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Published 2 September 2014
When claiming for unpaid fees, construction professionals can often find themselves on the receiving end of a counterclaim. In some cases, the counterclaim will be a perfectly valid one. In others, however, it may simply be a tactic to avoid paying some or all of the unpaid fees. In such cases, even if there is a valid claim, it is not uncommon to discover that the claim has been exaggerated so as to ensure that all or, at the very least, a large proportion of the fee claim is extinguished.
There are a number of practical difficulties that arise as a result of exaggerated claims, especially if proceedings have been commenced. It is extremely difficult to have an exaggerated claim struck out and the exaggerated nature of the claim can make it difficult to quantify the real value of any valid claim. However, if - notwithstanding that the value of the claim is exaggerated - a valid claim has been made against a construction professional, the sensible thing to do is make an early and robust Part 36 offer (an offer to pay a sum plus legal costs). What, though, if the exaggerated nature of the claim and the other party's conduct makes it difficult to accept a liability for all of the costs? The Court of Appeal decision in Walker Construction (UK) Ltd v Quayside Homes Ltd confirms that the commercial reality of litigation is a factor that should be taken into account when assessing a party's liability for costs.
Walker entered into a contract to carry out drainage and highway works at Quayside's building site. In February 2008, Walker brought proceedings to recover sums that had been retained by Quayside as a result of Walker's allegedly defective works. In August 2008, Walker commenced adjudication proceedings and, in December 2008, the adjudicator awarded Walker approximately £23,400.72, plus interest, which included £8,941.16 in respect of sums retained by Quayside for remedial works to defects that Walker asserted had been caused by Quayside's own building operations. Quayside paid the award but maintained that Walker's works were defective.
In spite of attempts by the parties to settle the dispute, the proceedings continued. Quayside amended its defence and counterclaim and claimed a total sum of £169,158.80 from Walker, which included the repayment of the £8,941.16 awarded to Walker in the adjudication. During the proceedings, Walker made a non-Part 36 offer, known as a Calderbank offer, to pay £30,000 in full and final settlement of Quayside's claim, which included Quayside's costs. Walker's offer made it clear that it was unable to make a Part 36 offer because the manner in which Quayside has conducted its claim (it had rejected offers for Walker to undertake the remedial works and according to Walker had claimed for works that had not been undertaken and were unnecessary) had to be taken into account when assessing Walker's liability for costs. Shortly before the trial, Quayside amended its counterclaim to £84,168.22.
The trial judge eventually awarded Quayside a net sum of £10,035.91, but dismissed Quayside's claim to recover £8,941.16 awarded to Walker by the adjudicator. Quayside was awarded its costs partly on a standard basis and partly on an indemnity basis. Those costs amounted to a staggering £345,000. Unsurprisingly, Walker appealed and the Court of Appeal overturned the costs order.
The Court of Appeal held that the trial judge had got it “plainly wrong” by failing to take into account the commercial reality of the litigation. The costs should reflect the reality that Quayside had substantially failed on its counterclaim, which was "on any basis exaggerated". Therefore, it was “impossible” that a proportionate result was for Walker to pay Quayside's costs of £345,000 in circumstances where Quayside's recovery amounted to 5.93% of its original claim and 11.92% of its amended claim. The trial judge failed to give appropriate consideration to Walker's Calderbank offer. If he had done so, he would have found that Walker's offer of £30,000 should have been accepted by Quayside.
And so, while Calderbank offers should only be made in limited circumstances, the Court of Appeal's decision in Walker does offer some comfort to those on the receiving end of exaggerated claims where making a Part 36 offer would result in disproportionate cost consequences.