WHEN THE DEFENDANTS FAILED TO BEAT THE CLAIMANTS’ PART 36 OFFER, BUT MONEY IS NOT DUE IMMEDIATELY: WHAT ARE THE CONSEQUENCES?

We are looking again at the judgment of Mr Justice Hildyard in Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor [2022] EWHC 3366 (Ch). Having determined that a valid and effective Part 36 offer had been made by the claimants the judge then went on to consider what the consequences should apply. In particular whether it was unjust for the defendants to suffer the normal consequences.

 

THE CASE

The administrators of a company, Lehman Brothers International (Europe) sought a declaration that when their appointment ended a suspensory condition in an agreement, which meant that the defendant’s did not have to pay interest, would fall away and the defendants would be liable to make payment of interest. The administrators succeeded in the their application.  During the course of the proceedings the administrators had made Part 36 offers to settle. The judge decided that that offer was valid and effective.  The judge then went on to the consider the consequences for the defendants.

THE JUDGMENT ON THE ISSUE OF WHETHER IT WAS UNJUST FOR THE NORMAL PART 36 CONSEQUENCES TO APPLY

The judge held that the judgment meant that the defendants would be liable to pay sums in the future.  This meant that the provision for additional interest on damages could not apply. However all the other consequences of failing to beat the offer did apply, including additional interest on costs and the payment of an additional sum in damages.

43. In my judgment, CPR 36.17(1) applies. CPR 36.17(2) does not; but the relief to which they are entitled is “at least as advantageous” to the Administrators as their Offer, so as to trigger the consequences set out in CPR 36.17(4), unless I am persuaded that any is “unjust”.
The consequences if the Administrators’ Offer complied with CPR Part 36
    1. CPR 36.17(4) provides that the Court must [my emphasis] “unless it considers it unjust to do so” order that the claimant is entitled to:

(a) Interest on the whole or part of any sum of money (excluding interest) awarded, at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant offer expired (CPR 36.17(4)(a)).

(b) Costs on the indemnity basis from the date on which the relevant offer expired (CPR 36.17(4)(b)).

(c) Interest on those costs at a rate not exceeding 10% above base rate (CPR 36.17(4)(c)).

(d) An “additional amount” not exceeding £75,000 calculated by applying a prescribed percentage of any sum awarded to the claimant by the court or, where there is no monetary award, the sum awarded to the claimant in respect of costs (CPR 36.17(4)(d)).

    1. When considering whether it would be “unjust” to make the orders specified in CPR 36.17(4) the Court must take into account “all the circumstances of the case” (CPR 36.17(5)) including (but not limited to, see paragraph 46 below):

(a) “the terms of any Part 36 offer” (CPR 36.17(5)(a));

(b) “the stage in the proceedings when any part 36 offer was made, including in particular how long before the trial started the offer was made” (CPR 36.17(5)(b));

(c) “the information available to the parties at the time when the Part 36 offer was made” (CPR 36.17(5)(c));

(d) “the conduct of the parties with regard to the giving of or refusal to give information for the purposes of enabling the offer to be…evaluated” (CPR 36.17(5)(d)); and

(e) “whether the offer was a genuine attempt to settle the proceedings” (CPR 36.17(5)(e)).

    1. The principles for determining whether it would be “unjust” to make the orders in question were summarised by Briggs J (as he then was) in Smith v Trafford Housing Trust [2012] EWHC 3320 (Ch) at [13] (as approved by the Court of Appeal in Webb v Liverpool Women’s NHS Foundation Trust [2016] 1 WLR 3899). The following four principles are relevant:

(a) The question is not whether it was reasonable for the defendant to refuse the offer. Rather, the question is whether, “having regard to all the circumstances and looking at the matter as it affects both parties, an order that the defendant should pay the costs would be unjust”.

(b) Each case will turn on its own circumstances. Ultimately, the Court should be trying to assess “who in reality is the unsuccessful party and who has been responsible for the fact that costs have been incurred which should not have been”.

(c) The Court is not constrained by the list of potentially relevant factors in CPR 36.17(5), there is no limit to the types of circumstances which may, in any particular case, make it unjust that the ordinary consequences set out in [36.17(4)] should follow”.

(d) However, the Court does not have an unfettered discretion to depart from the ordinary cost consequences, “the burden on the defendant to show injustice is a formidable obstacle to the obtaining of a different costs order.

    1. In Lilleyman v Lilleyman (No. 2) [2012] EWHC 1056 (Ch), another decision of Briggs J, he said at [16]:
It is plain that the court’s discretion to depart from CPR r 36.14(2), constrained as it is by a precondition that its full enforcement would be unjust, is much more circumscribed than the court’s broad discretion under Part 44. Furthermore, the four specific considerations identified in paragraph (4)(a)–(d) disclose a common thread which focuses the injustice analysis upon the circumstances of the making of the offer and the provision or otherwise of relevant information in relation to it, rather than upon the general conduct of the proceedings by the parties. None the less, I consider that the requirement to take into account all the circumstances of the case does enable the court to take a broader view in an appropriate case, so that it is not entirely disabled from having regard to questions of justice or injustice arising from the manner in which the offering party has made use of its costs expenditure prima facie now recoverable from the unsuccessful offeree, in the pursuit of its defence to the claim.”
    1. In Downing v Peterborough & Stamford Hospitals NHS Foundation Trust [2014] EWHC 4216 (QB), Sir David Eady (sitting as a High Court Judge) observed at [61] that:
“It is elementary that a judge who is asked to depart from the norm, on the ground that it would be ‘unjust’ not to do so, should not be tempted to make an exception merely because he or she thinks the regime itself harsh or unjust. There must be something about the particular circumstances of the case which takes it out of the norm.”
    1. In exercising its circumscribed discretion, the court must have regard to the objective of the provisions of CPR 36.17(4), which Sir Geoffrey Vos, when Chancellor of the High Court sitting in the Court of Appeal described in OMV Petrom SA v Glencor International AG [2017] 1 WLR 3465 at [32] as being “…in large measure, to encourage good practice” and to incentivise both the making and acceptance of genuine Part 36 offers. Sir Geoffrey Vos accepted that this could result in awards which are “not entirely compensatory”. Briggs LJ (as he then was) described the approach as being both “carrot and stick” and as operating ‘pour encourager les autres’ (see PGF II SA v OMFS Company I Limited [2013] EWCA Civ 1288 at [40] and [56]).
    1. The court must also have regard to all the circumstances of the case, which may include (but again are not limited to): (i) whether the defendant took entirely bad points or whether it had behaved reasonably in continuing the litigation, despite the offer, to pursue its defence; (ii) what level of disruption can be seen to have been caused to the claimant as a result of a refusal to accept (at [38]). In the context of (i), where (as here) the dispute can fairly be regarded as “all or nothing” or “binary” litigation in the sense of there being no room for the court to make a partial award, the court is entitled to and should assess the reasonableness of the offer having regard to the amounts at stake, the discount offered and the prospects of success: see Ritchie and Others v Joslin and Others [2011] 1Costs LO 9 at [47] (a decision of HHJ Behrens sitting as a High Court Judge).
    1. I turn to the application of this approach in this case, and to deal in turn with each of the four consequences specified in CPR 37.17(4). In addition, the relevant “circumstances” rendering it “unjust” to grant relief may not necessarily be identical for each of the four orders the Court can make under CPR 36.17(4) (OMV Petrom SA v Glencor International AG at [23]).
Firth Rixson’s primary position: unjust to grant any additional relief under CPR 36.17(4)
    1. Firth Rixson’s primary position is that in all the circumstances of this case it would be unjust to grant any of the additional relief provided for under CPR 36.17(4).
    1. Firth Rixson especially relied on the following:
(1) The terms of the Part 36 Offer: As noted above, the terms of the Part 36 Offer entailed immediate payment of the Principal Amounts. That is something which LBIE is not entitled to under the Master Agreements and still not entitled to under the Judgment. Further, the offers in relation to the Principal Amounts offered a very limited discount (0.2% in relation to the US Dollar Swap, 10% in relation to the Sterling Swap). There were no additional savings in respect of interest in relation to the Sterling Swap. As regards the US Dollar Swap, there was no interest payable as at the Relevant Date – interest will only become payable in the event that Events of Default under the Master Agreements cease to be continuing.
(2) The binary nature of the proceedings: The issue in the proceedings was whether, once the Relevant Steps had been taken any existing Events of Default would cease to be continuing, such that s.2(a)(iii) of the Master Agreements would cease to have any suspensive effect on Firth Rixson’s payment obligations. This was, in effect, a binary issue leaving little scope for any meeting in the middle, which (as noted in paragraph 50 above by reference to Ritchie and Others v Joslin and Others) makes it appropriate to assess the prospects of success of the claim to determine the reasonableness of the refusal of the offer and whether it would be unjust for the ordinary Part 36 consequences to follow.
(3) The prospects of success and conduct of the proceedings: The issues of construction in the present case are far from straightforward. Firth Rixson submitted that in this case the merits of the competing submissions were reasonably balanced and there was nothing unreasonable in Firth Rixson’s decision to take the case to trial. Nor was there anything unreasonable in Firth Rixson’s conduct of the litigation.
    1. In making the determination whether it would be unjust to make the orders sought, however, there must also be taken into account (by reference to the mandatory requirements of CPR 36.17(5) in particular) the fact that in this case:
(1) the terms of the Administrators’ Offer were clear;
(2) the Administrators’ offer was made before the issue of the proceedings but after an iterative discussion of the essential matters in dispute and the provision of a copy of the draft intended witness statement in support of the intended application which clearly delineated the points in issue;
(3) adequate information was thereby provided;
(4) that information was plainly adequate to enable the offer to be evaluated; and
(5) I am satisfied that the offer was a genuine attempt to settle the proceedings.
    1. The principal point left to determine is whether the binary nature of the issue, its complexity and the reasonably balanced nature of the competing arguments, and/or Firth Rixson’s reasonable conduct are sufficient to warrant total or partial derogation from the ordinary consequences stipulated by CPR 36.17(4) on the basis that in the circumstances their application would be unjust.
    1. Adopting Briggs J’s explanation at [15] in Smith v Trafford Housing Trust (see paragraph 46 above) of the essential purpose of Part 36 as being “to visit costs consequences upon parties of whom it can properly be said that they ought to have settled by accepting the other party’s offer, rather than taken the matter to trial” the litmus test, as I see it, is whether this was (“unusually”, Briggs J suggested) “a case properly taken to trial by both parties” notwithstanding the genuine offer which the Administrators’ offer comprised and which would have brought the dispute to an end. That, in my view, requires there to be considered once again what the offeree reasonably hoped to achieve from the litigation which was denied it by the offer, and whether the rejection of the offer was, in all the circumstances, sufficiently justified that it would be unjust for the loss of the point in issue to result in consequences more onerous than those incidental to litigation in the ordinary course.
    1. In my judgment, this case is on the cusp. The point of interpretation raised by the proceedings was, in my view, arguable, and the amount at stake was plainly considerable. Further, and most important perhaps, Firth Rixson has retained, despite the result, such amorphous and uncertain advantage as there may be to it, beyond the discount it was offered, of not having actually to pay until conclusion of the administration of LBIE.
    1. Against that, it seems to me appropriate to take into account that Firth Rixson was pressing for a somewhat counter-intuitive result (that it should never have to pay a large sum of money which it owes its counterparty, even when that counterparty is fully solvent and is no longer subject to any insolvency proceedings). It is notable that (as appears from the introduction to the Administrators’ Offer) once the Court of Appeal had decided that the effect of Section 2(a)(ii) of the ISDA Master Agreements was to suspend but not extinguish the liability (see paragraph 35 of my main judgment), LBIE was able to reach agreement with most, if not all, the other counterparties which had been withholding sums owed to LBIE in reliance on Section 2(a)(ii) of the ISDA Master Agreements for the settlement of their debts. Further, the fact is that the effect of the Administrators’ offer was to provide for a benefit by way of discount in excess, in all likelihood, of the time value in monetary terms of delayed payment.
    1. In circumstances where I consider that to achieve an egregious result Firth Rixson have resorted to a theoretical possibility of some supervening Event of Default which in my view is barely more than fanciful, it seems to me that Firth Rixson cannot complain that it is unjust the effect of the Administrators’ Offer was to “up the ante” in the event that the dispute was decided against Firth Rixson. In my judgment, it is not “unjust” for there to be some additional consequences of failure over and above those which would ordinarily follow the loss of contested litigation.
    1. I do not, therefore accept Firth Rixson’s primary argument that the circumstances of this case offer a sufficient basis on which to conclude that it would be unjust to visit on Firth Rixson any of the various consequences prescribed by CPR 36.17(4). However, in all the circumstances, I consider that it would be unjust to impose relief which is quasi-penal in nature. I turn to consider the application of each of the sub-paragraphs in CPR 36.17(4), and certain specific arguments advanced by Firth Rixson in that regard.
Application of CPR 36.17(4)(a)
    1. Firth Rixson submitted that CPR 36.17(4)(a), which provides for the claimant to be entitled to “interest on the whole or any part of any sum of money (excluding interest) awarded”, is only applicable in cases where the judgment includes the award of a sum of money, and that the declaratory relief as to the contractual consequences that may arise if and when the Relevant Steps are taken which had been sought and obtained by the Administrators does not constitute any such “award”.
    1. The Administrators submitted that the effect of the declarations in this regard, though prospective, was in substance that the sums due under the Swaps were required to be paid when the Relevant Steps were taken and that as a matter of substance the Court will thereby have “awarded” “sum of money” within the meaning of CPR 36.17(4)(a).
    1. In my judgment, CPR 36.17(4)(a) applies only to an award for the immediate payment of sums of money (excluding interest). I do not consider that it was the intention of the rule to provide for an award of interest in respect of sums which are not yet immediately due and payable. To that extent, I agree with Firth Rixson’s submissions in this regard.
    1. Further, even if (contrary to my view) CPR 36.17(4)(a) is applicable, I would consider it unjust to apply it in circumstances where it is common ground (and always has been) that Firth Rixson is under no obligation to make payments to LBIE for as long as Events of Default are continuing (which they are, and may be so for up to three years or even longer if the administration process is once again extended).
    1. If I am wrong in that regard also, I would not have awarded interest at a rate higher than that specified in the relevant contract between the parties: none being so specified in the case of the Sterling Swaps. I well appreciate that the provision enables and probably envisages the payment of interest at a higher rate of interest at the going rate (“the enhanced rate” though that is not to exceed 10%). I also appreciate that an award pursuant to CPR 36.17(4) may not be entirely compensatory. But in this case, the fact that no payments are yet due would, in my judgment, render it unjust to provide for any enhancement.
Application of CPR 36.17(4)(b)
    1. Firth Rixson did not advance specific additional arguments in support of their contention that CPR 36.17(4)(b), which provides for costs to be paid on the indemnity basis, did not apply even if the Administrators’ Offer was held to be a compliant Part 36 offer.
    1. The purpose of ordering costs on an indemnity basis, though outside the context of Part 36 unusual, is compensatory and not penal. It is intended to ensure a more realistic and complete level of cost recovery for the paying party. In my judgment, it is not unjust that Firth Rixson should have to pay costs on the indemnity basis. I therefore order Firth Rixson to pay costs on the indemnity basis from the date on which the “relevant period” expired, being 21 days after the date of the Administrators’ Offer.
Application of CPR 36.17(4)(c)
    1. Decisions as to whether to award an enhanced rate of interest on costs (that is to say, higher than the rate (if any) which would otherwise be chosen under section 35A of the Supreme Court Act 1981) are to be regarded separately from decisions as to the rate of enhancement.
    1. The provision for an enhanced rate of interest to be paid was described by Chadwick LJ in McPhilemy v Times Newspapers Ltd (No. 2) [2001] EWCA Civ 933 (at [23]) as being intended “to redress…the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment…” The objective is compensatory.
    1. In relation to the decision as to the rate of enhancement, such awards are not entirely compensatory, but nor can they be considered “penal”: OMV Petrom SA v Glencore International AG [2017] 1 WLR 3465. The Court has a discretion to include a non-compensatory element to the award, but the level of interest “must be proportionate to the circumstances of the case” (at [38]).
    1. In my judgment, it has not been shown in this case that an award of interest on costs to compensate for the cost of money (or the loss of the use of money) would be unjust; and it is therefore directed by CPR 36.17(4)(c).
    1. The Administrators submitted, relying on the notes at 36.17.4.3 of the White Book, that the conventional rate would be 4% above the base rate. They explained that their proposed rate of 6% offered, in effect, a discount on the norm to reflect the fact that the base rate was lower for part of the period in which interest would fall to be paid. Firth Rixson submitted that a 6% rate would be disproportionate and that the appropriate rate would be about 2%.
    1. Although sharply rising interest rates now tend to dislodge the memory of historically low rates, it should be remembered that the base rate in March 2020 was just 0.1% and was not raised until December 2021 and then only to 0.25%. Even after a further rise in February 2021 it stood at 0.5%. Having regard to the low rate for much of the period after the date of the Administrators’ Offer, I consider that the rate of 6% proposed by the Administrators would be disproportionate, even adopting 4% over base rate as the norm. However, the rate of 2% proposed by Firth Rixson seems to me to be inadequate having regard to the purposes of the provision. I propose to adopt the rate of 4.5% as fair having regard to all the circumstances of the case.
Application of CPR 36.17(4)(d)
    1. Firth Rixson relied on their general points in support of their overall position that none of the consequences of CPR 36.17(4) should apply in the circumstances of the case; but they did not put forward any more specific considerations to support a contention that it would be particularly unjust to grant an order for “an additional amount” as provided for by CPR 36.17(4)(d).
    1. The notes at 36.17.4.4 in the White Book suggest that the provision was originally introduced further to the Review of Civil Litigation Costs: Final Report (21 December 2009). It was there noted that the costs sanctions against a defendant for failing to accept a claimant’s offer to settle generally amount to less than the sanctions against a claimant for failing to beat a defendant’s offer, resulting in there being less incentive for a defendant to accept a reasonable offer from the claimant than for a claimant to accept a reasonable offer by the defendant. The notes in the White Book go on that the new provision “therefore deliberately rebalanced Part 36 by increasing the claimant’s reward for making an adequate offer.”
    1. Rule 36.17(4)(d) states that the “additional amount” is to be calculated by applying the prescribed percentage to an amount which is either “the sum awarded to the claimant by the court” or “where there is no monetary award, the sum awarded to the claimant by the court in respect of costs…” The latter test would be applicable here; and the amount concerned would be the maximum of £75,000.
    1. I was not shown any case in which CPR 36.17(4) was engaged where an order was not made under CPR 36.17(4)(d). Such an order is not compensatory; it is in the nature of a prescribed reward to encourage offers and their acceptance and is part of the regime introduced “to encourage good practice” (per Sir Geoffrey Vos C. in OMV Petrom SA v Glencor International AG at [32]). Remembering Sir David Eady’s admonition in Downing v Peterborough & Stamford Hospitals NHS Foundation Trust (at [61]) that a judge “should not be tempted to make an exception merely because he or she thinks the regime itself harsh or unjust”, it does not seem to me that I have been provided with any sufficient reason specifically referable to this provision why, under the regime, the Administrators should not be entitled to the specified reward in the maximum figure. I have concluded that I am required to make such an order accordingly.