IPEC provides useful guidance on settlement offers and recovery of costs

In a recent decision of the Intellectual Property and Enterprise Court (IPEC), a successful claimant in a passing-off action was awarded only a portion of its costs in light of the defendants' early settlement offer, as a consequence of which, in the court's opinion, the continued litigation was primarily motivated by costs (Bocacina Ltd v Boca Cafes Ltd [2014] EWHC 26 (IPEC), December 20 2013).

However, notwithstanding the claimant's reduced recovery, the defendants still ended up paying more in costs than they would have, had they offered to pay the claimant's costs as they then were when they made the offer of settlement.

Daniel Alexander QC, sitting as enterprise judge, awarded the claimant 90% of its costs up until the date of the defendants' settlement offer and decreased the claimant's recovery rate to 50% after that date. In their settlement proposal, the defendants had offered to change their name and surrender their trademark for BOCA BISTRO CAFÉ. The judge considered that the defendants had effectively "given in" and that the settlement offer had removed any real cause for complaint. The judge considered that after the settlement proposal, which was rejected by the claimant, the litigation had become a dispute about costs. As a result, even though the claimant had been successful in its claim against the defendants, the judge cut significantly the proportion of costs recoverable by the claimant after the settlement offer.   However, the judge also noted that had the defendants offered to pay the claimant's costs as part of its settlement proposal, this would have avoided the action proceeding to trial and, due to the early stage at which the offer was made, would have resulted in the defendants paying significantly less than it now had to.

The judge decided that there should be a reduced incentive for claimants to continue to trial when a settlement offer proposes to provide substantive relief. That said, the judge remarked that a settlement offer may not always be reasonable, for instance where the offer does not include an offer to settle a significant proportion of the costs expended up until then.

The judge also considered issues relating to conduct and particular points on the level of costs in these proceedings.

The background of the case is as follows. On October 14 2013 Daniel Alexander QC, sitting as an enterprise judge, had given judgment in favour of the claimant in its passing off claim against the defendants. In his judgment, he had ordered that the parties file written submissions on costs. Both parties filed submissions, although the defendants' submissions were filed late.

The judge handed down his decision on costs on December 20 2013. In his assessment of the costs recoverable by a successful claimant, the judge considered:

• relevant provisions of the Civil Procedure Rules (CPR), in particular CPR 44;
• the approach taken in Westwood v Knight [2011] EWPCC 11; and
• court guidance on cost caps.

As a preliminary matter, the claimant contended that the defendants' submissions should be disregarded as they had been filed late. The judge acknowledged that, while a court would be entitled to disregard the submissions, it was not in the interests of justice to do so here. The judge reached this conclusion partly on the basis that the claimant was content for the costs assessment to be dealt with on paper if it could respond to the late submissions, and partly on the basis that admitting the documents was likely to save costs, since an additional hearing would not be needed.

The judge reiterated the objectives of the IPEC, namely to decide cases more efficiently and cheaply and help small and medium enterprises (SMEs) resolve disputes without needing a trial. The judge was critical of costs-only litigation. He noted that, if significant costs had already been incurred, it might not be reasonable for a party to make an offer of settlement without including a significant proportion of the costs expended. The judge suggested, however, that if costs incurred were low, it would make little sense for claimants to continue to trial. The judge reiterated that SMEs should be encouraged to concede points at an early stage in the proceedings and that there should be "rewards" for making settlement offers. The judge stated that one way of achieving this aim is to take account of reasonable, admissible offers to settle a case at an early stage in determining costs.

In the case, the defendants had made an offer to the claimant shortly after the particulars of claim had been served. The defendants proposed a settlement on the basis that they would:

• change their name;
• undertake not to use the disputed word ‘boca’ as part of a "trading style"; and
• surrender their own trademark registration for BOCA BISTRO CAFE. 

No contribution as to costs was offered and the defendants warned the claimant that, although they would change their branding as soon as possible, it may take up to nine months.

The judge dismissed the claimant's argument that the defendants' offer was unreasonable on the basis of timing and failure to offer to pay costs. The judge noted that the claimant had not sought interim relief as an urgent issue and that the contents of the offer were not materially worse than what the claimant eventually obtained in the judgment after trial and covered substantially all of the relief realistically obtainable. As a result, the judge considered that the offer was a factor to be taken into consideration in the assessment of costs.

The judge found that, up until the date of the defendants' settlement offer, the claimant's costs should be "relatively generously assessed" but that after that, the claimant should recover only 50% of its costs. The judge recognised that this was a "rough estimate" but that it took into account various factors, including:

• the finding by HHJ Birss QC (as he then was) at the case management conference (CMC) that the claimant's claim was meritorious;
• the reasonableness of the defendants' offer;
• the nature of the litigation, being largely about costs after the settlement offer;
• the defendants' persistence in denying liability (despite their offer), preventing the claimant from being able to summarily obtain judgment on admissions;
• the defendants' legitimate interest in continuing the case following the pre-emptive re-brand from Boca to Bica, and the claimant's refusal to provide acknowledgement that such a change would avoid liability (and this allegation was not ultimately pursued by the claimant at trial); and
• the findings that (i) successful claimants cannot expect to recover full costs if there was no real reason for pursuing the claim other than the recovery of costs, and (ii) in cases where defendants do not offer as part of early stage settlement proposals a reasonable sum by way of costs, they are likely to bear a significant proportion of the costs at trial.

In addition, the judge took into account the defendants' conduct, in particular:

• their failure to inform the claimant of their rebranding (even if the rebranding would have been obvious to the claimant, the lack of communication had increased time expended by the claimant on the matter);
• the difficulty of communicating with them (the defendants had appeared to disengage from without prejudice save as to costs correspondence before the particulars of claim were issued and served);
• arriving at court late on the day of trial (the judge awarded extra costs to the claimant in this respect); and
• failing to provide their costs submission on time.

Taking all of those factors into account, the judge then went on to apply the IPEC cost rules and his findings to the costs incurred by the claimant in the proceedings.

In relation to the short period prior to the settlement offer made by the defendants, the judge disallowed the claimant's costs relating to photocopying. He found no basis for making an exceptional allowance for recovery of photocopying charges as provided for in the Practice Direction to CPR 47 and noted that there were limited documents in the case which did not justify the sums spent.

Copying charges aside, the judge allowed 90% of the claimant's costs in relation to work regarding particulars of claim and commencement of the action, a sum within the relevant stage cap found in Table A, Section IV of the Practice Direction to CPR 45. The judge rejected the defendants' arguments as to unreasonableness of hourly rate and staffing.

With regard to the costs incurred post-settlement offer, the judge considered the costs submitted by the claimant in relation to the reply to the defendants' defence, the CMC, the evidence and the trial to be either reasonable or slightly high (for instance in relation to evidence and trial costs), and adjusted them to what he considered constituted a reasonable sum, within the limits of the cost caps of the Practice Direction to CPR 45. The judge awarded the claimant 50% of such costs. The judge considered these costs reasonable in light of the general principles and noted that the defendants had ended up paying around twice as much as they would have had to pay if they had offered to meet a substantial portion of the claimant's costs at the date of their settlement offer. This can serve as a warning to defendants envisaging making settlement offers in IPEC litigation to seriously consider offering a contribution as to costs rather than the sometimes default position of proposing a walk away deal, especially if the proceedings are at an early stage.

Business impact of the decision:

• Rejecting a reasonable offer to settle in the IPEC may have an impact on the measure of costs recoverable, even by a successful party.
• Including a cost contribution proposal in a settlement offer can save litigants money in the long run, in particular if the question of costs is all that remains in issue between parties.
• Filing documents late and in breach of a court order may lead, at best, to costs penalties if it causes cost increases and, at worse, to the documents being disregarded.

David Wilson, Christopher Sharp and Alexandra Leriche, Herbert Smith Freehills LLP, London