Rejecting generous settlement offer not necessarily unreasonable conduct

The Employment Appeal Tribunal has overturned an employment tribunal costs order, made mainly because the claimant had turned down two offers of settlement. It has also said that an offer to pay £500 for legal advice on the first of these offers was “wholly unrealistic”.

We will come back to the £500 later, but it is worth explaining the background first. As is widely known, costs do not “follow the event” in the employment tribunal (unlike in the ordinary civil courts). Apart from in certain specific circumstances, there is no power to make a costs order unless the paying party has either acted “vexatiously, abusively, disruptively or otherwise unreasonably”, or the case (or defence) they are pursuing had “no reasonable prospect of success”. It is therefore not surprising that costs orders are rare. In the year 2018/19 the official figures show that over 120,000 claims were presented to the employment tribunal, but only 209 cost awards were made (roughly 75% of them in favour of respondents).

In this case the employment tribunal had made a costs order of £20,000 against an unrepresented claimant who had pursued a long and complex discrimination and unfair dismissal claim. Before the liability hearing, she had been offered £50,000 to settle all her claims, and £500 plus VAT to pay for legal advice to assess the offer. She rejected the offer. At the hearing all her discrimination claims were dismissed, though her unfair dismissal claim was upheld because there had been some procedural unfairness in the disciplinary process.

After the liability hearing, she received another offer. This time she was offered £1900 (equivalent to her basic award for unfair dismissal) in full and final settlement of the proceedings. That would have precluded her appealing and any application for costs from the respondents. She rejected that offer too. The remedies hearing went ahead and she was awarded precisely the sum she had previously been offered.

There was no suggestion that her claim had no reasonable prospects of success, although the ET said that she should have been aware that there were “significant difficulties” with her case. So the key question was whether refusing these offers amounted to unreasonable conduct. The ET thought it did. The EAT overturned the decision, saying that this issue had not been addressed in the right way.

The EAT said that in many cases there will be more than one reasonable course of conduct. It thought that in this case the tribunal had substituted its own view of the matter, rather than putting itself in the shoes of the claimant, as it was required to do. It is at this point that the £500 comes in. The offer to contribute this amount towards her legal costs was made so that the claimant (who had no legal representation) could get an informed view of her prospects of success and the value of the settlement offer. However, in such a complex case, the EAT thought that, while this would have been enough to get advice on the terms and effect of the proposed settlement agreement, it was unrealistic to expect she could also have obtained legal advice on the merits of her claim for that sum. The respondent’s costs application will now have to be reconsidered by the employment tribunal.

It follows that his case does not set a new benchmark for what employers should offer towards an employee’s legal costs so that they can obtain independent advice on a proposed settlement agreement. However, once litigation has started, it does illustrate how an offer to contribute to legal costs on top of a settlement sum can be seen as inadequate, if a respondent later wants to use the rejection of the settlement offer as an example of unreasonable conduct.

In addition, while we don’t know the final outcome of the costs application, this case illustrates that a party making such an application is in a relatively weak position if it wishes to rely on a rejection of a settlement offer as the main basis for an costs application. Given that employment tribunals are essentially a costs-free jurisdiction, there is no equivalent to the Part 36 Offer regime that applies in the ordinary civil courts. In the employment tribunal, the party seeking costs is on much stronger ground if they can show that the claim had no reasonable prospects of success. A few weeks before this decision was published, the EAT upheld an order for the claimant to pay the entire costs of the proceedings (estimated at some £170,000 before detailed assessment) because the tribunal was of the view that the claim should never have been brought. However the typical costs order is more modest. Last year the median award was £2,400 and the average (distorted by one very high award of over £300,000) was £6,729.