PART 36: OFFERS MUST BE CONSIDERED EVEN THOUGH ALL THE PIECES OF THE JIGSAW ARE NOT IN PLACE: CONSEQUENCES ARE IMPOSED ON THE ACTUAL AMOUNT AWARDED NOT THE SUM THAT THE MAKER WOULD HAVE SETTLED FOR

I am grateful to Professor Dominic Regan for drawing my attention to the judgment of Mr Justice Kerr today in Equitix Eeef Biomass 2 Ltd v Fox & Ors [2021] EWHC 2781 (TCC).  The judge rejected the notion that the Part 36 consequences should apply to the sum that a claimant would have settled for.  Interest was imposed on the amount awarded.

“… parties frequently face the pressure of a Part 36 offer without all pieces of the jigsaw in place. Much of the purpose of Part 36 would be lost if it were otherwise; the costs which the regime was intended to prevent being incurred, would have to be incurred before the normal consequences of the offer could flow. A well judged Part 36 offer is often based on inspired and educated guesswork, which the other party must also display when deciding whether to accept it.”

THE CASE

The judge was considering issues of costs and interest after a trial. Judgment had been given for £11 million and a counterclaim dismissed.  The claimant had made a Part 36 offer which had beaten at trial. The judge considered the consequences of that Part 36 offer.  He rejected an argument that additional interest should only run on the sum that the claimant had said it would settle for.

THE JUDGMENT ON INTEREST AND PART 36

    1. It is agreed that Equitix made a relevant Part 36 offer, by a letter dated 25 January 2021, that the offer was not accepted and that it was beaten at trial. With certain qualifications and exceptions, the defendants accept that the normal consequences should flow from successfully bettering the offer at trial.
First period: before taking account of the Part 36 offer
    1. To calculate interest on damages, Equitix contends that the first relevant period starts on 5 August 2016, the date the SSA was concluded and its loss (based on the diminution in value calculation) crystallised; and ends on 15 February 2021, 21 days after the date of the Part 36 offer letter.
    1. Equitix submits that it was from 5 August 2016 that it was deprived of the use of the money now awarded as damages. The defendants should not complain because they knew what they were selling and the state of the plant and equipment; while Equitix had to uncover by degrees the full extent of its overpayment for Gaia.
    1. The defendants accept that interest will generally run from the date of accrual of the cause of action, but point out that it does not invariably run from that date. They contend that the first period of interest should be awarded not from 5 August 2016 but from 30 October 2018, the date of the claim form.
    1. They submit that it would be wrong to regard Equitix’s loss as crystallising from 5 August 2016 when their initial pleaded case relied on either loss of operating profit from the Greenergy contract or on a diminution in value approach producing the figure £7,441,064, the total amount Equitix then said was expended on buying the shares in Gaia. Further, Equitix should not be allowed to claim interest from before the date of the claim when its accounts for the period booked no loss.
    1. I do not think it would be just to accept the defendants’ submissions on this issue and I see no reason for departing from the general rule that interest runs from the date the cause of action accrues. I accept the contention of Equitix that it parted with its money on 5 August 2016 and that it did so in ignorance of the falsity of the relevant warranties. It is therefore right to regard it as having been kept out of its money since then.
    1. As explained in my main judgment, a hypothetical open market purchaser aware of the true position would only have parted with £1 million and therefore kept hold of the £13.45 million by which Equitix overpaid. I do not see why Equitix should not be treated as having been kept out of £13.45 million (albeit capped at £11 million) from 5 August 2016.
    1. The defendants, using similar reasoning, suggest that the principal amount on which interest should be awarded should be confined to £7,441,064 until 28 May 2020, for until that date Equitix was content, on its pleaded case, to limit the diminution in value basis for the claim to that amount, as an alternative to its unquantified (and unsound) claim for damages based on lost operating profit.
    1. I reject that contention. I attribute little importance to the state of the pleaded quantum claim at different times during the evolution of the litigation. It is not unusual for the presentation of the claim to evolve as the claim proceeds, especially In a complicated case such as this. The parties are continuously updating their knowledge of the documents, of witness evidence, of the assessment of the experts and of the product of legal research and a consequent need to refine the pleadings.
    1. I will therefore award interest on the damages of £11 million from 5 August 2016 down to 15 February 2021. The parties are now agreed that the rate of interest should be 2 per cent per annum over base rate. To be clear, the base rate applicable will be the Bank of England base rate from time to time during the relevant period.
Second period: after taking account of the Part 36 offer
    1. The second relevant period for the purpose of interest on damages starts, according to Equitix, from 16 February 2021 (the 22nd day after the Part 36 offer) and should run to the date of payment. The defendants, however, argue that the enhanced rate of interest (consequent on the Part 36 offer having been beaten) should run only from 22 March 2021.
    1. They say that it was not until 22 March 2021 when Ms Hill’s second report was served, that they were able to make an informed assessment of the offer. Further, interest at an enhanced rate should be awarded only on the £5,471,093.60 Equitix offered to accept in full and final settlement of the claim and counterclaim: it would be unjust to award interest on an amount more than twice what Equitix was willing to accept.
    1. I reject the defendants’ contentions. As to the first, parties frequently face the pressure of a Part 36 offer without all pieces of the jigsaw in place. Much of the purpose of Part 36 would be lost if it were otherwise; the costs which the regime was intended to prevent being incurred, would have to be incurred before the normal consequences of the offer could flow. A well judged Part 36 offer is often based on inspired and educated guesswork, which the other party must also display when deciding whether to accept it.
    1. As to the second contention, it is another ordinary consequence of the Part 36 regime that enhanced rate interest is payable on the amount actually recovered, not on the amount the other party would have settled for. Part of the incentive to settle is the “upping the ante” consideration that a recipient of the offer may pay dearly for not accepting it, if it is beaten at trial.
    1. It remains to consider the appropriate rate during the second period. It must not exceed 10 per cent over base rate (CPR 36.17(4)(a)). Equitix submits the rate should be 10 per cent, apparently including base rate. The defendants stress that 10 per cent over base is not a default rate; the rate should be 4 per cent over a base rate of 0.1 per cent.
    1. The defendants point to the short period between the offer and the judgment; and to the fact that the information available to them was incomplete until 22 March 2021. Procedural disputes were still ongoing and the expert evidence (including some defence expert evidence) was not all served by then.
    1. Equitix counters that the short period between offer and trial is already catered for by “the fact that the period over which interest is to be paid at the uplifted rate is that same short period”.
    1. However, the enhanced rate continues during the period between trial and judgment, up to the date of this supplemental judgment and beyond until payment. I am satisfied that 10 per cent is too high, having regard to the guidance in OMV Petrom SA v Glencore International AG [2017] EWCA Civ 195[2017] 1 WLR 3465.
    1. Applying the guidance in that authority, I would not say the defendants took obviously bad points or behaved unreasonably in deciding, despite the offer, to pursue their defence; nor that refusing to negotiate did anything worse to Equitix than obliging it fight the case in court.
    1. Weighing the various factors in the balance and finding nothing particular untoward in the way the case was conducted, I will opt for a figure towards the lower to middle part of the spectrum and award interest on the damages of £11 million from 16 February 2021 onwards at the rate of 5 per cent over the current base rate, i.e. 5.1 per cent.
Uplift: Additional Amount
  1. The parties are agreed that there should be an award of an additional amount of £75,000 pursuant to CPR rule 36.17(4)(d).