PART 36: JUDGE WAS WRONG NOT TO ALLOW ENHANCED INTEREST WHEN CLAIMANT BEAT ITS OWN OFFER: COURT OF APPEAL DECISION

In the judgment today in Telefonica UK Ltd v The Office of Communications [2020] EWCA Civ 1374 the Court of Appeal overturned the decision of the trial judge not to award additional interest on damages and costs in a case where a claimant had beaten its Part 36 offer.

“I see 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 principal sum, whether as a matter of “proportionality” or otherwise. The rule provides for the successful claimant (in the terms of CPR 36.17(1(b)) 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. In this case the Judge regarded the award of the two more trivial enhancements as a reason why it was unjust to award the major enhancement. I consider he was not entitled to do so.”

THE CASE

The claimant brought an action against the defendant and obtained judgment for  £54,379,489.05 together with simple interest of £2,995,007.55.  The claimant did better than its own Part 36 offers. The judge ordered the defendant to pay £75,000 in addition, plus costs on an indemnity basis. The judge refused to award additional interest. The claimant appealed.  The Court of Appeal allowed the claimant’s appeal.

THE COURT OF APPEAL’S JUDGMENT ON THIS ISSUE

Lord Justice Phillips found that the judge had erred in not awarding enhanced interest on costs and interest.

    1. Turning to the four types of enhanced relief, the Judge first recorded that Ofcom had agreed that an additional sum of £75,000 was payable to Telefónica pursuant to CPR 36.17(4)(d). The Judge did not accept Ofcom’s submission that that sum was sufficient to satisfy the application of CPR 36.17(4), but did regard it as “a significant starting point”.
    2. The Judge also awarded indemnity costs under CPR 36.17(4)(b), stating:
“16. As I said earlier, I do not find that the offers were not genuine attempts to settle the proceedings. Therefore the normal Part 36 approach, to my mind, ought to be engaged and in the normal way, as I understand it, a standard consequence is an indemnity costs order. That is not, I emphasise, on the basis that there was any unreasonable conduct in refusing those offers, but I consider that the offers themselves entitled the claimants now to come forward and obtain that judgment.”
    1. The Judge declined, however, to award enhanced interest on the principal sum under CPR 36.17(4)(a) for the following reasons:
“18. …the claim for an additional measure of interest which is permissible under the [rule] produced in this case a very large number in that….it would award over and above the current judgment, plus interest, a sum of £3.2 million in favour of Telefónica …
19. Whilst there no doubt may be cases in which, following a Part 36 offer, the award of supplementary interest is appropriate, given the circumstances of this case and in particular the very high nature of the offers…and given the other benefits which I have already referred to, it does appear to me that it would be disproportionate, and accordingly unjust, to impose this further sanction on Ofcom, in circumstances in which, as I have said, I do not regard its conduct as unreasonable albeit that it was in the event misguided.”
    1. The Judge also declined to award Telefónica enhanced interest on its costs pursuant to CPR 36.17(4)(c), giving the following reasons:
“Equally, so far as the interest on costs is concerned, I consider that it is a relevant factor here to see how the case was itself conducted. I do not consider that it was conducted in any unreasonable way. I do not consider the costs that were incurred were necessarily enlarged because of the way in which the case was conducted. In those circumstances, given, as I said, the further factors which I have already referred to, I do think that it would be unjust to award an additional uplift of interest on those costs.”
The parties’ arguments on the appeal
    1. Telefónica pointed out that all of the criteria specifically identified in CPR 36.17(5) pointed to the justice of awarding the four enhancements: the offers were clear and simple and were made at an early stage, all material was available to the parties, there was no adverse conduct with regard to the provision of information and the offers were genuine attempts to settle.
    2. Further, Telefónica submitted, none of the factors identified by the Judge justified a finding that an award of enhanced interest was unjust. In particular:
i) the fact that the dispute was “binary” could not be relevant: many disputes could properly be compromised (and Part 36 offers made in that regard), notwithstanding that the result at trial would be “all or nothing”;
ii) the reasonableness of Ofcom’s conduct, whilst relevant in the broad sense, was not remotely sufficient to render the award of enhanced interest unjust;
iii) equally, the fact that the offers were at the very highest end of the spectrum of genuine offers did not render it unjust to order enhanced interest.
    1. However, Telefónica placed most weight on the Judge’s mistaken assumption that the enhanced interest on the principal amount of the judgment would amount to about £3.2m and so would be disproportionate. Telefónica argued that the Judge thereby completely failed to recognise that he had a wide discretion as to the level of any enhanced interest, was certainly not bound to enhance the rate to 10% above base rate, but could award a lower rate which would not be disproportionate. Contrary to the clear guidance in OMV, the Judge thereby failed to distinguish between the question of whether it was just to award enhanced interest and what level of enhanced interest to award.
    2. Finally, Telefónica submitted that something had obviously gone wrong with the Judge’s decision: Telefónica had bettered its first Part 36 offer by over £4.25 million (circa 8%) and its second Part 36 offer by over £4.5 million (circa 9%), yet was awarded no more interest than it would have been awarded had it made no offer at all.
    3. Ofcom emphasised that the question of whether it was unjust to order one of the enhancements under CPR 36.17(4) was a value judgment for the first instance judge, itself creating a formidable obstacle on appeal of his decision: see Dutton v Minards [2015] EWCA Civ 984 per Lewison LJ at [26] and [27]. In this case the Judge was uniquely well placed to make that value judgment.
    4. Further, Ofcom submitted, the Judge did not confuse any particular factor (such as “reasonableness” or “proportionality”) with “justice”, but rather took into account all the circumstances of the case (as he was bound to do pursuant to CPR 36.17(5)) and formed the broad value judgment that an award of indemnity costs and £75,000 was sufficient and that any more would be unjust. Those circumstances properly included the high level of the offers (the terms of offers being a compulsory criterion) and the reasonableness of the Ofcom’s decision to take the matter to trial. In the latter respect, Ofcom contended that it was reasonable for a public authority to seek to pursue a point of principle to judgment where the outcome might significantly affect how much (if any) public money was recoverable.
    5. Ofcom also argued that the Judge was entitled to take into account the “all or nothing” nature of the dispute, pointing out that in Ritchie v Joslin [2011] 1 Costs LO 9 HH Judge Behrens took the view that in such “binary” cases it was necessary to assess the prospects of success on the claim in order to determine the reasonableness of the refusal of the offer and whether it was unjust to follow Part 36. In reply, Telefónica questioned the correctness of the decision in Ritchie, but it is unnecessary to decide that issue because the Judge did not place any real weight on the binary nature of the dispute, nor did he consider the reasonableness of the offers, expressly stating that he was not in a position to do so.
    6. As for the discretion as to the level of any enhanced interest, Ofcom rejected the suggestion that the Judge had forgotten that power, pointing to discussion in that regard in the transcript of argument at the hearing.
    7. In summary, Ofcom contended that the decision was a value judgment, one which the Judge had reached considering all the circumstances and without erring in principle.
Discussion
    1. The Judge did not consider that the factors he identified rendered it unjust to award Telefónica both indemnity costs and the maximum additional sum. Indeed, in relation to indemnity costs, he considered that the “normal Part 36 approach” ought to be engaged, and that the “standard consequence” was an indemnity costs order. The Judge was rightly not persuaded that the fact that Ofcom was a public body (and that public money was at stake) excused Ofcom from the consequences of failing to accept a Part 36 offer which it failed to beat after a trial. The decision to continue to litigate was in Ofcom’s own hands and its status as a public authority could not relieve it of the normal consequences of that decision.
    2. In that context, the question arises as to why the position was any different in relation to the award of the other standard consequences, namely the award of additional interest on the principal judgment and costs. I agree with Stewart J’s observation in JLE that it would be unusual for the circumstances to yield a different result for some only of the consequences. The question is particularly acute in the case of a judgment for £54 million (following a relatively short trial under Part 8), where an award of indemnity costs and an additional £75,000 was an almost trivial uplift and any significant enhancement in overall relief would only have been achieved by the award of additional interest on the principal sum.
The award of enhanced interest under CPR 36.17(4)(a)
    1. In relation to enhanced interest on the principal award (CPR 36.17(4)(a)), the Judge’s reasoning was that such an award would have been “disproportionate” given the “very high nature of the offers” and the other benefits he was awarding. In my judgment that reasoning does not bear scrutiny.
    2. First, it is difficult to see the relevance of the level of the offers given that the key factor is that the defendant could have avoided the need for the proceedings (or most of the proceedings) by accepting one of the offers, and been in as good a position as it was after the trial. The fact that the amount of an offer is a very high percentage of the maximum a claimant could be awarded after judgment may justify the court in finding that it is not a genuine attempt to settle the proceedings (the purpose for which CPR 36.17(5)(c)) was added in April 2015) and therefore find that the award of enhancements would be unjust. The offers in this case, based on payment of 100% of the principal sum then claimed and discounting only some or all of the interest claimed, might have been in that territory. However, once the Judge had accepted that the offers were genuine attempts at settlement (his negative formulation that he could “not determine that they were not genuine attempts to settle” amounting to the same finding, in my judgment), the level of the offers could not, in itself, form the basis of an assessment of the “proportionality” of enhanced interest, let alone a finding that any enhanced interest would be unjust. In making no order for enhanced interest in that situation, the Judge awarded the claimant no more interest than would have been awarded if the claimant had not made or not beaten a Part 36 offer, apparently on the basis that the margin between the offer and amount claimed (and for which judgment was granted) was small and the award of enhanced interest proportionately too large to be just. In my judgment, in so doing, the Judge “reintroduced” the overturned approach in Carver, effectively and improperly declining to implement Part 36 because of the small margins involved.
    3. Second, since the court has 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. As emphasised in OMV, the level of enhanced interest awarded must be proportionate in all the circumstances, entailing that the court can and must ensure that the award of enhanced interest is not, by definition, unjust on the grounds of disproportionality. For example, if the court considered that any significant element of enhanced interest would be disproportionate, it could award a very low or even nominal enhanced rate. But it would not be entitled to refuse to make an order for enhanced interest at all on that ground.
    4. Third, I see 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 principal sum, whether as a matter of “proportionality” or otherwise. The rule provides for the successful claimant (in the terms of CPR 36.17(1(b)) 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. In this case the Judge regarded the award of the two more trivial enhancements as a reason why it was unjust to award the major enhancement. I consider he was not entitled to do so.
The award of enhanced interest under CPR 36.17(4)(c)
    1. The Judge considered it unjust to award an uplift of interest on costs because the case was not conducted by the defendant in an unreasonable way and so costs were not enlarged by such conduct.
    2. However, as identified by Briggs J in Smith v Trafford Housing Trust, the key question is which party was responsible for costs being incurred when they should not have been. In a case such as the present, the costs were incurred because the defendant could have, but did not, accept the claimant’s offers, deciding instead to fight the case but failing to do better than the offers. That is the basis of the claimant’s entitlement to enhanced interest on costs and is not displaced in the present case.
    3. Again, and as emphasised in OMV, a defendant’s conduct of proceedings after rejection of the claimant’s offer may be a major factor in increasing or decreasing the level of interest awarded. But, in my judgment, reasonable conduct on the part of the defendant is not sufficient, in itself, to render it unjust to make an award at all.
Conclusion
  1. In summary, although the Judge accepted that the claimant was entitled to enhanced relief under CPR 36.17(4), the effect of his decision was to deprive the claimant of any significant enhancement under that rule, doing so on the basis of a combination of factors which did not give rise to injustice as contemplated by the rule and so did not justify that result. Although the decision involved a value judgment and an exercise of discretion, the Judge took into account irrelevant considerations, contrary to clear statements of principle in the authorities, and failed to take into account his discretion as to the rate of interest.
  2. It follows that I would allow the appeal and award the claimant enhanced interest on both the principal sum awarded and its costs. Exercising the discretion in that regard afresh, and taking into account all relevant circumstances (including those identified by the Judge in refusing to make any award of enhanced interest) I would award an additional 1.5% per annum (equating, as I understand it, to about £900,000), making the total interest payable 3.5% above base rate, on both principal and costs, from the relevant date.