Costs and Funding

Dispute Resolution > Costs and Funding

A claimant makes a Part 36 offer of £90,000 which the defendant rejects. At trial, the judge awards £175,000 in damages. The claimant now seeks enhanced costs consequences under CPR Part 36—indemnity basis costs plus interest at an enhanced rate (up to 10% above base rate) plus an additional amount (up to £75,000). The defendant argues that the enhanced consequences should not apply because the judgment is for less than the original claim. The court must decide whether the judgment is "at least as advantageous" as the Part 36 offer. This scenario tests SQE1 candidates on the complex interplay between costs, Part 36 offers, and the bases for assessing costs.

What Are Costs and Funding in SQE1?

Candidates often lose marks on SQE1 by forgetting the costs consequences of failing to beat a Part 36 offer — the penalties are severe and examiners test them repeatedly. Costs and funding are the mechanisms by which civil litigation is financed and how the parties' legal costs are allocated after judgment. The civil procedure rules set out two bases for assessing costs (standard and indemnity), the principles governing who pays costs and when, and the consequences of Part 36 offers for costs liability. Candidates must also understand the different funding mechanisms available to litigants: conditional fee agreements (CFAs), damages-based agreements (DBAs), before-the-event and after-the-event insurance, and legal aid.

Understanding costs and funding is essential for SQE1 because examiners test Part 36 consequences extensively—these are high-value exam points. Candidates must also understand how costs interact with pre-action conduct, settlement and ADR, and interim applications. The distinction between standard and indemnity basis assessment, and the impact of costs budgeting in multi-track claims, are also frequently tested.

Key Principles for SQE1

Standard Basis and Indemnity Basis: On the standard basis, the court only allows costs which are proportionate to the matters in issue and resolves any doubt in favour of the paying party (CPR r.44.3(3)). On the indemnity basis, the court allows all reasonable costs except those shown to be unreasonable, and doubt is resolved in favour of the receiving party.
Part 36 Offers and Enhanced Costs: Where a claimant's Part 36 offer is not beaten at trial, the defendant is liable for indemnity costs from the expiry of the relevant period, plus interest at an enhanced rate (up to 10% above base rate), and an additional amount (up to £75,000). This is a major exam topic and requires careful analysis of whether judgment is "at least as advantageous" as the offer.
Costs Budgeting: Parties must file costs budgets in multi-track claims (CPR Part 3). The court may use budgeted costs to cap recoverable costs in later costs assessments.
Conditional Fee Agreements (CFAs): Used to fund litigation. The losing party may be ordered to pay the winning party's success fee (uplift), subject to reasonableness. Success fees are recoverable only in certain circumstances post-LASPO.
Damages-Based Agreements (DBAs): Alternative to CFAs. The lawyer is paid a percentage of damages recovered (up to 25% in personal injury cases, 50% in others). DBAs are restricted in scope and cannot be used in family or criminal cases.
General Rule: Loser Pays: The general rule is that costs follow the event (CPR Part 44)—the losing party pays the winning party's costs. However, the court has discretion to depart from this rule based on the parties' conduct.

Exam tip

The general rule is 'loser pays' (CPR Part 44), but examiners love testing the exceptions—particularly qualified one-way costs shifting (QOCS) in PI claims and the effect of Part 36 offers on costs. Always check whether a Part 36 offer was beaten at trial. If a claimant's offer was not beaten, the defendant will be liable for indemnity basis costs plus interest and an additional amount. This is a goldmine for SQE1 examiners.

How This Appears in SQE1 Questions

SQE1 questions test Part 36 consequences extensively, particularly whether judgment is 'at least as advantageous' as the offer and what costs follow. Questions also test costs assessment on the standard versus indemnity basis, and may ask about the interaction between costs orders and Part 36 offers. You might see questions about qualified one-way costs shifting (QOCS) in PI claims, costs budgeting in multi-track claims, or the recoverability of success fees under CFAs. The key is to understand that Part 36 offers are a powerful procedural tool that can dramatically shift the costs liability if the offer is not beaten. This is a classic SQE1 trap.

Common Mistakes Students Make

Confusing when standard basis and indemnity basis apply—remember that standard basis is the default, and the court must have a reason to move to indemnity basis (e.g., unreasonable conduct, non-compliance with court orders).
Overlooking Part 36 consequences—forgetting that if a claimant's offer is not beaten, the defendant must pay indemnity costs plus interest and an additional amount.
Misunderstanding "at least as advantageous"—the judgment must be at least as favourable to the offeror as the offer; this is assessed globally, not just on quantum.
Forgetting that costs budgeting applies in multi-track claims and may cap recoverable costs.

Quick Summary

Standard basis: only proportionate costs allowed, doubt resolved in favour of paying party.
Indemnity basis: all reasonable costs allowed, doubt resolved in favour of receiving party.
Part 36 offers trigger enhanced consequences if not beaten: indemnity costs, enhanced interest (up to 10% above base), additional amount (up to £75,000).
Costs budgeting in multi-track claims may cap recoverable costs.
Conditional fee agreements (CFAs) allow recovery of reasonable success fees.

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Costs and Funding for SQE1