SETTLEMENT AGREEMENT DISPLACED PART 36 RULES: BE CAREFUL WHAT YOU ARE OFFERING: TROUBLE AT SEA WHEN TWO RULES COLLIDE

August 4, 2021 · by · in Civil Procedure, Part 36

The judgment of Clare Ambrose (sitting as a High Court judge)  in Falcon Trident Shipping Ltd v Levant Shipping Ltd [2021] EWHC 2204 (Comm) held that a settlement agreed drafted after acceptance of a Part 36 offer displaced the provisions of Part 36.

“By the time the matter came to trial the sum in dispute was USD 60,000. The legal costs generated by these proceedings must have greatly exceeded this. The parties told the court that alternative dispute resolution was not appropriate such that a High Court trial was required. Common sense and proportionality would suggest otherwise for a costs dispute of this size.”

THE CASE

The claimant made a claim for damages following a collision between ships.  A Scott Schedule was prepared which included items of claim and also included some items of costs incurred, primarily the costs of foreign lawyers.

 

“(1) USD 9,531.50 for agency fees incurred in India on owners’ behalf for instructing an Indian advocate Mr Ashwani Kumar who was involved in the arrest.
(2) USD 10,000 for fees of an Indian advocate Mr Girihdaran fee note;
(3) USD 13,086, for PANDI correspondent’s fees covering liaison with lawyers, agents and surveyors, and meetings with lawyers relating to the arrest;
(4) USD 27,000.42 for fees of Italian lawyer, Bonelli Erede who had been appointed by Italian hull insurers.”

 

THE JUDGE’S OPENING OBSERVATIONS

It is worthwhile reading the judge’s opening observations.
    1. This was a trial about costs. By the time the matter came to trial the sum in dispute was USD 60,000. The legal costs generated by these proceedings must have greatly exceeded this. The parties told the court that alternative dispute resolution was not appropriate such that a High Court trial was required. Common sense and proportionality would suggest otherwise for a costs dispute of this size.
  1. I deal with the matter in some detail because the parties chose London jurisdiction and there are questions of general interest as to the effect of a pre-action Part 36 offer, and as to the proper categorisation and recovery of fees that are incurred in investigating and securing a claim in another jurisdiction. This happens quite often in shipping disputes and the position regarding such expenses is not always clear.

THE CLAIMANT’S PART 36 OFFER

The claimant made a Part 36 offer after serving the Scott Schedule.  This Schedule included the costs incurred in instructing the foreign lawyers.  Subsequently the claimant made a Part 36 offer.

“[The Claimant] makes this offer to settle pursuant to Part 36 of the Civil Procedure Rules 1998. This offer is intended to be a Claimant’s Part 36 offer.
3. If the offer is accepted within 21 days of service of the date of this offer, your clients will be liable for our clients’ costs up to the date of acceptance in accordance with CPR Rule 36.13.
4. This offer is to settle the claims arising out of the collision between the NEW LEVANT and the FALCON TRIDENT on 21 April 2019 (the “Claims”).
5. FTSL will accept the sum of US$ 775,000 (seven hundred and seventy-five thousand United States Dollars) inclusive of interest in accordance with Rule 36.5(4), payable within 14 days of acceptance of this offer, in respect of the Claims.
6. If this Part 36 offer is accepted within 21 days of service of this letter, Owners of the vessel “NEW LEVANT” will be liable for our clients’ pre-action costs in accordance with CPR Part 36.13(1) and 36.13(3). Thereafter, unless withdrawn, the offer may still be accepted but the costs consequences in CPR Part 36.13(4) and 36.13(5) will apply.”
    1. On Friday, 22 May 2020 the Defendant accepted the Part 36 Offer stating:
“We refer to your clients’ attached Part 36 offer. We confirm that our clients accept your clients’ attached Part 36 offer of US$775,000 inclusive of interest but plus your clients’ reasonable and recoverable pre-action legal costs to be agreed or failing agreement to be assessed. Please let us have your clients bank account details and also details of your proposed recoverable costs so that we can see if these can be agreed and paid at the same time as the US$775,000?”.
    1. About 3 hours later, the Defendant’s solicitor, Mr Hall, wrote by email that “We will let you have a draft settlement agreement in [sic] Tuesday“. On the next working day, Tuesday, 26 May 2020, the parties’ solicitors signed a Settlement Agreement on their clients’ behalf.

THE SETTLEMENT AGREEMENT

The parties then entered into a settlement agreement.
    1. The Settlement Agreement provided as follows:
“WHEREAS
D. The “FALCON TRIDENT” Owners submitted their claim following permanent repairs to the “FALCON TRIDENT”, as set out in the letter of claim from MFB Solicitors dated 3rd April 2020, and as subsequently amended in the Scott’s schedule dated 12th May 2020, in the total sum of US$876,682.79 plus interest and legal costs (the “Claim”).
…
F On 12th May 2020, the “FALCON TRIDENT” Owners made a Part 36/without prejudice save as to costs offer set out at Annex I to this Settlement Agreement (the “Offer”). The Offer was accepted by the “NEW LEVANT” Owners on 22nd May 2020 (the “Acceptance”).
1. In accordance with the Offer and the Acceptance, the “NEW LEVANT” Owners will pay and the “FALCON TRIDENT” Owners will accept:

a. the sum of US$775,000, inclusive of interest (the “Principal Sum”); and

b. the recoverable pre-action legal costs of “FALCON TRIDENT” Owners up to the Acceptance in accordance with. CPR Rule 36.13 (the “Costs”)

in full and final settlement and discharge of the Claim and all losses, damages, expenses and costs whatsoever and howsoever arising between the Parties out of the Collision.
…
3. The Costs of the “FALCON TRIDENT” Owners shall be assessed by the High Court of Justice in London, if not agreed between the parties.
…
7. This agreement constitutes the entire agreement between the parties, with regard to its subject matter, and supersedes the terms of all previous agreements, whether written or oral between the Parties. …”

THE DISPUTE OVER COSTS

The question arose as to whether the costs of the foreign claimed in the Scott Schedule could be recovered as costs of the action.  The defendant argued that these figures formed part of the settlement figure and could not be claimed.

 

    1. Pursuant to the Settlement Agreement, the Defendant paid USD 775,000 on 2 June 2020. The dispute arose when MFB sent a summary of its costs totalling the sum now claimed.
    1. By a Part 8 claim form dated 20 January 2021, the Claimant now seeks an additional sum of USD 85,538.06 in respect of “recoverable pre-action legal costs” on top of the USD 775,000 it already received.

 

THE POSITION OF EACH PARTY

The judge outlined the position of each party.
    1. The Claimant’s position was that the Part 36 Offer was made and accepted in accordance with Part 36 and accordingly the consequences of a Part 36 offer must follow. The Settlement Agreement merely memorialised the Part 36 Offer and gave effect to what had already been agreed, as shown by the fact that it followed the wording of the Part 36 Offer, referred expressly to costs being recoverable in accordance with CPR 36.13 and appended the Part 36 Offer.
    1. The disputed items were recoverable under CPR 36.13 because they are recoverable pre-action costs within the meaning of CPR Part 36. The Claimant says that in the ordinary way the disputed items are costs recoverable as “costs of and incidental to the proceedings” under s51 of the Senior Courts Act 1981 and CPR 36.13. For this purpose, they rely on authorities such as The Kos [2010] 1 Lloyd’s Rep 87, [2008] EWHC 1843 (Comm) showing that costs of seeking security are treated as costs of and incidental to proceedings.
    1. The Claimant submitted that both parties would have known that a Part 36 offer cannot be made inclusive of costs. In addition, the manner in which the costs items were separated from the principal items on the Scott Schedule (and as explained in MFB’s earlier letter of 3 April) meant that the parties knew that these items were not part of the principal claim agreed to be settled for USD 775,000. In the Settlement Agreement both parties understood that costs would be treated differently from principal, as seen by the correspondence between the solicitors. The Claimant submits that the agreement to pay USD 775,000 was intended to cover everything other than those items which the parties had been treating as costs up to that point. The Claimant argued that that the figure in the recital should be ignored as the body of the contract should take precedence unless there is an ambiguity.
  1. The Defendant’s position was that the Settlement Agreement superseded the Part 36 Offer and that the definition of claim in recital D should be applied to identify what was agreed to be settled under clause 1, such that the sum of USD 775,000 covered the claims covered by the sum of USD 876,682.79 quantified in the Scott Schedule, including the disputed items. It argued that the same approach applied to the Part 36 Offer which was also referable to the Scott Schedule where costs had been treated as part of the claim. The Defendant said that its construction of both the Part 36 Offer and the Settlement Agreement better reflected business common sense since the Claimant’s construction would mean that the claim put forward was settled with a discount of less than 5%.

THE JUDGE’S FINDINGS

The judge found that the consent order displaced the Part 36 provisions.  The costs of the foreign lawyers set out in the Scott Schedule were included within the costs of the settlement.

    1. It was also unsurprising that the Settlement Agreement had not meticulously separated costs and principal. At that stage the Scott Schedule was the best document that either party could rely on to identify the claims and the Claimant had not yet drafted a claim form. While MFB had agreed that costs be dealt with separately, and the Scott Schedule had separated costs items from other items the separation was not rigorous in defining the claim. Costs were grouped with the other heads of claim whereas legal fees and legal disbursements (solicitors’ and counsel’s fees) were left over for assessment. Some items within the costs tab in the Scott Schedule were subsequently recognised to fall better outside recoverable legal costs (including the P&I Club Invoice and the costs of in-house counsel). As explained below, there may be a grey area in categorising expenses. It was significant that the quantified costs items in the Schedule were included within the total claim given as the bottom line, and this could have been relevant for the purposes of overall settlement and assessment of interest.
    1. After long and bitter legal argument over more than 12 months both solicitors are now acutely aware of the finer differences between the various costs items, whether they were separated out, and whether they are recoverable as costs or damages or at all. Not surprisingly both consider that their preferred view was agreed. However, at the time no claim had been drawn up and on its face the Scott Schedule was intended to itemise all heads of claim save for solicitors’ and counsel’s costs which were left for assessment. It was in both sides’ interest to pin down what had been settled and avoid the prospect of further argument or litigation about the recoverability of items such as Indian agency or lawyers’ fees.
    1. A pre-action Part 36 offer may confer certainty where a claim has been clearly identified or is formulaic (typically a personal injury claim). However, the Claimant’s Part 36 Offer taken together with the Scott Schedule was not entirely clear in identifying which claims were settled, not least since the Scott Schedule listed claims including costs items. In addition, for the offer to take effect proceedings would have to be issued so it was unsurprising that the parties agreed a fuller settlement agreement that gave greater certainty. Looking at the parties’ objectively stated intentions at the time their purpose was to achieve a full settlement agreement which would avert the need for litigation and clearly identify the bottom line figures that had been settled rather than leave substantial heads of claim open to assessment on grounds that they were costs.
    1. I find that on its proper construction:
a) the Settlement Agreement superseded the Part 36 Offer;
b) the “legal costs” recoverable under paragraph 1(b) did not include items listed in the Scott Schedule within the sum of USD 876,682.79 referred to in the recital;
c) items listed within the sum of USD 876,682.79 in the Scott Schedule were settled and covered by the agreement to pay USD775,000 under paragraph 1(a).
    1. There was some debate as to whether the disputed items would have been recoverable under CPR Part 36.13. Given my conclusion that the Settlement Agreement superseded the Part 36 Offer it was not strictly necessary for me to draw conclusions on this and it would be speculative to attempt to determine the outcome if no settlement agreement had been concluded.
    1. However, I address the issue briefly because Mr Steward put forward careful argument and the Settlement Agreement must be construed in light of the Part 36 Offer that was accepted. As explained above, Part 36.13 does not apply as a matter of law to a pre-action Part 36 offer so there would be no deemed order for costs. The Kos suggests that the costs of obtaining security are in principle recoverable as legal costs of and incidental to proceedings within s51 of the Senior Courts Act 1981. This is important for a defendant who may have no claim in damages. However, The Kos is not authority that costs associated with obtaining security automatically fall within s51. The question as to whether such items are recoverable as costs or damages will be fact sensitive and depend on the claim put forward. Mr Hall fairly commented that this was a grey area. The Kos suggests that if an expense is recoverable as a litigation cost then it is not recoverable as damages. However, the issue in The Kos arose in somewhat unusual circumstances where a costs order had been made in favour of a defendant.
    1. In practice English courts do not apply a hard distinction such that expenses associated with obtaining security in a foreign jurisdiction are only recoverable as costs. This is perhaps because such expenses may be factually more closely linked to the events giving rise to the cause of action than the proceedings subsequently pursued. Expenses such as agency fees, surveyors’ fees and foreign lawyers’ fees incurred to obtain security or resolve a legal issue are commonly pleaded and awarded as a head of damages or indemnity. Even following The Kos there remains some debate as to whether the cost of obtaining security for a claim is recoverable as costs in an arbitration but I need not address that question.
    1. Where a pre-action Part 36 offer has been made a court does not have the benefit of a pleaded claim in order to assess whether an item must be categorised as costs. This again shows that a settlement agreement may confer greater clarity than a pre-action Part 36 offer. On the facts here I would probably have concluded that the fees of Indian and Italian lawyers Instructed to obtain security, admit liability or agree English jurisdiction would be recoverable as legal costs. Agency fees, P&I correspondent fees and the costs of gathering contemporaneous surveys where there has been a casualty are much less obviously identifiable as costs. In practice these items are more frequently claimed as damages or expenses, and I would have declined to rule that they were only recoverable as costs.
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