A claimant who rejects a defendant's settlement offer had better be sure it can win a bigger sum at trial, otherwise the legal costs could make it all pointless

Just before Christmas, shopfitters EQ Projects seemed to have won a victory in the Technology and Construction Court. True, EQ had claimed £112,000 from Mr Alavi, whose clothing shop on London's Carnaby Street it had fitted out, but £38,000 was not to be sniffed at. But all was not how it appeared …

The case was a lively affair. Judge Coulson observed that neither party missed an opportunity to make points regardless of whether they were good, bad or indifferent. One point, though, is of some interest.

Mr Alavi originally retained Preprint as designer and project manager. The plan was that Preprint would nominally be the main contractor, subcontracting the shopfitting works to a specialist. One Mr Storey, on behalf of Preprint, agreed with EQ that it would do the work for £200,000. But Mr Alavi was told that Preprint's price was £236,000, made up of £224,000 for the works and £12,000 for Preprint's fee.

Before EQ started work, there was a change of plan. It was agreed that Mr Alavi would retain EQ as main contractor instead of Preprint because Preprint was said to have financial difficulties. The overall price remained at £236,000, with EQ paying Preprint's £12,000 design and project management fee.

In evidence Mr Storey (now no longer with Preprint) said the difference of £24,000 was for a main contractor's uplift/profit margin. However, he conceded that when Mr Alavi directly retained EQ, the £24,000 could no longer be payable as Preprint was not going to be the main contractor.

When Mr Alavi discovered, shortly before the trial, that EQ had agreed to carry out the works for £200,000 he used the f-word. To be precise, he claimed he had been induced by a fraudulent misrepresentation into entering a contract that was £24,000 higher than it should have been.

The judge disagreed and found no dishonesty by EQ, although he did find that Mr Storey had been deceitful in failing to give Mr Alavi the true split of the £236,000 price because he feared telling the client that, effectively, Preprint's fee had tripled from £12,000 to £36,000.

EQ was not out of the woods, though. The judge found it was a term of the contract that the fixed price of £236,000 was agreed on the incorrect basis that the cost of the works would be £224,000 and Preprint's fee would be £12,000. This term was breached - the cost of the works was £200,000. There was no basis for the difference of £24,000, which the judge therefore disallowed in EQ's claim against Mr Alavi.

Now for the bit that recently came to light. One month before proceedings commenced, Mr Alavi generously offered to pay £74,000 to EQ to settle its claim. In the absence of Mr Alavi's offer, EQ would have been awarded some of its costs. Instead, because EQ had failed to recover more than the £74,000 that Mr Alavi offered, the position was reversed and EQ was ordered to pay Mr Alavi's legal costs of the entire litigation. The proceedings had effectively been a waste of time.

It did not matter that Mr Alavi had not backed up his offer by paying £74,000 into court once the proceedings commenced. Recently the courts have said it is not essential for defendants to pay the amount they are offering into court. If the offer is clear, genuine and expressed to be open for at least 21 days, it will provide good costs protection if the claimant fails to beat it at trial. However, the defendant must be good for the money when making the offer. This is handy for companies that would rather not have a large sum of money tied up in the Court Funds Office's bank account for the duration of a case.

The government is consulting on reforming the court rules to identify those (such as public bodies and insured parties) who should be considered able to pay settlement offers that have not been backed up with a payment into court. Those not identified will continue to face the risk of being found not to have been good for the sum they offered.

EQ will no doubt find that Mr Alavi's costs of its protracted dispute dwarf the sum awarded by the court for the works they carried out. The legal climate might have improved in favour of litigants in recent years, but there are still harsh lessons for the unwary to learn. The judge said it did not fall to EQ to say now that Mr Alavi had not been good for his offer.