Part 36 costs sanctions delayed until defendant had information needed to assess quantum

In a recent case where the claimant beat its Part 36 offer to settle, the High Court held that it would be unjust to apply the Part 36 costs sanctions against the defendant (namely, indemnity costs and enhanced interest) until the defendant had received the claimant's evidence and was in a position to take an informed view of the quantum of the claim: Thai Airways International Public Company Ltd v KI Holdings Co Ltd [2015] EWHC 1476 (Comm).

The court said it was not necessary to decide whether the claimant had failed to disclose evidence in a timely way. What was clear was that the information needed to establish what losses the claimant had suffered as a result of the defendant's breaches of contract was in the claimant's own possession. The court took the view that it would be unjust to subject the defendant to the financial risks of not accepting the Part 36 offer until it had been able to consider the relevant information.

In many cases, of course, the information needed to establish a claimant's losses will be in the possession of the claimant rather than the defendant. This may be a useful decision for defendants who wish to argue that they should not be penalised for a failure to accept a Part 36 offer until they had access to the relevant information. Defendants should not however assume that such an argument will always find favour; each case will be assessed on its own facts. The practical message for claimants who have made Part 36 offers is that it may be in their interests to give early disclosure of information needed to assess the quantum of the claim.

The case is also of interest for the court's decision to award enhanced interest at 8%, rather than the maximum permitted by Part 36 which is 10% above base rate.

Background

On 24 October 2013 the claimant made a Part 36 offer to accept US$36 million in settlement of its claim for damages arising from the defendant's breaches of a contract for the supply of aircraft seats. The relevant period for acceptance of the offer expired on 15 November 2013.

The offer was not accepted and the claimant ultimately obtained judgment for nearly three times the amount of the offer. The court had to consider the effect of the offer on the claimant's entitlement to costs and interest.

Under the relevant provisions of CPR Part 36, where a claimant obtains a judgment that is more advantageous than its Part 36 offer, the court must (unless it considers it unjust to do so) order that the claimant is entitled to:

• indemnity costs from the date on which the relevant period expired;
• enhanced interest on both damages and costs, at up to 10% above base rate, for some or all of the period following that date; and
• an additional amount of up to £75,000 (calculated as 10% of the first £500,000 awarded and 5% of the next £500,000).

Decision

The court (Leggatt J) held that the claimant was entitled to indemnity costs and enhanced interest, but only from 3 October 2014 rather than 15 November 2013 (ie some 10 months after expiry of the relevant period). The rate of interest awarded was 8%. The claimant was also entitled to receive the additional amount of £75,000.

Indemnity costs

The starting point was that the court had to order payment of indemnity costs from expiry of the relevant period, unless it considered it unjust to do so. The defendant had submitted that it had "sound reasons" for not accepting the offer, and that its decision was "not unreasonable", but that was not the test that applied.

In considering whether it would be it unjust to make the usual order, the court had to take into account all the circumstances of the case including the information available to the parties at the time the offer was made, and the conduct of the parties with regard to giving or refusing to give information to enable the offer to be made or evaluated.

Here, the judge said, it was clear that the information needed to establish what losses the claimant had suffered as a result of the breach was in the claimant's own possession. This included information as to whether the defendant's delays had caused the claimant's decision to lease certain aircraft, a question which had significant financial consequences for the case. The defendant could not make an informed judgment about that question, the judge said, until it received the claimant's witness statements in August 2014 and a joint expert report in September 2014.

The court concluded that it would be unjust to order indemnity costs for any period before 3 October 2014, when the defendant had had 21 days to take stock of the claimant's expert evidence and was in a position to take an informed view of the quantum of the claim.

Interest

For the same reasons as applied in relation to the claim for indemnity costs, the court considered it would be unjust to award interest at an enhanced rate for the period before 3 October 2014.

From that date onward, the court awarded interest at 8%. It rejected the defendant's submission that an award of 10% above base rate would be a "windfall" because it was far more than the actual cost to the claimant of not being paid its damages earlier. The enhanced rate of interest was an incentive deliberately created to promote the policy underlying Part 36 of encouraging parties to make and accept sensible offers of settlement. The fact that the rate awarded is higher than the actual cost of borrowing was not a valid objection.

Nevertheless, the court accepted that the 10% uplift was "a ceiling and not a guideline". In deciding what uplift to apply, the court took account of the fact that interest rates are currently at a very low level, but noted that the judgment rate of interest still stands at 8% and so found that that would be an appropriate rate to apply.

Before that date, interest was payable at 2.5% over 6 month US dollar LIBOR, which was a reasonable average rate on short term borrowings for a reasonably creditworthy commercial party.

Comment

This decision illustrates that a claimant may be deprived of the benefits of its Part 36 offer until such time as the defendant had sufficient information to assess the quantum of the claim - at least if that information is in the possession of the claimant during the period in question. Each case will however be assessed on its own facts, and the court must apply the Part 36 costs consequences unless it considers that it would be unjust to do so.

A similar decision was made in the context of late acceptance of a Part 36 offer, in Webb Resolutions Limited v Waller Needham & Green [2012] EWHC 3529 (Ch). In that case the court held that a defendant who accepted a Part 36 offer almost a year late should be awarded its costs for the period of delay, reversing the normal costs rule, because of the claimant’s failure to supply documents requested in accordance with the applicable pre-action protocol (see post).