Qualified One-Way Costs Shifting – Has the Balance Toppled?

The Supreme Court’s decision in Ho (Respondent) v Adelekun (Appellant) [2021] UKSC 43 overturns the earlier Court of Appeal decision, along with the decision in Howe v MIB [2017] EWCA Civ 932. It is now clear that where the Qualified One-Way Costs Shifting (QOCS) scheme applies to a claim, a defendant is unable to recover costs awarded in its favour by off-setting them against costs awarded to the claimant. We summarise below this area of the law, the decision in Ho, and consider whether the practical application of the QOCS scheme has now shifted too far in favour of claimants.

What is QOCS?

Costs in litigation usually follow the “loser pays” principle.  This principle is however adjusted by QOCS which was introduced for personal injury claims from 1 April 2013 via the introduction of Civil Procedure Rules 44.13 to 44.17. The rules state that unless certain limited exceptions apply, defendants will be ordered to pay the costs of successful personal injury claimants and will not be able to recover their own costs if they successfully defend the claim. The QOCS scheme was introduced to counterbalance the impact on personal injury claimants of the decision (introduced at the same time) to abolish recoverability of CFA success fees and ATE insurance premiums. The rationale behind the reforms was that the burden falling on defendants and their insurers would be less if they were to forego costs recovery when they won a claim than if they were forced to bear not only the claimant’s costs but also success fees and ATE premiums when they lost a claim.

One feature of QOCS is that it does not prevent costs awards being made against unsuccessful claimants. Instead, it puts in place controls against their enforcement by defendants. Specifically, CPR rule 44.14 operates as a bar to enforcement of costs orders in excess of damages and interest unless one of the exceptions to the rules apply. The QOCS rules are silent on setting off costs against costs and refer only to setting off against damages. This issue formed the subject of the dispute in Ho.

The decision in Ho

The facts

Miss Adelekun (the claimant) sustained injury when she was involved in a Road Traffic Accident with Mrs Ho (the defendant). She brought a damages claim against the defendant, who agreed that she was liable and made an offer to settle for £30,000 under Part 36, which was accepted. However, a dispute then arose as to whether the claimant’s costs should be paid on a ‘Fixed Recoverable Costs’ basis, which amounted to c.£16,700 (which the defendant contended), or on the conventional ‘standard basis’, which amounted to c.£42,000  (as the claimant contended). That issue ended up in the Court of Appeal and was decided in the defendant’s favour. As such, she was awarded her costs of that aspect of the litigation in the amount of £48,600.

The defendant asked the Court of Appeal to set off the costs that she had been awarded from her obligation to pay the claimant’s fixed costs. The claimant considered she was protected by the QOCS scheme and that such an order could not be enforced against her. The Court of Appeal was asked to determine the issue.

The Court of Appeal’s decision

It was accepted by the parties that as the claim had been settled by CPR Part 36 there was no “order for damages” made within the meaning of the QOCS regime and the defendant therefore accepted that she could not offset her costs order for the assessment dispute against the damages (the £30,000) and interest she had agreed to pay the claimant pursuant to the settlement (as per the decision in Cartwright v Venduct Engineering Limited [2018] EWCA Civ 1654).

The only issue in dispute was therefore whether the Court had jurisdiction to make an order that the costs order in the defendant’s favour in the assessment dispute (i.e. the £48,600) be set-off against the order for costs in claimant’s favour (i.e. the c.£16,700 fixed costs).

A differently constituted Court of Appeal had already determined this issue in Howe v Motor Insurer’s Bureau. In Howe the Court of Appeal held that set-off of opposing costs orders was not affected by QOCS, essentially because set-off is not a type of enforcement. The Court of Appeal in Ho took the opposite view but were compelled to follow the decision in Howe and allowed the set-off. The case was appealed to the Supreme Court.

The Supreme Court’s decision

The Supreme Court considered that the only question it could deal with related to the proper construction of the language of the QOCS provisions. Counsel for both parties put forward compelling policy reasons as to the adverse consequences on a finding either way. The court was however clear that it was not its place to examine these considerations in detail as that was a matter for the Civil Procedure Rules Committee (CPRC).  The Supreme Court held that rule 44.14 operated in the following way:

• Reference in rule 44.14 to the costs order being “enforced” should be understood as extending to the exercise of a right to set-off.
• Rule 44.14 does not operate as a total ban of set-off of opposing costs orders. However, it does impose a “monetary cap” on any set-off which amounts to the claimant’s orders for damages and interest.
• Set-off of costs against costs will therefore be banned where there are no orders for damages or interest (as in the case of Ho) or if the aggregate amount of damages and interest have already been used up by other means of enforcement.

In light of the Supreme Court’s findings, the defendant had to pay the claimant the full pre-settlement costs of £16,700 and was unable to enforce her own Court of Appeal costs order for £48,600.

Comment

We consider that the practical application of QOCS has significantly shifted in favour of claimants in recent years and Ho is a decision which will leave defendants and their insurers further exposed. Although the decision in Cartwright produced a much larger effect on the tipping of this balance, the consequences of Ho should not be underestimated. The decision means that once an underlying damages claim is settled, there is little to no risk for claimants which will no doubt encourage claimant solicitors to raise spurious arguments to avoid fixed costs. Furthermore, it removes the teeth of the defendant’s part 36 offer as late acceptance of a Part 36 offer by a claimant will not lead to the defendant benefitting from a costs order which can be enforced, as there will be no order for damages. It is therefore hoped that the CPRC will now review QOCS and effect the changes to the CPR to rebalance its fairness.