Consider the following, not unusual, scenario. In a case subject to QOCS, a defendant makes an early offer to settle. The claimant does not accept the offer and runs the case to trial. The claim succeeds and the judge awards the claimant something, but less than the defendant’s offer. The court makes the usual costs order in those circumstances: the defendant to pay the claimant’s costs until the expiration of the offer, and the claimant to the defendant’s costs thereafter. Because the offer was made early in the litigation the latter exceeds the former. Let’s say for the sake of argument that the costs payable by the defendant to the claimant are £1,000, the costs payable by the claimant to the defendant are £4,000, and the judgment sum is £2,000.
Most practitioners will be aware that the defendant can, without the need for the court’s permission, enforce the costs order in its favour against the C’s damages (and interest). That is the effect of CPR r44.14 (1) which reads:
Subject to rules 44.15 and 44.16, orders for costs made against a claimant may be enforced without the permission of the court but only to the extent that the aggregate amount in money terms of such orders does not exceed the aggregate amount in money terms of any orders for damages and interest made in favour of the claimant.
So far, so straightforward. But does the court have the power to set off the defendant’s costs against the claimant’s costs (a “costs/costs set off”) and, if so, when should it do so?
The answers to these questions are important for defendants.
In the example above, if the court does not order costs/costs set off then the defendant will be able to enforce £2,000 of its costs order against the claimant’s damages; but the difference between the defendant’s costs order and the claimant’s damages (£2,000) will be subject to QOCS and hence unenforceable. The claimant, however, will be able to enforce the £1,000 costs order in their favour. Net result: the defendant is out of pocket to the claimant to the tune of £1,000.
If the court does order costs/costs set off (and order the claimant to pay the balance) then the resulting costs order will be that the claimant shall pay the defendant £3,000 (£4,000 - £1,000). The defendant will then be able to enforce that order against the claimant’s damages (up to the judgment sum of £2,000). The defendant will still have £1,000-worth of costs which are subject to QOCS and hence unenforceable against the claimant; but it will be £1,000 better off than had the court not ordered set-off.
Firstly, then, does the court have the power to order costs/costs set off in a QOCS case? CPR r44.12(1) reads, so far as relevant:
Where a party entitled to costs is also liable to pay costs, the court may assess the costs which that party is liable to pay and either –
(a) set off the amount assessed against the amount the party is entitled to be paid and direct that party to pay any balance …
For a while, however, some claimants argued that because r44.14(1) makes reference to enforcement against a claimant’s damages but not against the claimant’s costs, this must mean that the former is permissible in QOCS cases but the latter is not. Although r44.12 gives the court a general power to order costs/costs set off, so the argument ran, that rule only applies to non-QOCS cases. This argument found favour with some judges: see Darini & anr v Markerstudy Group (unreported, County Court at Central London, HHJ Dight, 24 April 2017).
The matter has now been put beyond doubt (at least until such time as it is considered by the Supreme Court). In Howe v Motor Insurers’ Bureau (No.2), (unreported, 6 July 2017) the Court of Appeal came down firmly in favour of the power to order costs/costs set off still existing in QOCS cases. Its reasoning was that such set off was not a form of “enforcement” and hence the absence of reference to it in r44.14 could not give rise to the inference that the usual power did not prevail in QOCS cases as much as any other. The claimants also argued that, if the power existed, it should not be exercised in QOCS cases because of the policy considerations which gave rise to the QOCS regime. The Court of Appeal rejected that argument also, holding that there was nothing in those considerations that precluded costs/costs set off.
It is unfortunate that the decision in Howe is not better known or more widely reported. This is probably because it came in a short supplemental judgment to a longer main judgment which dealt with wider issues relating to QOCS. The latter is reported as  EWCA Civ 932,  1 WLR 923.
Howe is authority for the proposition that the court retains the power to order costs/costs set off in QOCS cases. What are the principles governing the exercise of that power? For that, one must go back the general law of set off.
The leading authority remains Lockley v National Blood Transfusion Service  1 WLR 492 (CA). At 496G-497C Scott LJ set out the relevant principles and in particular that:
… the broad criterion for the application of set-off is that the plaintiff's claim and the defendant's claim are so closely connected that it would be inequitable to allow the plaintiff's claim without taking into account the defendant's claim. As it has sometimes been put, the defendant's claim must, in equity, impeach the plaintiff's claim.
Beyond this broad guidance that the court must consider what is equitable, Scott LJ made the following specific observation at 497D:
… a set-off of costs against costs, when all are incurred in the prosecution and defence of the same action, seems so natural and equitable as not to require any special justification. I would expect the party objecting to the set-off to give some special reason for the objection
There will be some cases where the issue of set off is complicated by counterclaims, multiple parties and maybe even multiple actions; but in a straightforward case such as the example considered by this post, the effect of Scott LJ’s dictum must be that there is a presumption in favour of set off which is rebuttable only if the party resisting it is able to point to some “special reason” which makes it inequitable.