Court of Appeal gives guidance on proper approach to enhanced awards where claimant beats its own Part 36 offer to settle

The Court of Appeal has held that a claimant who beat its own Part 36 offers was entitled to the full range of enhanced awards under CPR 36.17, rather than the less generous partial award ordered by the High Court: Telefonica UK Ltd v The Office of Communications [2020] EWCA Civ 1374.

CPR 36.17(4) provides that, where a claimant has obtained a judgment which is at least as advantageous as the proposals contained in its Part 36 offer, the court must (unless it considers it is unjust to do so) order that the claimant is entitled to: enhanced interest on both damages and costs at up to 10% above base rate; an award of indemnity costs; and an additional amount of up to £75,000 calculated as a percentage of the judgment sum. The court must take into account all the circumstances of the case when deciding whether it would be unjust to make such an order, including “whether the offer was a genuine attempt to settle the proceedings”.

In the present case, the High Court judge had awarded indemnity costs and the additional £75,000. However he considered that it would be disproportionate, and therefore unjust, to order enhanced interest on damages and costs, in particular because of the small differential between the claimant’s offers and the amount claimed (and awarded), and the fact that the extra interest on damages would be very large (£3.2 million).

The Court of Appeal was critical of this approach, finding in particular that the margin by which a claimant beats his own offer is irrelevant in the exercise of the court’s discretion, and that the judge had failed to take into account that he did not have to award enhanced interest at the maximum 10% above base rate but could award a lesser percentage.

This decision confirms that, in cases where a claimant has beaten its own Part 36 offer, it will be unusual for the court to conclude that it is just to award the claimant some but not all of the enhancements under that rule, though enhanced interest may be awarded at less than the full 10% above base rate.

Background

Telefónica brought a claim against Ofcom for restitution of annual licence fees paid to Ofcom between 2015 and 2017 pursuant to a regulation that had been quashed in judicial review proceedings. It was awarded the full amount of its claim, approximately £54.38 million, plus simple interest at 2% above base rate (which amounted to just under £3 million).

It was common ground that the claimant had obtained a judgment more advantageous than two Part 36 offers it had made, the first on 6 April 2018. The judge accepted that the offers were a genuine attempt to settle the proceedings and that CPR Part 36.17(4) ought to be engaged. He awarded the claimant indemnity costs from 28 April 2018 (the expiry of the 21 day “relevant period” for the first of the offers) and an "additional amount" of £75,000. However, he refused to award an enhanced rate of interest on either the judgment sum or the costs.

Although the offers were genuine attempts to settle the proceedings, the judge noted that they were at the highest end of what could be considered a genuine attempt, being offers to accept around 96% or 97% of the amount claimed. He also noted that the claim for additional interest on the judgment sum would amount to a sum of £3.2 million, a very large amount over and above the sum already awarded to the claimant. Given the very high nature of the offers, and in light of the other Part 36 benefits awarded, the judge considered that it would be disproportionate, and accordingly unjust, to impose this further sanction in circumstances where Ofcom’s conduct (in refusing to settle and taking the matter to trial) was not unreasonable, albeit that it was in the event misguided.

So far as interest on costs was concerned, it was relevant to take into account how the case was conducted. The case had been conducted reasonably and the costs that were incurred were not necessarily enlarged because of the way in which the case was conducted. Therefore to award an additional uplift of interest on costs would be unjust.

The claimant appealed against the judge’s refusal to award enhanced interest.

Decision

The Court of Appeal allowed the appeal and awarded the claimant additional interest on both damages and costs at 1.5% per annum, giving a total of 3.5% above base rate. Phillips LJ gave the leading judgment, with which Arnold and Peter Jackson LJJ agreed.

Phillips LJ questioned why the judge considered it just to award the claimant indemnity costs and the additional £75,000, but unjust to award additional interest on the principal judgment and costs. He agreed with Mr Justice Stewart’s  observation in JLE v Warrington & Halton Hospitals [2019] 1 WLR 6498 (considered here) that it would be unusual for the circumstances to yield a different result for only some of the Part 36 consequences. He noted that the question was particularly significant here where the judgment was for £54 million and the award of indemnity costs and the additional £75,000 was an “almost trivial” uplift. The only way of achieving a significant enhancement would be by awarding additional interest on the judgment sum.

Award of enhanced interest on the judgment sum

Phillips LJ rejected the judge’s reasoning that it was disproportionate to award enhanced interest on the judgment sum given the very high nature of the offers and the other benefits the judge was awarding.

First, it was difficult to see the relevance of the level of the offers, since the key factor was that the defendant could have avoided the need to continue the proceedings by accepting one of them. Where, as here, the claimant’s offer was calculated as a very high percentage of the claim, that may justify a finding that it is not a genuine attempt to settle the proceedings and hence it would be unjust to award any enhancements. However, the judge had not taken that view. Accordingly, the fact that the margin between the amount of the offer and the amount claimed (and awarded) was small was irrelevant in the exercise of his discretion. In taking it into account, the judge had impermissibly reintroduced the  approach in Carver v BAA [2009] 1 WLR 113, in which the Court of Appeal had declined to give effect to Part 36 because of the small margins involved – an approach that had since been reversed by the Civil Procedure Rule Committee with the introduction of a provision (now at CPR 36.17(2)) that “more advantageous” means “better in money terms by any amount, however small”.

Second, since the courts have a wide discretion as to the rate of enhanced interest to award, there is limited (if any) scope for consideration of disproportionality in deciding whether it is unjust to make any such award. If a court considered that any significant element of enhanced interest would be disproportionate, it could award a very low or even nominal enhanced rate. However, it would not be entitled to refuse to make an order for enhanced interest at all on that ground.

Third, there was no justification for the judge's approach of treating the award of the additional amount of £75,000 and of indemnity costs as factors rendering it unjust also to award enhanced interest on the judgment sum, whether as a matter of "proportionality" or otherwise. Part 36 provides for the successful claimant to receive each of the four enhancements and “there is no suggestion that the award of one in any way undermines or lessens entitlement to the others”. Therefore the judge had not been entitled to regard the award of the two more trivial enhancements as a reason why it was unjust to award the major enhancement of interest on the judgment sum.

Award of enhanced interest on costs

Phillips LJ also rejected the judge’s reasoning for not awarding enhanced interest on costs on the grounds that the defendant had not conducted the case unreasonably. The key question was which party was responsible for costs being incurred when they should not have been. In this case, the costs were incurred because the defendant could have, but did not, accept the claimant's offers, deciding instead to fight the case but ultimately failing to do better than the offers. A defendant’s conduct of proceedings after rejecting the claimant’s offer may be a “major factor” in setting the level of interest awarded, but reasonable conduct was not sufficient to render it unjust to award enhanced interest in the first place.