The Law Commission



PART VIII

OFFERS TO SETTLE

8.1     Here we consider how our proposals will affect pre-trial offers made under Part 36 of the Civil Procedure Rules. We first consider the additional interest payments available to claimants who have made an unbeaten offer. At present such interest is subject to a cap of a simple rate of 10%. We ask whether this cap should be expressed in simple or compound terms.
8.2     We then look briefly at how claimant and defendant offers are expressed. Should offers be made inclusive or exclusive of interest, and does the offeror need to calculate interest precisely?

CLAIMANT OFFERS AND ADDITIONAL INTEREST PAYMENTS

The current law

8.3     As part of the civil justice reforms, Lord Woolf recommended that claimants should be encouraged to make formal offers, with significant financial incentives on both parties to take those offers seriously. ^[1] The Civil Procedure Rules 1998 therefore introduced the new concept of a formal claimant's offer. Where defendants refuse such offers only to have judgments made against them that are more advantageous to claimants than the offers they have refused, they face three possible sanctions: additional interest on the award, costs against them on an indemnity basis, and interest on those costs.
8.4     Rule 36.21(2) sets out the interest sanction in the following terms: 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.
8.5     Rule 36.21(3) permits interest on indemnity costs from the latest date that the defendant could have accepted the offer without permission, also "at a rate not exceeding 10% above base rate". Rule 36.21(4) states that the court will make such orders "unless it considers it unjust to do so". The following sub-section then sets out a list of factors that the court must take into account.
8.6     Thus the court has only limited discretion whether to grant additional interest at all. However, it does have wide discretion whether to award additional interest on all or part of the sum; and over the rate of interest (up to a maximum of 10% above base). At present, however, the interest must be simple. ^[2] It is worth noting that the maximum rate of 10% over base is a cap on all the interest awarded. ^[3] If base is 3.75%, interest cannot exceed 13.75%. If the claimant has already received interest at 6%, the maximum additional interest is 7.75%.
8.7     Technically, rule 36.21 only applies to cases that go to trial. However, in a recent case Lord Woolf suggested that courts may also increase the interest available when granting summary judgment. He explained that, where a claimant made an offer for a lesser sum, it is possible for the court, when exercising its general jurisdiction as to interest, to give a higher rate of interest than the going rate. It is important that courts bear this in mind otherwise claimants might be tempted not to obtain summary judgment in cases where it could be obtained with the objective of obtaining higher rates of interest at the conclusion of a trial. That would be entirely contrary to the whole ethos and policy of the CPR. ^[4] In that particular case, he suggested 4% over base would be a suitable sum.
8.8     Research into the effect of the Woolf reforms found that claimant offers were widely welcomed as an important and helpful innovation. ^[5] However, few solicitors had experience of sanctions being applied, as most cases settle rather than proceed to trial. Solicitors acting for personal injury claimants criticised the sanctions for being inadequate. They complained that in large cases it was only possible to make a finely judged offer when all the evidence was available – which meant that most serious offers were made within a year of the trial. Thus the additional interest may amount to a relatively small sum. Greater penalties were imposed on claimants who refused defendants' offers, and who therefore risked the full costs of the trial. ^[6]

Should the maximum rate be expressed as a compound rate?

8.9     The Consultation Paper proposed to amend the CPR Rule 36.21 to turn the maximum limit of 10% above base into a compound rate. It was felt that this was needed to cater for the theoretical possibility that any compound rate awarded may, after enough years, exceed the simple interest ceiling.
8.10     Most of those responding on this issue agreed that the maximum limit should be expressed as a compound rate, for the reasons we gave. But a few disagreed. The National Health Service Litigation Authority suggested that applying compound interest to Part 36 offers "would throw the whole system into confusion". The Medical Protection Society (MPS) felt that "there is no justification … whatsoever" for a compound rate: The interest applied under Part 36.21 of the CPR is designed to be punitive. Since it is not compensatory, MPS cannot see why interest should be charged on a compound basis. The Society argued that the present maximum was already steep enough and any more would amount to a double penalty.
8.11     There is some confusion over the rationale behind Rule 36.21(2). Lord Woolf has specifically stated that the measure is not designed to be penal but is "a means of achieving a fairer result for a claimant". ^[7] On the other hand, there would appear to be some element of sanction involved. If the interest award were purely compensatory, rule 36.21(2) would not be needed: the court could simply exercise its discretion under section 35A, which does not include an upper limit. Part 36 is intended to place a disincentive on defendants who fail to take a claimant's offer seriously. It therefore provides for interest that is additional to the compensatory interest already awarded under the courts' general powers.
8.12     The principles behind the rule are still developing, as courts attempt to find a balance between imposing appropriate incentives on defendants and doing justice to claimants. In practice the courts have been reluctant to award anything like the maximum cap. ^[8] We do not intend to interfere with developing case law. That said, there are technical reasons for amending rule 36.21. In particular, we wish to avoid a situation in which the court ends up granting both compound and simple interest on the same sum. This would add a new dimension of complexity to the calculations, which would be outside the capacity of the computer programme or the tables. Interest under rule 36.21 is often granted at the very last minute, and we are keen that the calculation should be as simple as possible. If the award already bears compound interest, this will normally be achieved by increasing the compound rate for the period since the offer. If only simple interest has been granted, the increase would be simple.
8.13     A further problem is that it is theoretically possible for any compound rate to exceed a simple rate, given a long enough time period. This means that if a claimant is awarded compound interest under (an amended) section 35A, and another award under rule 36.21, it is possible that the rate could exceed the simple cap. Although this would be extremely rare, it would require the courts to carry out unnecessary checks. Again, it would add an unwarranted layer of complexity to the court's decision-making.
8.14     A few respondents suggested that if the maximum limit were to be expressed as a compound rate, the overall limit should be lowered. ^[9] We have considered whether if the maximum rate is to be expressed as a compound rate it should be reduced (for example, to 8% or 9% above base). We do not recommend this because many offers are made quite soon before trial. Lord Woolf has accepted that in small cases, where offers are made shortly before trial, the interest rate may need to be higher than in other claims. ^[10] In such circumstances, a rate of base +8% compound would be substantially less than a rate of base +10% simple.
8.15     In practice, we do not think that expressing the maximum cap as a compound rate will increase the amount of interest awarded under rule 36.21. In practice, most awards will be for much less than the maximum. Furthermore, most are made for quite short periods, when the effect of compounding will be minimal. However, if the court is adding additional interest to a compound rate, it would reduce complexity to express the additional sum in compound terms, subject to a compound cap.

8.16 We therefore recommend that rule 36.21 should be amended to express the maximum cap as a compound rate of 10% above base. The prohibition on awarding interest on interest should also be removed, so as to allow the courts to award compound interest if this seems appropriate.

EXPRESSING CLAIMANT AND DEFENDANT OFFERS

8.17     Concerns have been expressed that compound interest could cause problems when the parties make offers. It is suggested that both claimants and defendants could be caught out by the complications of calculating compound interest so as make an offer that was slightly more (or slightly less) than the sum finally awarded. As a result, they could lose the advantages of Part 36.
8.18     At present, the rules state that unless a claimant or defendant offer indicates to the contrary it shall be treated as inclusive of all interest. ^[11] Under rule 36.22(2), where the offer specifically excludes interest, it must state whether interest is offered and if so "the amount offered, the rate or rates offered and the period or periods for which it is offered". ^[12]
8.19     The requirement that an offer made exclusive of interest must not only specify the interest rate and periods but also "the amount" of interest offered could potentially cause problems. The wording suggests that the offeror must carry out their own interest calculations and, if they make a mistake, risk losing the protection of the offer. If the offer had to state the amount of compound interest where that was claimed or offered by a defendant, that would add to the risk that a mistake might be made.
8.20     In fact we are not convinced that the rule is intended to mean what it appears to say. Where the offer is expressed not to be inclusive of interest, and interest is offered as a separate item, it does not seem necessary to require the offeror to state both the amount of interest offered and the rate or rates and the period or periods for which it is offered. It would make more sense to require one or the other. However, we suspect that the provision was intended to permit an offer to be made which did not calculate the interest at all but merely stated what interest is offered on what sums. ^[13] This may save a good deal of time, since it may be that the offer will be rejected out of hand, with the result that the effort of calculating the amount of interest would be wasted. Thus we suspect that what was intended by the rule is that the offer, if it is not inclusive of interest, should state "the amount or amounts on which interest is offered, the rate or rates offered and the period or periods for which it is offered."
8.21     This would fit with what we believe should be the general principle: the recipient of the offer should be able to determine easily just what is being offered. This may be in the form of a global sum including interest; ^[14] or a principal sum with the rates of interest and periods of interest that are offered on the various components that make up that principal sum. We do not think it necessary to require those making offers to settle to carry out interest calculations; and we certainly would not wish to require this when compound interest is claimed or included in the offer. It would be sufficient for a party to make an offer of a principal sum expressed to be exclusive of interest, together with a statement of the amount or amounts on which interest is offered, the rate or rates offered, the period or periods for which it was offered, and whether it was simple or compound.

8.22 We therefore recommend that the Civil Procedure Rule Committee consider amending rule 36.22(b) to require that offers expressed as exclusive of interest should state the amount or amounts on which interest is offered, the rate or rates offered, the period or periods for which it is offered, and whether it is simple or compound.

8.23     We are concerned lest an offer might be treated as invalid because it does not state whether the interest offered is simple or compound. Particularly when the scheme is still new and unfamiliar, this might happen often. Instead we suggest that the Rule Committee might consider providing that a failure to state this should not invalidate the offer, but that a series of presumptions should apply. These would reflect the claim made and the presumptions we have recommended as to whether any interest awarded should be simple or compound. Take the case where an offer said to be exclusive of interest states that interest is offered but does not specify whether it is simple or compound. It should be presumed that if the claimant has claimed compound interest, ^[15] and the principal amount offered is £15,000 or more, then interest is compound. On the other hand, if compound interest has not been claimed, or if the principal amount is less than £15,000, interest should be simple.

8.24 We recommend that the Rule Committee should consider establishing presumptions to apply to offers expressed as exclusive of interest which state that interest is offered but which do not specify whether interest is simple or compound.

SUMMARY OF RECOMMENDATIONS

8.25     We recommend that rule 36.21 be amended to

(1) express the maximum cap as a compound rate of 10% above base; and

(2) remove the prohibition on awarding interest on interest.

8.26     We also recommend that the Rule Committee consider

(1) amending rule 36.22(b) to provide that offers expressed as exclusive of interest should state the amount or amounts on which interest is offered, the rate or rates offered, the period or periods for which it was offered, and whether it was simple or compound;

(2) establishing presumptions where an offer expressed to be exclusive of interest states that interest is offered but does not specify whether it is simple or compound. It should be presumed that if the claimant seeks compound interest and the sum offered is £15,000 or more, then interest is compound; otherwise it would be simple.