England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON
CIVIL JUSTICE CENTRE (MERCANTILE LIST)
HIS HONOUR JUDGE BRIAN KNIGHT QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		17 June 2003

Peter Gibson L.J. (giving the judgment of the court):

1. When judgment was given in this court on 2 May 2003 awarding the successful Appellants US$227,400 in place of the Judge's award of US$115,800, we were informed by Mr. Karia for the Appellants that they had made three Part 36 offers. It is common ground that in the light of this court's judgment the Appellants did better than both their first two offers made before trial, and accordingly this court awarded the Appellants their costs of the trial on the indemnity basis and interest at 3% over the prime rate. The third offer was made on 10 March 2003, when the Appellants offered to accept US$227,400 plus the costs of the trial on the indemnity basis but waiving any interest uplift on both the damages and the costs awarded.
2. The only question outstanding is whether this court should accede to the Appellants' submission that it is on the indemnity basis that they should be awarded their costs of the appeal pursuant to CPR 36.21, or, if that is inapplicable, pursuant to r. 44.3. That submission is opposed by the Respondents. They say that this court should award the Appellants their costs of the appeal only on the standard basis.
3. We drew the attention of Counsel to the decision of this court in Mitchell v James [2002] EWCA Civ 997 and allowed them to make submissions in writing on the applicability, if any, of what was said in that case to the present case. This judgment is written in the light of the helpful written submissions which we have received from each side.
4. R. 36.21 is in this form:

"Costs and other consequences where claimant does better than he proposed in his Part 36 offer

36.21 – (1) This rule applies where at trial –

(a) a defendant is held liable for more; or

(b) the judgment against a defendant is more advantageous to the claimant,

than the proposals contained in a claimant's Part 36 offer.

(2) The court may order interest on the whole or part of any sum of money (excluding interest) awarded to the claimant at a rate not exceeding 10% above base rate for some or all of the period starting with the latest date on which the defendant could have accepted the offer without needing the permission of the court.

(3) The court may also order that the claimant is entitled to –

(a) his costs on the indemnity basis from the latest date when the defendant could have accepted the offer without needing the permission of the court; and

(b) interest on those costs at a rate not exceeding 10% above base rate.

(4) Where this rule applies, the court will make the orders referred to in paragraphs (2) and (3) unless it considers it unjust to do so."

5. In Mitchell v James the relevant offer was one whereby the claimants offered to accept payment of a specified sum and, amongst other terms, each party was to bear his own costs. Park J. had held at the end of the trial that the Claimants' case succeeded and that the defendants should pay the Claimants' costs. He further held that the requirements of r. 36.21 (1) were not satisfied and so he ordered costs to be paid on the standard basis. On appeal this court concluded that terms as to costs were not intended to be included in Part 36 offers. In a judgment with which Potter L.J. and Sir Murray Stuart-Smith agreed, Peter Gibson L.J. gave the following reasons for that conclusion:

"30. First, r.36.14 is worded as applicable whenever a claimant's Part 36 offer is accepted without needing the permission of the court. It does not say "unless a claimant's Part 36 offer indicates to the contrary" (cp. r.36.22(1)) or other wording to indicate that the parties can agree otherwise. Similarly, para. 7.2 of the Practice Direction indicates that on acceptance of the Part 36 offer "the costs consequences set out in rule .... 36.14 will then come into effect." So too in a case where the court's permission is needed for the defendants to accept a Part 36 offer, if permission is given, para. 7.5 envisages that the court may order that the costs consequences set out in r. 36.14 will apply. These provisions are inconsistent with a term as to costs being part of the Part 36 offer.

31. Second, r.36.21 is applicable where at trial either a defendant is "held liable" for more, or "the judgment" against a defendant is more advantageous to the claimant, than the offer. The words "held liable" and "the judgment" both appear to me to connote what the trial judge holds or decides on the substantive issues in the case as distinct from the ancillary issue of costs to be determined after the substantive issues are decided. Mr. Brunner accepted that that was so in relation to "held liable", though not in relation to "judgment". For my part, I cannot see why there should be such a difference.

32. Third, the rule is intended to apply universally at the end of the trial when the judge is required to make an order for costs. Save in a case where the judge can make a summary assessment or the rare case where the costs at that point are agreed, there will have been no assessment of the costs, the figure for which would therefore be uncertain. Yet the rule contemplates that merely by reference to that for which the defendant is held liable or by reference to the judgment the judge will be able to decide whether r.36.21 applies because the defendant has been held liable for more, or the judgment against a defendant is more advantageous, than the offer. I find it hard to believe that the draftsman contemplated that a Part 36 offer is one which includes a term as to costs, so that the judge might have to evaluate the quantum of his costs order. That is normally the function of a costs judge, not the trial judge.

33. Fourth, there would be a real risk of abuse if a term as to costs could be included in a Part 36 order. Every well-advised claimant would make a Part 36 offer containing the terms sought in his claim plus an offer as to costs in the hope that if he succeeded in his substantive claim he would obtain indemnity costs in place of the ordinary award of costs on the standard basis. Merely to win on his substantive claim and to obtain an order for costs under the general rule (see CPR 44.3(2)) will cause r.36.21 to be applicable, so that the court "will" make the orders referred to in r.36.21(2) and (3) unless it considers it unjust to do so. Injustice in the eyes of the court is therefore the only basis on which the court could refuse to make an order for indemnity costs and interest. That does not confer a general discretion on the court."

6. Mr. Karia's primary submission is that costs should be awarded on the indemnity basis under r. 36.21 because the Respondents have been held liable for more than the Appellants proposed in their offer of 10 March 2003 or the Appellants have secured a judgment which is more advantageous to them than they proposed in that offer. In each case, he says, the concession offered relating to interest represents a discount now agreed to be about US$12,000 on the footing of the uplift of 3% over the prime rate.
7. Mr. Karia distinguishes Mitchell v James on the ground that it related to an offer on costs, whereas the present case relates to an offer on interest. He points out that the award of interest, unlike costs, relates directly to the substantive liability claimed and he prays in aid of the remarks of Lord Wright in The Liesbosch [1933] AC 449 at p. 468 that interest represents "damages for the loss of the use of the money representing the lost vessel" - in the present case the equivalent is the equipment the subject of the Appellants' claim – "as from the date of the loss until payment". He therefore says that the award of interest forms part of the measure of the Appellants' loss. Further, he argues that none of the reasons which impelled this court to its conclusion in Mitchell v James applies to the present case. He draws attention to the fact that some of the provisions of the rules and the Part 36 Practice Direction on which this court relied do not apply to the award of interest, and he submits that the financial effect of concessions involving interest will be immediately apparent at the time the court determines the principal sum and interest rate to be awarded. He also says that there is no real risk of abuse. Finally, he relies on some general policy considerations, arguing that parties should be encouraged to accept reasonable settlement offers when to do so would result in them being better off and in saving court time. He urges us to take a broad commercial view and to apply a purposive approach to construing r. 36.21.
8. Mr. Diwan for the Respondents submits that the offer did not satisfy the requirements of r. 36.21(1), because the Appellants only offered to accept what they were claiming, and the offer of a concession on the interest uplift was irrelevant. He says that in the same way that concessions as to costs are not to be taken into account in assessing whether or not a claimant has done better than his Part 36 offer, so concessions as to uplift interest should also be left out of account. Accordingly he contends that the Respondents have been held liable for as much as, but not more than, what the Appellants proposed in their offer and the judgment against the Respondents is the same as, but not more advantageous than, those proposals. He argues that parts of the reasoning of this court in Mitchell v James are directly applicable to the question of uplift interest for the following reasons:

(1) the words "held liable" and "the judgment" in r. 36.21(1) relate to what the court decides on the substantive issue as distinct from ancillary issues such as costs; a fortiori the issue of whether to award uplift interest is an ancillary matter entirely within the discretion of the court and consequent upon comparing the liability or judgment with the Part 36 offer and is no part of the court's determination of the substantive issue;

(2) there is a risk of abuse in claimants making concessions not on the substantive claim but on ancillary matters such as uplift interest, and by offering to accept ordinary interest claimants bargain with something to which they are not entitled and which is entirely within the court's discretion;

(3) this court's reasoning in Mitchell v James was that r. 36.21 was intended to apply universally at the end of the trial when the court is required to make an order for costs and that the rule contemplates that the court, merely by reference to that for which the defendant is held liable or by reference to the judgment of the court, will be able to discern whether r. 36.21 applies; that cannot be done in the case of uplift interest the award of which depends on whether the claimant has done better than he proposed in his Part 36 offer.

9. In our judgment, the submissions of Mr. Diwan are to be preferred. We accept that the award of interest forms part of the defendant's liability in a way that the award of costs does not; but the relevant concession offered by the Appellants related solely to uplift interest, that is to say interest over the ordinary rate. The court can award uplift interest only if the conditions of r. 36.21(1) are satisfied. Thus while the provisions of Part 36 expressly contemplate that a Part 36 offer may include an offer as to interest (see r. 36.22), and while the court is directed by r. 36.21(4) to make an order as to interest in accordance with r. 36.21(2) unless it considers it unjust to do so, the draftsman of the rule cannot have contemplated that uplift interest should be any part of the offer to be taken into account in determining the applicability of the rule.
10. We turn next to Mr. Karia's alternative submission that the court should exercise its discretion under r. 44.3 to award costs of the appeal on the indemnity basis, having regard to paras. (4) and (5) of that rule. By r. 44.3(4) the court is required to have regard to all the circumstances, including the conduct of the parties and any admissible offer to settle made by a party and drawn to the court's attention, whether or not made in accordance with Part 36. Mr. Karia suggests that as a matter of substance and reality the Appellant won and did better than their offer, and he argues that the Respondents misinterpreted the evidence of the expert, Mr. Gibbons, and did so as a way of seeking to avoid the inevitable success of the Appellants' appeal. He relies on the view expressed in Foskett: The Law and Practice of Compromise, 5^th ed. (2002), n. 30 to para. 23.11, on r. 36.21(1):

"The word "more" is used in sub-paragraphs (a) and (b) of this rule. It follows that, strictly speaking r. 36.21 would not become engaged if the claimant merely matched his offer at trial. However, such an offer would clearly be seen to have been a reasonable one in the light of the result of the trial and one that the defendant ought to have accepted. Given that the court has power to award indemnity costs where a party has behaved unreasonably, and has the power to award interest at such a rate as it considers just (see Petrotrade Inc v. Texaco Ltd. [(Note) [2002] 1 WLR 947], there would be no reason why orders similar to those contemplated in paragraphs (2) and (3) should not be made in this situation."

11. Mr. Diwan submits that in resisting the appeal the Respondents' conduct does not deserve the court's disapproval and was not so unreasonable as to justify costs being awarded against them on the indemnity basis.
12. It is not in dispute that we have a wide discretion under r. 44.3, though one which we must exercise taking account of the matters to which we are required to have regard. The fact that the Appellants offered by a Part 36 offer to accept as much as they were awarded is plainly an important factor, but so is the fact that the offer was made on the appeal, the court below having awarded a lesser sum. We do not think that the Respondents acted unreasonably in seeking to resist the appeal nor was their conduct of the appeal in any way improper. In Kiam v MGN Ltd. (No. 2) [2002] 1 WLR 2810 Simon Brown L.J., with whom Waller and Sedley L.JJ. agreed, after citing from the Petrotrade case, said:

"12. I for my part understand the court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order made under Part 44 (unlike one made under Part 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory.

13. It follows from all this that in my judgment it will be a rare case indeed where the refusal of a settlement offer will attract under Part 44 not merely an adverse order for costs, but an order on an indemnity rather than standard basis."

13. In our judgment, having regard to all the circumstances, we do not regard this case as one of those rare cases. We therefore direct that the Respondents pay the Appellants' costs of the appeal on the standard basis.

Tuckey L.J.

14. I agree.

Nelson J.

15. I also agree.
Order: For the reasons given in the judgment of the court which has been handed down, it is on a standard basis that the respondent will pay the appellants' costs of the appeal. The appellants will pay the cost of the skeleton argument dated 12^th May 2003 on the standard basis if not agreed. The court's order on the substantive appeal will be in the form agreed between the parties. (Order does not form part of the approved judgment)