Summary

A judge had erred in applying the costs consequences of the claimants' failure to beat a Part 36 offer when the defendants' offer did not comply with the CPR Pt 36. It was not permissible to discount a number of failures to comply with the requirements of Part 36 as matters of mere technicality.

Facts

The appellants (F) appealed against a decision ([2011] EWHC 1731 (Ch), [2012] Bus.L.R.891) that they should pay costs to the respondents (B) on the indemnity basis plus interest. B cross-appealed against the disallowance of 30 per cent of their costs.

F had brought proceedings for a declaration that B's exercise of an option under a limited liability partnership agreement was not valid. Before the trial, B had made a settlement offer of £5.8 million. The offer was expressed to be open to a specified date. It was not a Part 36 offer. F rejected the offer. The court found that B's exercise of the option was valid and F was ordered to pay B approximately £7.8 million. B also succeeded in an unfair prejudice petition, but failed to establish a number of other allegations. F failed in their cross-petition for unfair prejudice. The judge ordered F to pay 70 per cent of B's costs on the standard basis up to the last date when they could have accepted B's offer. After that date, they were to pay B's costs on the indemnity basis. He justified his order on the basis that B's offer had been akin to a Part 36 offer. He also ordered F to pay interest on those costs at three per cent above base rate up to the offer's expiry date, thereafter at 10 per cent above base rate, rising to 40 per cent per annum, and then falling to 22 per cent, to reflect the borrowing rates paid by B on loans they had obtained to fund the litigation.

Held

(1) The starting point was that B's offer was not a Part 36 offer. The judge's jurisdiction as to costs fell under the CPR r.44.3 and he had no jurisdiction to make a costs order under r.36.14. It was therefore difficult to see how the costs regime of Part 36, whether indirectly or by analogy, could properly be invoked. Rule 36.14 represented a departure from otherwise established costs practice and imposed deliberately swingeing costs sanctions on claimants who failed to beat a defendant's Part 36 offer. That was designed to encourage a sensible approach to offers and promote settlement. But there was no reason or justification to indirectly extend Part 36 beyond its expressed ambit. The general rule was that for an offer to be a Part 36 offer, it had to strictly comply with the requirements. It was not permissible to discount a number of failures to comply with the requirements of Part 36 as the merest technicality, Huntley v Simmonds [2009] EWHC 406 (QB) and Fitzroy Robinson Ltd v Mentmore Towers Ltd [2010] EWHC 98 (TCC) not applied. Since B's offer was not Part 36 compliant, either in substance or in form, the judge was wrong in principle to take as directly analogous the potential costs consequences of Part 36. There was no doubt that he was entitled under r.44.3(4)(c) to have regard to the offer in deciding what order to make. The difficulty was that the judge had not found that F's conduct in pursuing their case had been unreasonable, Epsom College v Pierse Constructing Southern Ltd (In Liquidation) (formerly Biseley Construction Ltd) (Costs) [2011] EWCA Civ 1449, [2012] T.C.L.R. 2 applied. The award of indemnity costs was therefore set aside (see paras 54-57, 61-68 of judgment). (2) The judge had selected a rate of three per cent interest above base rate for the period up to the expiry of B's offer. The higher rate for the subsequent period was made by reference to an analogy with Part 36. Since the position was not dictated by Part 36 in the instant case, there could be no justification for departing from the rate of three per cent above base rate. The court generally took a pragmatic approach. The rate set was often less than the successful party would have to pay as a borrower, but more than he would receive as a lender (paras 82-83, 88). (3) The judge had taken the view that B had suffered particularly high losses as a result of the litigation, in the form of interest charges on bridging loans taken out to fund the litigation. His award of interest at 40 per cent, and 22 per cent, could not stand because: (a) he had taken into account his award of indemnity costs before reaching his conclusions on interest; (b) there could be no justification for some kind of penal award of interest in the instant case; (c) although regard had to be had to the compensatory principle, reasonableness so far as the paying party was concerned was also relevant. F had been given no prior notification that B were borrowing at such rates. Further, the cost of funding litigation by way of bridging loans was not ordinarily recoverable as a cost of litigation, but the judge's approach came near to having that consequence. A rate of three per cent above base rate was therefore substituted for all other rates awarded by the judge (paras 94-100).

Appeal allowed, cross-appeal dismissed