway…"

21. On 5 November 2012, Bellway's solicitors responded on a "without prejudice save as to costs" basis. They did not accept that the letter was compliant with Part 36 and went on to say:

"3. We observe that your letter maintains the approach adopted by your clients at the Mediation, which in essence was to elide the issue of your client's entitlement to payment of the balance of the retention moneys with the substantive dispute between the parties, in an attempt to engineer for your client an advantageous costs position.

4. As you are very well aware, there exists no serious dispute between the parties with regard to the issue of retention. The additional costs generated as a result of your client's decision to include this head of claim within its Counterclaim in the Proceedings are correspondingly modest and pale into insignificance when set against the costs incurred to date in connection with the dispute the subject matter of our client's Claim. Furthermore, upon imminent completion by your client of the ongoing remedial works at the Shiremoor Bypass, no further costs will be incurred in relation to the retention issue, nor will any such costs be incurred the trial…

6. We therefore consider the position adopted by your client to be contrived, and transparently so, such that the Court in exercise of its discretion would, we feel, have little difficulty in dismissing any suggestion to the effect that your client should be entitled to its costs of both claim and counterclaim in the manner stated in terms of paragraph 7 of your letter of 18 October.

7. We perceive, and believe the Court would perceive, that in reality your letter contains not one but two offers, namely:

7.1 An offer by your client to accept the sum of £158,632 (inclusive of interest) in settlement of its Counterclaim; and

7.2 An offer by your client to pay the sum of £158,631 (inclusive of interest) against our client's Claim…

11. Accordingly, if it is genuinely your client's intention to make a Part 36-compliant or other offer of settlement against the Claim which is capable of acceptance by our client, we invite your client now to do so. As it is, we cannot sensibly seek our client's instructions as to the merits of any commercial settlement offer given the manner in which your letter of 18 October 2012 has been framed…"

This was responded to by Seymour's solicitors on 22 November 2012 saying that the offer was compliant and denying that their client's position was contrived.

22. Matters then become somewhat more complicated because on 24 January 2013 Bellway's solicitors wrote to Seymour's solicitors referring to the Reply to Defence to Counterclaim, going on:

"…It cannot seriously be doubted that the existence of these defects entitles our client to exercise set off as against the retention moneys claimed by your client.

Further, while it is common ground that a large number of defects cited by your client within its Statement of Case has since been attended to by your client, there remains, of course, the question of our client's Claim for recovery of sums overpaid to your client in respect of its claim for delay-related costs. Our client is entitled also to exercise set-off in this regard…

…our client is concerned that the satellite dispute which supposedly exists in relation to the retention monies has been set up by your client in an attempt to obscure the substantive issue which exists between the parties in relation to our client's Claim for reimbursement of delay costs.

It is clear that the costs which have been incurred in these proceedings relate to the Claim brought by our client and not to your client's Counterclaim (which essentially concerns the retention). In order to bring greater transparency to these proceedings moving forwards towards trial, our client has therefore resolved to release to your client the retention monies claimed.

For the avoidance of doubt, our client in so doing is not conceding that it does not have a right (indeed a continuing right) to exercise set-off as against these monies, is it is simply that our client has elected to waive that right in order to achieve additional clarity and transparency moving forwards.

For the further avoidance of doubt, our client intends to release the full amount of the retention fund (totalling £146,955.07) and does not propose to retain or continue to set-off any sum on account of the estimated cost to our client of attending to the small number of outstanding defects for which it maintains your client is responsible. Nor does our client intend pursuing a claim for recovery of these rectification costs at trial; frankly, the sums in question are such that the cost which would be involved in resolving liability for those items, were they to be held over to trial, does not justify our client incurring this expenditure.

Accordingly, our client does not require your client to return to site to attend to the disputed items; our client requires only that your client return to site within the period indicated in the RDCC in order to attend to the two outstanding items (being item nos. 8 and 43) for which your client has admitted responsibility. Should your client fail to resolve the acknowledged defects within this period, our client would seek judgment at trial upon your client's admission of responsibility for those items…."

The retention money was paid by Bellway to Seymour within a few days.

23. Also on the same day, Bellway's solicitors sent a Part 36 Offer to Seymour's solicitors offering to settle the whole claim for £225,000 plus standard costs; this acknowledged that the retention money of £146,955 was being released separately. By another letter the same day, Bellway's solicitors sent a "Part 44 and/or 47.19 Offer" relating to costs which were said to total £355,000 to date and offering to settle costs at a sum of £200,000 plus VAT.
24. Matters continued to proceed towards trial. On 12 April 2013, Seymour's solicitors wrote to Bellway's solicitors explaining its earlier offer of 18 October 2012 effectively saying that the Claimant would have to recover more than £158,631 at trial to come out of the overall litigation as a net winner. There seems to have been no response and Seymour's solicitors wrote again on 26 April 2013 (on a "without prejudice save as to costs" basis) indicating that their October 2012 offer had not been withdrawn and remained open for acceptance. They were mindful, they said, of the costs and urged the parties to use best endeavours to reach a settlement. They offered to settle on the basis that the Bellway paid the costs up to 8 November 2012 on the standard basis and that thereafter each party should bear its own costs. There was no immediate let alone direct response to this letter. However on 10 May 2013, Bellway's solicitors wrote offering to settle on the basis that Seymour paid £158,631 which took into account that small part of the Counterclaim which was left following the repayment of the retention in January 2013 and that Seymour should pay Bellway its costs on a standard basis of the Claim although Bellway would pay Seymour's costs of the claim for the retention. This was accompanied by another letter on the same day explaining its position.
25. On 28 May 2013, Seymour's solicitors offered to settle "adopting a commercial, reasonable and proportionate approach" taking into account the costs and the protracted proceedings for £130,000 with costs to be reserved to the trial judge. Again this was accompanied a day later by another explanatory letter. It is clear from the level down to which these offers were descending at that stage it was only the costs which were "wagging the dog" of litigation. On 4 June 2013, Bellway's solicitors repeated their offer of £158,631 and but on the basis that costs were to be left to the trial judge. This led on 7 June 2013 to Seymour's solicitors offering to settle for the precise sum of £146,953 with costs to be left to the trial judge together with interest since October 2012. Within several days, agreement was reached on this and costs still remain to be resolved by the Court.

The Arguments

26. Mr Constable QC for Bellway in effect repeated, elegantly, the arguments which had been trailed by his client's solicitors over the last nine months. He argued that Seymour should pay all his client's costs on a standard basis from start to finish. In essence, he says that it would be unjust to permit reliance on the October Offer where the costs incurred to the date of that offer (and since) related almost entirely to the matter for which, in the offer, Seymour accepted responsibility for the first time; it was effectively incapable of acceptance without severe injustice. He argues that a proper offer should have separated claim from counterclaim, and offered to pay Bellway the costs of the claim. Put another way, the offer of £1 was an offer by Seymour to pay an amount equivalent to its retention (less £1) in respect of Bellway's claim and it would be unfair overall if Seymour was not responsible for Bellway's costs. Particularly since the retention was paid over in late January 2013, he argues that Bellway had to proceed towards trial to recover anything in respect of its Claim and that by so proceeding it has in fact recovered a not insignificant sum relative to the amount claimed.
27. Mr Brannigan QC argues that Seymour should recover its costs from start to finish because in effect Seymour was the "winner" because it is ended up with the defendant and counterclaimant not only not paying any net sum to Bellway but also being £2 in credit. He argues that the judgment entered and/or result obtained is at least as advantageous to Seymour as its' October part 36 Offer because that offer dealt with both the claim and the counterclaim, and therefore with Seymour's claims to recover its £158,632 and in offering to accept just £1 in relation to the entirety of that dispute Seymour was offering to forgo all but £1 of that claim, which included its retention monies. He continues that once Bellway abandoned its defence to the claim for retention and paid it over, the directly equivalent offer by Seymour was to re-pay £146,954.07, namely the retention monies paid to it less the same £1, which is effectively the offer which Bellway eventually accepted in June 2013. He says that the bottom line is that in reality Bellway has accepted an offer to settle the sums in dispute in this action that it could have but did not accept in October 2012.
28. Following the conclusion of the argument in court, I invited further written submissions on the following points:

A. If (a) until about September 2012 the best evidence suggests that Bellway was entitled to hold onto retention but that thereafter there was at best a de minimis entitlement to do so, (b) and therefore, given the eventual settlement, Bellway was entitled to a hold on to the retention plus eventual settlement figure up until then but not thereafter, would it not be fair that (i) Bellway should have its costs up to, say, about the date of the October offer, but (ii) if arguably however, Bellway should have accepted the October offer given the state of the account overall at that stage, should it pay Seymour's costs thereafter?

B. What impact should there be on any order for costs in favour of Bellway given that it recovered albeit by settlement between one third and one quarter of what it was claiming? Should there be a proportionate reduction?

Such submissions were received and considered.

The Law and Practice

29. CPR Part 36.14 states materially:

"(1). This rule applies upon judgment being entered:

(a) a claimant fails to obtain a judgment more advantageous than a defendants part 36 offer, or

(b) judgment against the Defendant is at least as advantageous to the claimant as the proposals contained in a claimants Part 36 offer.

(1A) For the purposes of paragraph (1) in relation to any money claim or money element of a claim "more advantageous" means better in money terms by any amount, however small, and "at least as advantageous" shall be construed accordingly.

(2) Subject to paragraph (6), where rule 36.14(1)(a) applies, the court will, unless it considers it unjust to do so, order that the defendant is entitled to-

(a) his costs from the date on which the relevant period expired; and

(b) interest on those costs.

(4) In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3), the court will take into account all the circumstances of the case including –

(a) the terms of any Part 36 offer;

(b) the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;

(c) the information available to the parties at the time when the part 36 offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated"

30. Mr Justice Briggs in Smith v Trafford Housing Trust [2012] EWHC 3320 has provided at Paragraph 13 of his judgment a useful summary of how one considers the defendants' offers:

"a) The question is not whether it was reasonable for the claimant to refuse the offer. Rather, the question is whether, having regard to all the circumstances and looking at the matter as it affects both parties, an order that the claimant should pay the costs would be unjust: see Matthews v Metal Improvements Co. Inc [2007] EWCA Civ 215, per Stanley Burnton J (sitting as an additional judge of the Court of Appeal) at paragraph 32.

b) Each case will turn on its own circumstances, but the court should be trying to assess "who in reality is the unsuccessful party and who has been responsible for the fact that costs have been incurred which should not have been.": see Factortame v Secretary of State [2002] EWCA Civ 22 , per Walker LJ at paragraph 27.

c) The court is not constrained by the list of potentially relevant factors in Part 36.14(4) to have regard only to the circumstances of the making of the offer or the provision or otherwise of relevant information in relation to it. There is no limit to the types of circumstances which may, in a particular case make it unjust that the ordinary consequences set out in Part 36.14 should follow: see Lilleyman v Lilleyman (judgment on costs) [2012] EWHC 1056 (Ch) at paragraph 16.

d) Nonetheless, the court does not have an unfettered discretion to depart from the ordinary cost consequences set out in Part 36.14. The burden on a claimant who has failed to beat the defendant's Part 36 offer to show injustice is a formidable obstacle to the obtaining of a different costs order. If that were not so, then the salutary purpose of Part 36, in promoting compromise and the avoidance of unnecessary expenditure of costs and court time, would be undermined."

31. It follows from this that what is just or unjust is very much dependent on the particular case, it facts, its history and the negotiations and offers which are discloseable to the court.

Discussion

32. An important background factor to bear in mind is that the size of Bellway's claim, realistically no more than about £350,000, was such that costs were always going to loom large. The combined latest costs estimates, albeit not sanctioned by the court, came to £1,336,932. Although one strongly suspects that the Court, if it had been asked to make Costs Management Orders, would have imposed substantial reductions in these estimates to introduce a reasonable level of proportionality (if nothing else), it would doubtless have been argued that the case was very fact heavy and that programming and quantum experts would have added substantially to the cost. This is a relevant factor because it does seem to me that both parties should have been seeking pro-actively to find ways to settle this modest case sooner rather than later and that tactical manoeuvring by either side should not have been adopted.
33. It must also be borne in mind that a set-off, properly deployed, is a valid defence to a claim for debt or damages. The fact that the set-off is admitted in itself or does not give rise to a major incidence of costs does not mean that it can not be a good defence. It is also beyond argument that a defendant may make a Part 36 offer which seeks to settle a claim against it as well as any set-off or counterclaim which it has raised in the proceedings.
34. In approaching costs, the parties can not and do not expect the Court in effect to decide issues which have arisen on the pleadings between the parties. What the Court has here, apart from the broad factual background, is the pleadings, the payment by Bellway to Seymour in January 2013 of the retention money and the settlement itself. Although the final settlement was made in effect without admission of liability and doubtless commercial considerations and the narrowing of the debate on the expert programming evidence very much came into play, there is at the end of the litigation at least some recognition that it was appropriate for Seymour to pay Bellway £146,953, inclusive of two years plus interest up to October 2012. However, there has been some argument in the most recent written submissions, particularly from Mr Brannigan QC for Seymour, to the effect that its offers in October 2012 and later in June 2013 were simply commercial and that there is no evidence that Bellway would ever have established any entitlement to recovery of any sum awarded by the adjudicator or to justify its holding on to the retention after June 2011. The problem with that from a pragmatic point of view is that if that type of approach is to be adopted settlement will be discouraged in circumstances like this because one party or the other will have to prove its case simply to deal with costs. In my view, the Court is entitled to draw inferences from the background facts which are unobjectionable and from the settlement actually achieved. Thus, for instance in a case not involving a set-off or counterclaim in which the claimant claims £10 million but settles for £100 with costs to be dealt with by the judge, the judge might well infer that this was simply a nuisance or commercial offer.
35. I do not consider however that the implicit allowance within the £1 offer of 18 October 2012 of £146,954.07 for Bellway's Claim or the eventual settlement figure of £146,953 can be considered simply a nuisance or commercial offer, commercially minded though doubtless it was. It represented a proportion of some 25% to 30% of the Claim and some acknowledgement that it had been overpaid for prolongation as a result of the adjudicator's decision. Given the exercise which the Court has been required by the parties to do, I consider that it is necessary (to do justice to the parties) to proceed on the basis that there was a sum of money due on the Claim to Bellway which was virtually the same as the retention money which it had withheld.
36. The very real complication which arises here is that Bellway was itself entitled to seek to set off its own cross claim for defects outstanding at the end of the defects liability period (June 2011) against the retention money of some £146,000 which was due or at least due to be credited to Seymour by Bellway as at early July 2011. It is clear from the evidence before the Court that Seymour was still putting right the actual or alleged defects in July and August 2012. It is therefore possible to infer that at least until that time or at least much of the retention was not in commercial terms payable to Seymour until that stage.
37. It has been suggested by Mr Constable QC that it might be helpful if the Court considered the position on costs and the state of the account between the parties in what he calls "time-slices", namely at particular relevant times. I broadly agree with this approach.
38. The first time period therefore to consider the state of affairs is July 2010 to about September 2012, spanning the period in which the Pre-Action Protocol process was started through the issue of proceedings in March 2012, the pleading of the Counterclaim for repayment of the retention and the execution of almost all of the outstanding defects. During this period, assuming that some £130,000 to £140,000 exclusive of interest was due to Bellway in respect of its claim for payment for money paid out as a result of the adjudication decision, there was a net sum due to Bellway of that sum, albeit that this sum was in effect reducing as the defects which had justified the continued withholding of the retention were being put right by Seymour. Thus it can be legitimately argued that Bellway was justified in pursuing the Pre-Action Protocol process and issuing proceedings against Seymour for the recovery of that sum. Put another way, if it had been possible to bring this case to judgment say in June or July 2012, there would have been a net judgment in favour of Bellway.
39. The second time period to consider is from about September 2012 to the date of the 18 October 2012 offer made by Seymour. Doing the best that one can, it appears that at least the vast bulk of the defects had been put right, including some which Seymour had never accepted responsibility for. This is supported by the fact that, as against the original listed defects the cost of repair of which was said to be £177,750, this had come down to £101,370 in the Reply and Defence to Counterclaim (although an exact comparison is not possible because some different defects appear in the two lists). Secondly, even Bellway's solicitors were talking about the "imminent completion…of the ongoing remedial works" in their letter of 5 November 2012. Thirdly, in their letter of 24 January 2013, it was said to be "common ground that a large number of the defects…have since been attended to by" Seymour. Fourthly, the correspondence between Fairhurst and Seymour attached to the Reply to Defence to Counterclaim identifies very few defects remaining and Seymour's letter which challenged the earlier comments by Fairhurst was not itself challenged. Fifthly, Bellway was not prepared to pursue the outstanding defects at least as from 24 January 2013. Finally, in Annex A to the Reply to Defence and Counterclaim, albeit not supported by a Statement of Truth, a very large proportion of the alleged defects were pleaded as having been already addressed, with most "actioned in July/August 2012"; this was not apparently challenged by Fairhurst.
40. The position therefore in all probability is that, as at the date of 18 October 2012 offer, the state of the account, judged by the eventual settlement, was that there was a net sum, albeit only £1 or £2 due to Seymour, particularly if one takes into account the fact that the offer of 18 October 2012 incorporated an unconditional offer by Seymour to put right the one admitted item of defect said to be outstanding at its own cost as soon as reasonably practicable. Again, if it had been possible for a judgment then to be given, probably Bellway would have lost and Seymour would have been the net winner, this being predicated upon the admitted value of the retention compared with the eventual settlement figure.
41. The third period to be considered is from 18 October 2012 to the end of January 2013 when the retention money was paid in full by Bellway to Seymour. The position during this period is as before although it is marked by reluctance on the part of Bellway to accept that its claim was worth the same as or fractionally less than the value of the retention. In its letter of 5 November 2012, Bellway's solicitors explained why that their client could not accept the offer, which was mainly because it would mean that it would have to pick up paying all its own and Seymour's standard assessed costs; the latter however makes it clear in effect that it would not be prepared to accept an allowance against its claim even of £158,632 inclusive of interest. The period however is also marked by reluctance on the part of Seymour to indicate that it might be prepared to accept some responsibility for its own and Bellway's costs before the 18 October 2012 offer.
42. The fourth period is from the end of January 2013 to the final settlement in June 2013. During this period, in effect Bellway was in credit because it no longer owed the retention money which it had paid over at the beginning the period. Therefore if the matter had gone to trial and the judgment had been in effect for the settlement sum, Bellway would have been the net winner: it would have been justified pursuing the case to secure some money judgment in its favour. However, this period is marked by a reluctance of either party to engage constructively as to settlement at anything other than its own terms although Seymour proved more constructive towards the end of the period.
43. In my judgment, the offer of 18 October 2012 was, in form, a valid Part 36 offer: if accepted, it would have resolved the case. However, Part 36(14)(2) in effect requires the Court to take into account the justness of applying the normal costs consequences of a claimant failing to obtain a judgment more advantageous than a defendant's Part 36 offer. There is some injustice here in the formulation of the offer in the light of the history of the dispute, the proceedings and the resolution of issues relating to the retention. That injustice is that the offer, to be accepted, involved the recognition and acceptance by Bellway that it would have to pay its own and Seymour's costs of the proceedings up to that date (or three weeks after) notwithstanding that until about September 2012 the state of the account between the parties was such that Bellway was (probably) entitled to a net sum and it was only the execution of remedial or other work by Seymour in the preceding months which had led to the net state of the account moving fractionally in favour of Seymour. If the offer had been that Seymour would pay Bellway its standard costs of the Claim (and that Bellway would pay Seymour its standard costs of the Counterclaim), it could then be seen that it fairly reflected the state of the account up to about September 2012.
44. It would have been open to Bellway to protect its position by making it clear in late October or early November 2012 (during the period for acceptance of the 18 October 2012 offer) that it would settle its Claim for £146,954.07 (the eventual settlement figure) and either that Seymour would pay Bellway its standard costs of the Claim (and that Bellway would pay Seymour its standard costs of the Counterclaim) or, doing exactly what they eventually did in the final run-up to the eventual settlement, namely leaving it to the Court to resolve. It clearly did not do that and a primary reason must have been that it wanted more money than the £1 offer signified. That is clear from its solicitors' letters of 5 November 2012 and 24 January 2013. I attach greater responsibility to Bellway for failing to make its position much clearer as to what it wanted in respect of its Claim. Of course, a party does not have to avail itself of the Part 36 machinery, particularly in cases which give rise to possibly unjust consequences of accepting a Part 36 offer from the other party; this is recognised in the Supreme Court decision of Fairclough Homes Ltd v Summers [2012] UKSC 26 at Paragraphs 53 and 54. A "without prejudice save as to costs offer" could have been made by Bellway.
45. The reason in effect that the case did not settle until almost the 12th hour is that Bellway wanted more out of the proceedings than a sum equivalent to the retention which by October 2012 it was probably unjustifiably holding on to. On 24 January 2013, it wanted £225,000, on 10 May and again on 4 June 2013 it wanted £158,631 and it was only on or just after 7 June 2013 that it accepted the sum of £146,953. It was only on 4 June 2013 that it accepted the idea that costs could be left to the judge, an idea in fact first mooted (at least in writing) by Seymour's solicitors (by implication on 26 April and explicitly on 28 May 2013).
46. Essentially, what Part 36.14(2) requires the Court to do is what is just as between the parties. Although the circumstances of this case make this a difficult exercise, I consider that a just approach (subject to the following paragraphs) is as follows:

(a) Seymour should pay Bellway its costs on a standard basis up to and including 30 September 2012. This reflects the fact that the eventual settlement figure reflects the fact that it was entitled through an initial Pre-Action Protocol process to issue and pursue proceedings to recover a not insignificant element of overpayment resulting from the adjudication decision. The state of the account up to about that time would have demonstrated a net sum due to it.

(b) Bellway should pay Seymour's costs from 30 September 2012 up to 31 January 2013 to reflect not only that the state of the account between them was such that Bellway was entitled to nothing by reason of its continued and unjustified withholding of the retention but also its unwillingness effectively to engage in a settlement process which reflected settlement of its Claim at a level which was actually or virtually equivalent to the amount of the retention money.

(c) Thereafter, each party should pay its own costs. This reflects the almost complete pointlessness of the litigation proceeding when, although the net state of the account was in favour of Bellway, it should have been recognising that it would settle much earlier at the figure which it did settle for, namely £146,953; however it wanted more until close to the 12^th hour. Seymour did not help the process very much because it reiterated at least twice in April 2013 that it insisted on being paid its costs at least up until the expiry of its 18 October 2012 offer. That this litigation was during this period pointless is reflected by the fact that there was in reality little between the parties as to the settlement figure excluding the costs and that costs way over the probable true value of the Claim were being expended during this period. Whilst one can understand that both parties had possibly respectable arguments about the costs consequences, it took until June 2013 for there to be acceptance of (relatively) a very modest settlement figure and for costs to be left for the decision of the Court. There is no good reason either available or proffered to the Court why the parties took over four months to get to the position that they eventually (and extremely belatedly) reached on or about 7 June 2013. If the parties were (as seems likely) simply engaging in some form of brinkmanship, then neither of them should expect to gain some costs advantage out of it. The fact that when the arithmetic is done at the end Seymour was the net winner by £2 is a factor but is balanced by the fact that Seymour did not withdraw its insistence during much of this period on being paid its costs at least up until 8 November 2012.

47. The above is subject to a further qualification. The effect of the settlement is that Bellway has recovered, on my calculation, some 26% to 27% of its claim. Although its Claim was for the recovery of up to some £513,000 plus interest, it did accept a potential liability for prolongation costs in relation to 12 weeks' worth of the 31½ weeks overall delay. It was however putting in issue the whole of the quantum. The ultimate settlement reflects a very substantial reduction and in effect an acknowledgement that substantially more than 12 weeks' worth of delay would attract an entitlement to prolongation related costs. In Multiplex Constructions UK Ltd v Cleveland Bridge UK Ltd and another [2008] EWHC 2280 (TCC), Mr Justice Jackson (as he then was) summarised 8 helpful principles at Paragraph 72 of his judgment:

"(i) In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.

(ii) In considering how to exercise its discretion the court should take as its starting point the general rule that the successful party is entitled to an order for costs.

(iii) The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.

(iv) Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes and because of the steer given by rule 44.3(7).

(v) In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.

(vi) In considering the circumstances of the case the judge will have regard not only to any part 36 offers made but also to each party's approach to negotiations (insofar as admissible) and general conduct of the litigation.

(vii) If (a) one party makes an order offer under part 36 or an admissible offer within rule 44.3(4)(c) which is nearly but not quite sufficient, and (b) the other party rejects that offer outright without any attempt to negotiate, then it might be appropriate to penalise the second party in costs.

(viii) In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he has won but also the common costs."

In Brit Inns Ltd and others v BDW Trading Ltd [2012] EWHC 2489 (TCC), Mr Justice Coulson set out at Paragraph 45 some other helpful principles, having considered various cases including the Multiplex case:

"Accordingly, when dealing with costs in a case like this, the following principles apply:

(a) In a commercial case, the successful party will usually be the party that recovers money from the other (Multiplex and Gibbon);

(b) The only certain way for a defendant to shift its potential costs liability is to make a Part 36 offer which it then betters at trial (Gibbon and Fox);

(c) The pursuit of exaggerated claims may deprive the claimant of some or all of its costs (Islam and Fulham Leisure), but it is usually only where the exaggeration is deliberate that the claimant has been ordered to pay the defendant's costs (Painting and Ford);

(d) In general terms, for costs to be shifted as a result of conduct, so that the claimant who recovers something at trial still has to pay the defendant's costs, there needs to be more or less total failure on the issues that went to trial (Hullock) or a failure to accept a Part 44 offer that would have put the claimant in a better position than going on (Fulham Leisure).

48. In this case, it is not possible to make an overall issues based decision because no issues were ultimately decided by the court. All that one can say is that Bellway pursued a claim which was worth net of interest some £135,000 against its claim for £513,000 and that probably that claim was very substantially exaggerated and, given the nature of the Claim which proceeded on the basis that the burden of proof was on the Defendant, it was necessarily at least somewhat speculative; it could thus be properly said that Bellway was pursuing a claim for £513,000, which it must have known that it would only recover as a maximum some £350,000 and whether or not it recovered substantially less was a real risk which they must have known they faced. It thus pursued a claim for £513,000 knowing that it would end up with less and could well end up with a lot less.
49. In those circumstances, I consider that it is appropriate to make a proportionate costs decision in relation to Bellway's costs. The fact that it has only recovered some 26% to 27% of its cost of their Claim does not however in logic mean that it should only recover the same percentage of its costs because it has had to pursue the proceedings to secure even that amount. In all the circumstances therefore, I consider that the reasonable, fair and proportionate recovery is 50% of its costs.

Conclusion

50. In my judgment, Seymour should pay Bellway 50% of its costs on a standard basis up to and including 30 September 2012, Bellway should pay Seymour's costs from 30 September 2012 up to 31 January 2013 and thereafter each party should pay its own costs. This is all on the standard basis. I hope that this decision will send a message to litigating parties that it is better and sensible for parties to settle earlier rather than later and, as importantly, if there are difficulties created by a Part 36 offer, it is sensible to agree that the Court can be asked to resolve costs issues arising.
51. It might in one sense be thought to be a lacuna of the CPR that there is no express provision for reference by a party to the Court to permit it to accept the Part 36 offer during the "relevant period" but with the Court being left to resolve issues of costs; it could be said to be a lacuna because under CPR Part 36.10(4), the Court does have the authority to make costs orders where a Part 36 offer is accepted after expiry of the relevant (usually 21 day) period for acceptance. This might be explained by the fact that the offeree can make a "without prejudice save as to costs response" saying that it would accept what has been offered subject to the Court deciding costs issues; ultimately, both offers could be considered by the Court after the trial. It may be that the Rules Committee might want to consider this.