PART 36: NORMAL CONSEQUENCES OF FAILING TO BEAT OFFER MADE – REGARDLESS OF FINDINGS OF MISCONDUCT IN THE CONDUCT OF THE LITIGATION

In ABFA Commodities Trading Ltd v Petraco Oil Company SA (Re Consequential Matters) [2024] EWHC 706 (Comm) Mr Justice Foxton found that the normal Part 36 consequences should follow when a party (the effective claimant in the action) had beaten its own Part 36 offer.  The fact that there had been misconduct in the conduct of the action did not lead to the conclusion that the Part 36 consequences should be disapplied. Rather that misconduct was reflected by reducing the recoverable costs to 40% for a period – albeit those costs were to be paid on the indemnity basis.

THE CASE

The intervenor  (“Petraco”)had succeeded at trial in obtaining $27,034,184.8 in damages on the basis of undertakings given by the claimant when it had obtained . In October 2019 it had made a Part 36 offer of $24 million. there was no dispute that the claimant had beaten its own Part 36 offer.

SHOULD THE PART 36 CONSEQUENCES FOLLOW?

i) The effect of CPR r 36.17(4) is that the court does not have an unfettered discretion to depart from the stipulated consequences of failing to beat the Part 36 offer, and the burden on a party who has failed to beat the Part 36 offer to show that it would be unjust for the stipulated consequences to follow is a “formidable obstacle” to the obtaining of a different order.

ii) The factors identified r 36(17)(5) are not exhaustive, and the court can have regard to all of the circumstances of the case (Adrian Smith v Trafford Housing Trust [2012] EWHC 3320, [13] and Lilleyman v Lilleyman (No 2) [2012] EWHC 1056 (Ch), [16]).

1. 1. Nonetheless, the submissions largely followed the factors in r 36(17)(5) and I will address them by reference to those factors.

(a) “the terms of any Part 36 offer”

1. 1. Neither party suggested that there was any feature of the terms of the Part 36 Offer which bore on the issue of whether it would be unjust for the stipulated consequences to follow.

(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;

1. 1. Here the Part 36 Offer was made at an early stage of the Proceedings, and to the extent that this factor weighs in the balance, it weighs in Petraco’s favour.

(c) the information available to the parties at the time when the Part 36 offer was made

1. 1. When the Part 36 Offer was made, VTB Commodities was or ought to have been aware that (i) Petraco had paid $25m for the Disputed Parcel from the evidence filed on Petraco’s behalf on 1 May 2019 (paragraph 6 of Mr Dench’s witness statement); (ii) of the approximate market value of the Disputed Parcel (VTB Commodities being traders in this product who were themselves arguing that they were entitled to delivery of the Disputed Parcel and would suffer loss if it was delivered elsewhere); (iii) of demurrage liabilities for the ESTHER and LOUIE, which were already $537,000 by May 2019 and continuing at that date; (iv) that the loss claimed by Petraco including allowance for interest and costs was of the order of US$30m (this being the figure both counsel were content to work with at the hearing on 15 May 2019 as the approximate sum for “the value of the Disputed Parcel, plus an allowance for interest, costs, demurrage and other ancillary matters”).

1. 1. To the extent that VTB Commodities was unaware of the final amount of Petraco’s demurrage liabilities, it was at liberty to seek further information.

1. 1. I am not persuaded (as Mr Gourgey KC suggested) that VTB Commodities did not have sufficient information reasonably to assess the Part 36 Offer until Petraco had served its Reply and Defence to Counterclaim setting out its case on Russian law. VTB Commodities was able to and had accessed its own Russian law evidence.

1. 1. It follows that this factor does not support an argument that it would be unjust for the stipulated consequences to follow.

(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 made or evaluated

1. 1. This and the next factors are the principal matters relied upon by VTB Commodities. In particular, I made a number of adverse findings about the honesty of the evidence given by Petraco as to its knowledge of VTB Commodities‘ contractual rights and the consequence on VTB Commodities’ contractual rights if deliveries of cargo were to be made to MachinoImport for on-sale to Petraco. These can be found at [7]-[8] and [246]-[250] and I shall refer to them as the Petraco Knowledge issue.

1. 1. I was taken to a number of cases in which courts had ordered a successful party who had “beaten” their Part 36 offer no or only a proportion of their costs, to reflect disapproval of their conduct of the case or the effects that conduct had had in increasing costs and prolonging litigation:

i) In Walsh v Singh [2010] EWHC 1167 (Ch), no order for costs was made, a “beaten” Part 36 offer notwithstanding.

ii) In Sulaman v Axa Insurance plc [2009] EWCA Civ 1331, the Court of Appeal rejected an appeal against a costs order which awarded the claimant only a third of her costs, applying the beneficial consequences of beating the Part 36 Offer only to that third ([19]-[20]).

iii) In Lilleyman v Lilleyman (No 2) [2012] 1 WLR2801, Mr Justice Briggs gave the party who had “beaten” the payment in only 80% of its costs from the date of the payment in, with the Part 36 benefit of interest on those costs applying to the 80% order.

iv) In Ahuja Investments Ltd v Victory Game Ltd [2021] EWHC (Ch), the court awarded the claimant 75% of its costs, and otherwise applied the Part 36 enhancements.

1. 1. In seeking to resist the argument that the adverse findings I had made as to the honesty of Petraco’s case on knowledge made it unjust to apply the stipulated consequences for beating a Part 36 offer, Mr Kulkarni KC made two principal points:

i) First, he argued that the principal focus under this factor is on the circumstances of the making of the offer and the provision of information in relation to it (relying on Lilleyman v Lilleyman (No 2) [2012] 1 WLR 12801, [14], [16]).

ii) Second, he rightly noted that I had already marked my disapproval of Petraco’s conduct by refusing to enforce the undertaking in respect of loss of $1.6m which I found to be established.

1. 1. As to the first of these points, while I accept that this is the focus of factor (d), the court’s consideration of the parties’ conduct is not limited to those matters. As Briggs J made clear in Lilleyman, [16], the manner in which the litigation is conducted more broadly is also relevant, otherwise:

“The protection of a generous Part 36 offer would enable the offering party to conduct its part in the litigation at the offeree’s potential expense without regard to the obligations and constraints which the achievement of the overriding objective now place upon civil litigants.”

While I accept that there will be criticisms of the other side’s conduct in a case which might merit a CPR Part 44 allowance absent a Part 36 offer, but which would not be sufficient to make it unjust to apply the CPR 36.17(4) consequences in their full width, the conduct in this case was sufficiently serious and prolonged that I have concluded it does need to be reflected in the orders made by the court, the Part 36 Offer notwithstanding.

1. 1. As to the second, there are two reasons why the court may wish to make an order addressing the consequences of dishonest conduct in litigation: to mark its disapproval of that conduct, and to reflect the causative effect of the dishonesty on the length and cost of the trial (Sulaman v Axa Insurance Plc [2009] EWCA Civ 1331, [17]-[18]). My decision not to enforce the Undertaking to the full extent of Petraco’s loss reflected the first of those factors, but not the second. Petraco’s dishonest case on its knowledge clearly prolonged the case and occasioned additional legal costs. It also served to fuel the dispute, leading to an understandable sense on VTB Commodities’ part that it had been “wronged” and was entitled to recompense.

1. 1. However, I am persuaded that the appropriate means of addressing this factor – particularly in circumstances in which I have already marked my disapproval of Petraco’s conduct in financially significant terms – is through the costs order made. This ensures that the consequences of Petraco’s conduct are directly linked to its effects in the litigation, and that an important principle underpinning Part 36 – that VTB Commodities could have avoided the Part 36 consequences and the costs of the litigation by accepting the Part 36 Offer – is respected (West v Liverpool Women’s NHS Foundation Trust [2016] EWCA Civ 365, [38]). I return to this issue below.

(e) whether the offer was a genuine attempt to settle the proceedings

1. 1. This factor was introduced in April 2015, against the background of the decision of the majority of the Court of Appeal in Huck v Robson [2002 EWCA Civ 398, who held that an offer to accept 85% of the sum claimed was effective in that case, but held that if the offer was “merely a tactical step designed to secure the benefits of [Pt 36]”, the court would not give effect to it. The Huck test of whether an offer was “tactical” was not easy to apply, and was felt to be insufficient to control potential abuses of the Part 36 regime.

1. 1. The commentary to the White Book notes of (e) that this factor “will be a useful consideration in cases where claimants have made very high Part 36 offers” and suggests that judges are likely to take a broad-brush view largely informed by their own assessment of the strength of the case that they have just tried and therefore the extent to which the offer appeared to be a genuine attempt to settle.

1. 1. Reflecting that discussion, in Yieldpoint Stable Value Fund LP v Kimura Commodity Trade Finance Fund Ltd [2023] EWHC 1512 (Comm), Mr Stephen Houseman KC considered a Part 36 offer to accept $4.95m inclusive of interest (96% of the claim) and held that this was not a genuine attempt to settle a case which was said to have “a starkly binary nature.” He noted that cases in which very high claimant offers had been held to amount to a genuine attempt to settle had generally involved cases with very high prospects of success (e.g. Rawbank SA v Travelex Banknotes Ltd [2020] EWHC 1619 (Ch), [30]). However, as Zacaroli J makes clear in Rawbank, [29], “the critical question is not a mathematical one – the proportion of the discount – but whether it is possible to infer from the size of the discount that there is no genuine attempt to settle the proceedings.” The fact that the claim only permits of a binary outcome does not preclude an offer to settle for a high percentage of the claim being a genuine attempt to settle: Jockey Club Racecourse Ltd v Willmott Dixon Construction Ltd [2016] EWHC 167 (TCC).

1. 1. In this case, VTB Commodities point to the following factors in support of their conclusion that the Part 36 Offer was not a genuine attempt to settle:

i) First, the amount of the offer which was said to be only 4-6% of the amount then claimed. I am satisfied that this understates the position but accept that the offer involved a relatively limited discount on the value of the claim:

a) The damages claim was for the value of the cargo, not simply the price, and it was pleaded that Petraco had on-sold the cargo. The prospect of further liability for cancellation of the fixtures was expressly mentioned. Six months’ interest would have accrued.

b) On the basis of my findings, the total value of the claim at this point was of the order of $27.034m plus 6 months’ interest, which would have exceeded $600,000. On that basis, this was an offer to settle for about 86% of the claim value, which gave up several distinct heads of loss.

c) If viewed by reference to the claims pursued, the offer involved a discount of about 18%. I would note that at the date of the Part 36 Offer, the conduct which led me to refuse to enforce the Undertaking in respect of the demurrage and cancellation liabilities had yet to occur, with the result that this is a truer measure of the discount afforded by the Part 36 Offer at the time it was made.

d) As I have explained, I am satisfied that VTB Commodities would have had a good understanding of the likely value of the loss of profit claim and could have made enquiries as to the current amount of the demurrage and cancellation claims which, to the extent that they had yet to be quantified, represented an uncertainty for both parties.

e) I accept that the offer was for a high percentage of the value of the claim upheld at trial, but it involved a discount from the value of that claim, which in absolute terms was over $3m.

ii) Second, at a “without prejudice” meeting on 27 September 2019, Stephenson Harwood LLP informed PCB Byrne LLP that Petraco would be making a Part 36 offer “less a nominal sum in order to get enhanced interest and costs if they succeed at trial”. This is apparent from an internal PCB Byrne LLP email sent after the meeting, privilege in which was waived, and which I accept is broadly accurate (there having been a mis-recollection on the Mishcon de Reya side prior to waiver as to what was said at the meeting). I accept that it is likely that Petraco sought to pitch the Part 36 Offer so as to gain the benefit of the Part 36 regime while maximising the amount recoverable if the offer was accepted. That of itself does not engage factor (e): most decisions in litigation are tactical. The issue is whether they succeeded in that aim.

iii) Third, it is said that this was not a claim with overwhelming prospects of success. I agree with that assessment. Petraco succeeded at trial because I upheld its case on difficult and eminently arguable issues of Russian law.

1. 1. Against that background, the process of determining whether this was a genuine attempt to settle is neither an easy nor altogether satisfactory task. There are two further difficulties:

i) While factor (e) is identified in CPR 36.17(5) as one of five “circumstances of the case” which must be “taken into account”, alongside factors which clearly have weight rather than all or nothing effect, in those cases in which the court has found that there has been no genuine attempt to settle, this has been regarded as a factor sufficient on its own to disapply the Part 36 regime altogether (Yieldpoint Stable Value Fund LP v Kimura Commodity Trade Finance Fund Ltd [2023] EWHC 1512 (Comm), Sleaford Building Services Ltd v Isoplus Piping Systems Ltd [2023] EWHC 1643 (TCC)).

ii) There is also authority which suggests that the court will ordinarily apply all the beneficial incidents of beating a Part 36 Offer or none of them: see JLE v Warrington & Halton Hospitals NHS Foundation Trust [2019] 1 WLR 6498, [23(iv)] and [32] approved by Phillips LJ in Telefonica UK Ltd v Office of Communications [2020] EWCA Civ 1374, [42]. At first blush, that might be thought curious because CPR 36.17 embraces consequences of two different kinds:

a) Provisions which address the fact that the procedural remedies for interest and costs will not ordinarily award full compensation. Indemnity costs merely award a higher proportion of the costs actually incurred but remain compensatory (Kiam v MGN [2002] 1 WLR 2810, [12]), and simple interest awards are invariably less than the costs of actual borrowing (commercial lenders requiring compound interest and the payment of associated fees).

b) Provisions which are not compensatory in nature: interest awards exceeding any reasonable assessment of the commercial cost of borrowing and the stipulated sum.

c) I note that in OMV Petrom SA v Glencore International AG [2017] EWCA Civ 195, [23], the Master of the Rolls observed that “it does not seem to me to be inevitable that the relevant “circumstances” will necessarily be identical for each of the four orders that the court will make, unless it would be unjust to do so.”

1. It is not necessary in this case to consider whether there might be scope for giving offers which are found not to constitute a genuine attempt to settle, but which nonetheless offer more than a de minimis discount from the value of the claim which succeeds at trial, some but not all of the Part 36 benefits. I am satisfied that the discounts offered in this case are sufficient, in relative, absolute and subject-matter terms, to constitute a genuine attempt to settle.

THE RESULT

The judge held that Petraco’s conduct did lead to a reduction in the costs recoverable.  Recoverable costs were reduced to 40% after July 2021.  However those costs were to be assessed on the indemnity basis.

1. 1. In summary, Petraco is entitled to:

i) 100% of its costs on a standard basis up to 6 November 2019.

ii) 100% of its costs on a standard basis for the period from 7 November 2019 to 9 July 2021; and

iii) 40% of its costs on an indemnity basis for the period from 10 July 2021.

INTEREST AND THE ADDITIONAL £75,000

1. 1. In OMV Petrom SA v Glencore International AG [2017] EWCA Civ 195, [32]-[39], the Court of Appeal gave the following guidance as to the selection of an appropriate interest rate when giving effect to CPR 36.17(4):

i) The specified rate of 10% was not a starting point but the maximum possible enhancement ([31]).

ii) The purpose of the provision was not entirely compensatory ([33]).

iii) The court has a discretion to include a non-compensatory element in the award but the level of interest awarded must be proportionate to the circumstances of the case which may include (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 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.

1. 1. In this case, interest has been running for a lengthy period – in part because of VTB Commodities’ failed attempt to join additional parties, and partly because of the impact of sanctions on VTB Commodities for which I accept that neither party was at fault. There can be no criticism of VTB Commodities’ decision to pursue the claim, nor do I accept that there has been any particular level of disruption to Petraco beyond that inherent in any case where litigation continues instead of settling.

1. 1. Against that background:

i) I will award an uplift over US Prime of 3% on the interest payable on the damages I have awarded, subject to a maximum overall interest rate of 10% (the court usually assuming in the absence of contrary evidence that a party bringing a US dollar claim is sufficiently compensated by an award of interest at US Prime).

ii) I will award an uplift over the Bank of England base rate of 4% on the interest payable on costs subject to a maximum overall interest rate of 10% (the court usually assuming in the absence of contrary evidence that a party bringing a sterling claim will borrow at base rate plus 1%).

The £75,000 additional amount

1. I see no reason why it would be unjust to award Petraco this additional amount, which is a very small percentage of its recovery and of the concession offered by the Part 36 Offer.