INTEREST ON DAMAGES AFTER FAILING TO BEAT A CLAIMANT’S PART 36 OFFER: THE AIM IS TO ENCOURAGE GOOD PRACTICE AND NOT SIMPLY TO COMPENSATE

March 28, 2017 · by · in Appeals, Costs, Damages, Part 36

In Ovm Petrom SA -v- Glencore International SA [2017] EWCA Civ 195 the Court of Appeal overturned a decision not to award 10% interest on damages in a case where a defendant failed to beat a claimant’s Part 36 offer.

“The culture of litigation has changed even since the Woolf reforms. Parties are no longer entitled to litigate forever simply because they can afford to do so. The rights of other court users must be taken into account. The parties are obliged to make reasonable efforts to settle, and to respond properly to Part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court’s powers can be expected to be used to their disadvantage. The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process.”

KEY POINTS

  • The award of interest at 10% above base rate on damages and costs when a claimant beats its own Part 36 offer is not simply a “compensatory” matter.
  • The award of interest in these circumstances is part of the “carrots and sticks” approach to litigation introduced by recent reforms.
  • The judge erred in finding that the primary issue was compensation. He should have taken into account the defendant’s conduct of the litigation (which was reprehensible).
  • The Court of Appeal awarded 10% interest on both damages and costs.

THE CASE

The claimant made a Part 36 offer to accept US$35 million in damages inclusive of interest. The defendant did not respond. At trial the claimant was awarded $40 million (without interest).  “According to the judge in his judgment on interest delivered on 26th March 2015, Petrom’s case on liability “rested in large measure on the evidence of witnesses who were liars and Glencore put Petrom through the hoops of having to establish liability, in a very flagrant case of fraud, in a manner which was wholly unreasonable”.”

However the trial judge did not award the claimant 10% above base rate as interest for the period following the expiry of the Part 36 offer.  Interest was awarded but at lower rates.  The clamant appealed, arguing that interest should have been awarded at 10%.

THE AWARD OF THE TRIAL JUDGE AND THE GROUNDS FOR APPEAL
  1. Against this background, the judge awarded Petrom interest on the judgment sum up to the expiry of the Part 36 offer at the rate of 6-month US$ LIBOR plus 2.5% (the “Agreed Rate”) totalling over US$44 million, and from the expiry of the Part 36 offer up to judgment at the Agreed Rate plus 3.5% per annum totalling some US$2.2 million, together also with further interest after judgment. In addition, the judge ordered Glencore to pay the sum of £75,000 under what was then CPR Part 36.14(3)(d) plus interest, and to pay Petrom’s indemnity costs (in sterling, of course) plus interest at a rate of 2.5% per annum up to the expiry of the Part 36 offer, at a rate of 4.5% per annum between that date and judgment, and at a rate of 8% per annum (the judgment rate) thereafter. The rates differed according to whether the amounts in issue were in sterling or dollars.
  2. Petrom challenges in this appeal (with the permission of Lewison LJ) the rates that the judge ordered on both the judgment sum and on the costs for the period between the expiry of the Part 36 offer on 30th April 2014 until judgment on 13th March 2015. Petrom claims that the judge ought to have awarded a rate of interest enhanced by the maximum amount of 10% per annum allowed under what was then CPR Part 36.14(3)(a) and (c).
  3. Petrom contends that the judge wrongly concluded first that the essential function of CPR Part 36.14(3)(a), as to interest on the award, was compensatory, so that the level of interest could not exceed what legitimately compensated Petrom for the disruption and difficulties of the litigation, and secondly that the essential function of CPR Part 36.14(3)(c), as to interest on costs, was to reflect the cost of money. In both cases, Petrom says that the judge ought to have concluded that a party who has behaved unreasonably “forfeits the opportunity of achieving a reduction in the rate of additional interest payable” as Lord Woolf MR held at paragraph 76 in Petrotrade Inc v. Texaco Ltd [2000] EWCA Civ 512, [2002] 1 WLR 947 (the “Petrotrade case”). Petrom submits that the power to award enhanced interest enables the court to disapprove of and to discourage unreasonable conduct, that enhanced interest should be fixed at a level which creates an appropriate incentive to settle, and that having regard to Glencore’s conduct and to the absence of any meaningful incentives to settle under CPR Part 36.14(3)(b)-(d), this was a clear case to award interest at the maximum level of 10% above base rate.

THE JUDGMENT

The Court of Appeal considered CPR 36 and the pre-existing case law in considerable detail.

    1. I repeat first that the decisions concerning whether to award enhanced interest at all are to be regarded separately from decisions as to the rate of the enhancement. The McPhilemy case dealt only with the first question in relation to CPR Part 36.14(3)(a). CPR Part 36.14(4) sets out the basis on which the court is to consider whether it would be unjust to award enhanced interest, and the judge’s decision to do so in this case is not challenged; nor, in my judgment, could it be.
    2. The question here is, therefore, whether the judge was right to think that “what the court cannot do is to penalise Glencore for the way in which they conducted the case by awarding Petrom more by way of uplift on interest than legitimately compensates Petrom for the disruption and what might be described as the problems and difficulties which this litigation has inevitably caused them”. In essence, in considering the rate of enhanced interest to give Petrom, the judge accepted that the award of enhanced interest was entirely compensatory. He was, in my judgment, wrong about that for the reasons I will try shortly to give.
    3. First, I should say that I do not regard the specified rate of 10% as a starting point. The words of the rule provide for enhanced interest to be awarded “at a rate not exceeding 10% above base rate”. That does not make the figure of 10% a starting point. It makes it the maximum possible enhancement.
    4. Secondly, in my judgment, the objective of the rule has always been, in large measure, to encourage good practice. As Lord Woolf put it in the Petrotrade case, “Part 36.21(2) and (3) create the incentive for a claimant to make a Part 36 offer”, and a party who has behaved unreasonably “forfeits the opportunity of achieving a reduction in the rate of additional interest payable”. Chadwick LJ in the McPhilemy case said that it was “an incentive to encourage claimants to make, and defendants to accept, appropriate offers of settlement”.
    5. In my judgment, the likelihood that the provisions for all four possible awards are not entirely compensatory is supported by the negative formulation of CPR Part 36.14(3)(a) to the effect that “the court will, unless it considers it unjust to do so, order that the claimant is entitled to [the four awards]”. If the rule-makers had intended to say that all or any of the awards were only to be made if they represented compensation for litigation inconvenience, it would have been very easy to say so.
    6. The whole thrust of the CPR after Jackson LJ’s reforms is to use both the carrot and the stick, as can be seen from the court’s rulings in Denton supra and in PGF II SA supra where Briggs LJ said this at paragraphs 40 and 56:-

“40. The foregoing analysis is enough, on the face of the correspondence between the parties, to justify a conclusion that the defendant’s silence in face of two requests to mediate was itself unreasonable conduct of litigation sufficient to warrant a costs sanction, without the need for the detailed point by point analysis of the Halsey guidelines, carried out both before the judge and on this appeal, on the basis of the allegation that silence amounted to a deemed refusal. But the sanction imposed by the judge followed his determination that there had indeed been a refusal, and that it had been unreasonable. …

56. The court’s task in encouraging the more proportionate conduct of civil litigation is so important in current economic circumstances that it is appropriate to emphasise that message by a sanction which, even if a little more vigorous than I would have preferred, nonetheless operates pour encourager les autres”.

    1. In Denton supra, Lord Dyson MR and I said this at para 43:-

“The court will be more ready in the future to penalise opportunism. The duty of care owed by a legal representative to his client takes account of the fact that litigants are required to help the court to further the overriding objective. Representatives should bear this important obligation to the court in mind when considering whether to advise their clients to adopt an uncooperative attitude in unreasonably refusing to agree extensions of time and in unreasonably opposing applications for relief from sanctions. It is as unacceptable for a party to try to take advantage of a minor inadvertent error, as it is for rules, orders and practice directions to be breached in the first place. Heavy costs sanctions should, therefore, be imposed on parties who behave unreasonably in refusing to agree extensions of time or unreasonably oppose applications for relief from sanctions. An order to pay the costs of the application under rule 3.9 may not always be sufficient. The court can, in an appropriate case, also record in its order that the opposition to the relief application was unreasonable conduct to be taken into account under CPR rule 44.11 when costs are dealt with at the end of the case. If the offending party ultimately wins, the court may make a substantial reduction in its costs recovery on grounds of conduct under rule 44.11.  If the offending party ultimately loses, then its conduct may be a good reason to order it to pay indemnity costs.”

    1. If it were right to say that the provision for additional interest were entirely compensatory, the 10% cap would only rarely be engaged (as the judge’s order demonstrates), and then probably only in unusual cases where, for example, the period of the enhanced interest award was very short. First instance courts would be required to engage in a complex and unnecessary exercise aimed at identifying what the prolongation of the litigation has cost the successful party in terms of wasted management time and other on-costs. This would be the kind of undesirable satellite litigation, perhaps involving detailed evidence, of which the court spoke in Denton supra. Moreover, the range of possible additional costs that might be caused by the litigation would be boundless. It would all depend on the particular type of litigation and the particular situation of the claimant concerned. Such additional costs might include the loss of profitable commercial contracts, additional loan costs and many other types of damage.
    2. Moreover, the argument that the Jackson reforms demonstrate that the existing provision was not intended to be penal, in my judgment, proves too much. The Jackson reforms undoubtedly introduced a penal award of up to £75,000 as an additional sum calculated on the basis of the amount of the court’s award or, in the absence of such an award, the amount of the claimant’s costs. But whatever the consultation papers show as to what consultees thought about the nature of the existing provisions, Jackson LJ’s final report had said expressly at paragraph 1.1 of Chapter 41 that the existing Part 36 was “backed up by a scheme of penalties and rewards in order to encourage the making of reasonable settlement offers and the acceptance of such offers”.
    3. In my judgment, the use of the word ‘penal’ to describe the award of enhanced interest under CPR Part 36.14(3)(a) is probably unhelpful. The court undoubtedly has a discretion to include a non-compensatory element to the award as I have already explained, but the level of interest awarded must be proportionate to the circumstances of the case. I accept that those circumstances may include, for example, (a) the length of time that elapsed between the deadline for accepting the offer and judgment, (b) whether the defendant took entirely bad points or whether it had behaved reasonably in continuing the litigation, despite the offer, to pursue its defence, and (c) what general level of disruption can be seen, without a detailed inquiry, to have been caused to the claimant as a result of the refusal to negotiate or to accept the Part 36 offer. But there will be many factors that may be relevant. All cases will be different. Just as the court is required to have regard to “all the circumstances of the case” in deciding whether it would be unjust to make all or any of the four possible orders in the first place, it must have regard to all the circumstances of the case in deciding what rate of interest to award under Part 36.14(3)(a). As Lord Woolf said in the Petrotrade case, and Chadwick LJ repeated in the McPhilemy case, this power is one intended to achieve a fairer result for the claimant. That does not, however, imply that the rate of interest can only be compensatory. In some cases, a proportionate rate will have to be greater than purely compensatory to provide the appropriate incentive to defendants to engage in reasonable settlement discussions and mediation aimed at achieving a compromise, to settle litigation at a reasonable level and at a reasonable time, and to mark the court’s disapproval of any unreasonable or improper conduct, as Briggs LJ put the matter, pour encourager les autres.
    4. The culture of litigation has changed even since the Woolf reforms. Parties are no longer entitled to litigate forever simply because they can afford to do so. The rights of other court users must be taken into account. The parties are obliged to make reasonable efforts to settle, and to respond properly to Part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court’s powers can be expected to be used to their disadvantage. The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process.
    5. In these circumstances, and for the reasons I have given, the judge’s discretion in this case was exercised on the wrong basis, so this court must re-exercise it.
    6. The circumstances relevant to the determination of the appropriate rate of enhanced interest were Glencore’s refusal to engage in settlement discussions or to respond to the Part 36 offer, the fact that the eventual award was very significantly greater than the Part 36 offer itself, and, perhaps most of all, Glencore’s conduct of the litigation as described by the judge in his judgment on this issue. It is, however, by no means automatic that the 10% uplift will be appropriate, because, as Mr Southern pointed out, the outcome of applying that rate has to be considered, alongside the overall effect of the 4 awards that are being made (if they are) under Part 36.14(3). Here, however, it is hard to imagine a case in which there would be greater justification for the award of a 10% enhanced interest rate. The sum of US$2.6 million that Glencore will be required to pay may be 6.5% of the ultimate award. That does not seem to me to be an excessive or disproportionate amount, even taken in conjunction with the other 3 orders being made (as to indemnity costs, the £75,000 based on 10% of the award between zero and £500,000 and 5% of the award between £500,000 and £1 million, and an enhanced interest award on the costs – see below as to the latter). If the period had been 5 years instead of 10½ months, things might well have been different. But it was not. The judge made it clear that Glencore was guilty of lying. It ignored the Part 36 offer that was made, and shunned any mediated solution. Its conduct was deplorable, if not outrageous. Glencore is not excused by having raised an arguable, if unsuccessful, point of law on appeal. A blank refusal to engage in any negotiating or mediation process, and the use of a vast asset base to seek to frustrate a claimant’s attempts to reach a compromise solution should be marked by the use of the court’s powers to discourage such conduct.
    7. In my judgment, the judge ought in this case to have imposed the full 10% uplift for the enhanced rate of interest on the award in this case.
The award of enhanced interest on costs under CPR Part 36.14(3)(c)
    1. As I have said, I do think that we are bound by the McPhilemy case to decide that the assessment of the rate of interest on costs should be such as to achieve a fairer result for the claimant than would otherwise have been the case. That does not, however, indicate that some of the factors I have already mentioned may not be relevant. Moreover, once again I do not regard the award as purely compensatory. As I have also said, different factors may in practice apply to the enhanced interest under CPR Parts 36.14(3)(a) and (c). That is because account may need to be taken of how the costs, on which an enhanced rate of interest is claimed, were incurred. It could have been, for example, that despite the fact that it was unreasonable to refuse the Part 36 offer, the conduct of the litigation was itself reasonable, so that the costs on which enhanced interest was sought were not incurred in contesting bad points or dishonesty by the defendants. That is not this case – but in some cases, it would be a serious consideration.
    2. I have considered carefully the judge’s approach to the award of enhanced interest on the costs. He applied paragraph 23 of the McPhilemy case as he was entitled to do, but I think he fell into error, through no fault of his own, by failing to take into account some of the other factors I have mentioned including in particular the fact that the costs on which enhanced interest was claimed were largely incurred unreasonably in advancing a dishonest and unreasonable defence. In these circumstances, this court should exercise the discretion afresh. I would hold that the correct rate of enhancement is once again the maximum of 10% per annum for the reasons I have mostly already given. I do, however, also think that the factors I mentioned above in relation to the enhanced rate of interest under CPR Part 36.14(3)(a) were also relevant to the interest award on the costs, because this was a very bad case of the defendant simply ignoring a proper offer and running up the costs thereafter.
    3. In my judgment, therefore, the judge ought also to have imposed the full 10% uplift for the enhanced rate of interest on the costs in this case.
Conclusion
  1. For the reasons I have given, I would allow the appeal and replace the enhanced rate of interest on both (a) the award for the period from the date the Part 36 offer lapsed until judgment, and (b) the costs with an award of interest at a rate of 10% over base rate.
  2. I should not leave the case without saying that, in my judgment, appeals on issues of the kind raised in this case should in future be rare. The judge’s discretion as to the appropriate rate of enhancement under Part 36.14(3) is a wide one as I have explained and I would not expect the Court of Appeal often to be persuaded to interfere with it.
Tags: , , , ,