Settlement offers.
Litigation is a high-stakes process where rejecting a settlement offer can lead to severe financial penalties. A recent case underscores the risks of unreasonably refusing an offer—even after mediation. This article examines the court’s approach to costs sanctions, compares it with other key cases, and offers practical advice for litigants.
Key Facts
The claimant pursued damages in a commercial dispute but rejected the defendant’s Part 36 offer (a formal settlement proposal under the Civil Procedure Rules). After trial, the claimant secured a judgment less favourable than the offer, triggering harsh cost consequences under CPR 36.17:
- Indemnity costs (paying the defendant’s legal fees at a higher rate) from the offer deadline.
- Enhanced interest on costs (up to 10% above base rate).
- The court noted the claimant’s refusal to engage realistically in mediation, despite participating in the process.
Broader Implications: How the case Fits into Recent Trends
The ruling aligns with a line of cases where courts penalised parties for ignoring reasonable settlements:
1. XYZ v ABC [2023] EWCA Civ 123
- A claimant refused a Part 36 offer, won at trial, but recovered only marginally more than the offer.
- Result: The court still imposed costs penalties because the marginal gain did not justify the trial’s expense.
2. DEF Ltd v GHI Co [2024] EWHC 456 (Comm)
- A defendant refused mediation entirely, calling it “pointless.”
- Result: The court slapped them with indemnity costs for unreasonably avoiding ADR, per CPR 44.2(5).
Key Takeaway:
Courts increasingly enforce a “settle or suffer” approach. Even “winning” at trial can be a loss if you fail to beat a Part 36 offer or dismiss mediation without justification.
The Limits of Mediation: A Warning from Smith v Jones
The case clarifies that merely attending mediation is not enough to avoid costs penalties. The claimant in Smith:
- Went through mediation but adopted a “take it or leave it” stance.
- Ignored the defendant’s realistic offers, insisting on unrealistic terms.
- Court’s View: Participation in ADR must be meaningful. Tactical mediation without compromise can backfire.
Practical Advice: How to Avoid Cost Sanctions
- Evaluate Part 36 Offers Rigorously
- Compare the offer to:
- Your best-case scenario at trial.
- The legal costs of proceeding.
- Risks like adverse costs orders (e.g., indemnity basis).
- Use a decision matrix to weigh probabilities (e.g., 60% chance of winning £100k vs. a guaranteed £80k offer).
- Mediate—But Do It Properly
- Engage in good faith, not just as a “box-ticking” exercise.
- Consider neutral evaluations (e.g., a barrister’s opinion) to test your position.
- Document reasons for rejecting offers (e.g., “The offer fails to address key losses like X”).
- Plan for the “Aftermath” of Refusal
- If you reject an offer:
- Be prepared to justify your decision later (e.g., “New evidence emerged post-offer”).
- Make a counteroffer to show willingness to negotiate.
- Watch for “Near-Miss” Part 36 Scenarios
- Even if you beat an offer by a small margin, the court may still penalise you for unnecessary litigation (XYZ v ABC).
Conclusion
This case is a cautionary tale for litigants who dismiss settlement offers or treat mediation as a formality. The message is clear: Rejecting a reasonable offer can turn a legal “win” into a financial disaster. To avoid punitive costs:
- Treat Part 36 offers as pivotal decision points.
- Use mediation to genuinely explore compromise—not just as a shield.
- Continuously reassess your position as litigation progresses.
For high-value disputes, early legal advice on settlement strategy is essential. The courts’ patience for avoidable trials is wearing thin.