The pressure which parties feel to settle a case may come to a head at the door of the court, at the opening, or in the course of a trial. The way the parties perceive the case may shift when faced with the pressures and realities of the trial. Not only does a settlement seem within reach, where it had not seemed possible before, but often something can be worked out which leaves both parties feeling to some extent vindicated. Or maybe one party will feel vindicated, the other party will feel it was a draw. In such cases agreeing costs can be a stumbling block. A judge who is told that the case will settle if he is prepared to resolve the outstanding dispute solely as to costs may feel a lot of pressure to accept that task.

This week the Court of Appeal handed down judgment in just such a case, Promar International Limited v. Philip Clarke [2006] EWCA Civ 332 The judge had been persuaded to deal with the costs issue alone. Initially he ordered 75% of Claimant's costs against the Defendant. After a further hearing he changed his mind and ordered no costs either way, and was appealed – unsuccessfully as it turned out.

The Claimant ran a consultancy business. The Defendant was a Consultant who had worked for them. He had signed a restraint of trade covenant, which became relevant when he left to work for a rival business. The Claimant sought to enforce the restraint of trade covenant. They said he had breached it, and that they were entitled to an injunction and damages. The Defendant both denied the allegations, and took issue with the validity of the covenant.

In opening the case, Defendant's counsel offered an undertaking in lieu of an injunction to comply with the restrictive covenant. The offer was unconditional, it was not linked to the question of damages or costs. So that part of the case was potentially settled. The Claimants had got the main thing they wanted. They still had a large claim for damages – a major issue for the court, but perhaps an 'academic' issue for the Claimant because they seem not have expected the Defendant to be able to pay, even if they won damages. So they dropped the case.

Should either side contribute to the other side's costs in this situation? There was no quid pro quo. The Claimants, probably taking a 'commercial view', dropped a substantial damages claim of their own accord. So the Defendant might expect them to contribute to his costs. The Defendant on the other hand had given the Claimants the main thing they wanted, and the only thing were likely to get (given the problems of enforcing a money judgment): that is, the Claimants had ensured the Defendant would not breach, or stop breaching, the covenant. On that basis the Claimants might expect the Defendant to contribute to their costs. The Defendant could argue to the contrary that he still denied breaching the covenant, and did not want to breach it so the undertaking was no a big thing – certainly not amounting to a moral victory for the Claimants.

Let us look at the two approaches the judge tried in order to resolve this difference. The judge reluctantly agreed to decide the costs issue on the day, and of course Counsel had not had a chance to prepare submissions on the law, but getting the matter resolved finally must have been an attractive prospect. Counsel did not have any authorities to hand, so Approach A was derived from reading the bare words of the rules in CPR 44.3. Approach A was to ask, 'Whose fault was it that this case dragged on right up to trial before it settled?' Answer: the Defendant (who had after all signed a restrictive covenant which was not obviously unreasonable) could have tried offering an undertaking to comply with the covenant earlier. There was no certainty, but a fair chance that such an offer could have ended the litigation earlier, so the Defendant had to bear a measure of blame in the costs assessment.

Well, later Counsel found a case where something comparable had happened, and the Court of Appeal had given some guidance about how to approach the question. This was BCT Software Solutions Limited v. C Brewer and Sons Limited [2003] EWCA Civ 939. So the judge held another hearing (to which neither party objected) and applied Approach B. Approach B, following BCT Software, was to ask the following questions: 'Who would have won? Can the court make up its mind either way who was likely to have won? Maybe neither side would have won? Are there other issues of behaviour to take into account?' (This is my paraphrase: the way the judge put the questions is set out in paragraph 17 of the Court of Appeal judgment in Promar.) Approach B gave a different answer. In the Promar case the judge simply did not know who would have won. Therefore, no order as to costs.

Approach B was the right one, according to the Court of Appeal. The policy thinking behind approach A is attractive. Approach A is based on the idea that whichever party stood in the way of settlement – in so far as the court can decide – should bear the costs penalty.

But the policy behind Approach B is not primarily that the probable loser should pay. In BCT Software Mummery and Chadwick LLJ spell out the policy in the clearest possible terms, albeit obiter, and it is underlined by the Court of Appeal in Promar. The judge should be very ready to refuse to settle a costs dispute in such cases, but should be ready to say, 'Let the trial continue, unless and until you sort out a costs agreement between yourselves.' The aim of the policy is to make leaving the costs issue to the judge a very unattractive prospect, in the hope that parties will be persuaded that to do so is just too risky, and will try that bit harder to agree, and will settle the costs issue as part of the overall settlement.

The point – that the judge should be ready to decline to get involved – was obiter in both cases. In both cases the judge had got involved. The Court of Appeal decided CBT Software substantially, and Promar partially, on the basis that the appellate court should be slow to interfere with the judge's discretion. (In CBT Software a case is mentioned - Venture Finance plc v Mead and another [2005] EWCA Civ 325 – where the Court of Appeal did interfere with a costs decision following a settlement of other issues, but the case had unusual features). The point that the appellate court will rarely interfere with a costs decision is trite law, but perhaps bears repetition. In BCT Software Lord Justice Mummery quotes,
AEI Ltd–v- PPL [1999] 1 WLR 1507 at 1523 C to D: "Before the court can interfere it must be shown that the judge has either erred in principle in his approach or has left out of account or has taken into account some feature that he should, or should not, have considered, or that his decision was wholly wrong because the Court is forced to the conclusion that he has not balanced the various factors fairly in the scale".

In a nutshell, if you are advising on a court door settlement and costs are a sticking point, the key points are these. The Court of Appeal strongly encourages the judge to refuse to get involved in a costs-only dispute. The judge can, and the Court of Appeal imply that often he should, 'threaten' to go on with the trial, and should if necessary, do so. (There is an element of threat here, in the sense that this policy is supposed to put the parties under pressure to agree the costs issue.) If the judge does agree to get involved in making a costs-only decision, he should ask the questions I paraphrased as, 'Who would have won? Can the court make up its mind either way who was likely to have won? Maybe neither side would have won? Are there other issues of behaviour to take into account?' If the judge then says simply that he does not know who would have won, so he will make no costs order, the parties should not be surprised. The Court of Appeal have held that judge who does that is doing his job, and that simply refusing to decide the question either way, and to make no order as to costs, is a proper exercise of discretion which they will not interfere with. And in any event, the chances of a successful appeal, however little the client likes the judge's decision, are very slim indeed. It is far better to agree the costs issue, whenever a case is settled.

Dr John Birchall - Professional English, Legal English, and Common Law Training