Master McCloud exercised her discretion and declined to award the claimant a 10% ‘additional amount’ under CPR 36.17(4) on grounds that it would be disproportionate and unjust to do so where the claimant had beaten its own offer by just £7,000 on a bill assessed at £431,813.05.
* This decision has been successfully appealed
PROPORTIONALITY : PART 36 OFFER : CPR 36.17(4) : CPR 36.17(5) : DETAILED ASSESSMENT : ADDITIONAL AMOUNT
“where one is considering the 10% ‘bonus’ under sub-rule (4)(d) it is appropriate to disallow that sum if in all the circumstances the level of bonus is clearly disproportionate relative to the margin by which the offer was beaten, especially where a bill has been significantly reduced on assessment and where the margin by which the offer is beaten is small.”
This decision related to the interpretation of the provisions applicable to an assessment of costs, in particular where a Part 36 offer has been beaten.
The question to be determined was whether the Court has the power to award some, but not all of the consequences set out in CPR r.36.17(4) where the claimant has achieved an award more advantageous that its own Part 36 offer, and if the Court does have that power, whether that power should be exercised so as to allow the consequences at subparagraphs (a), (b) and (c) of the Rule, but not that at (d).
The defendant contended that:
The claimant’s contention was that the Court did not have the power to order some, but not all of the consequences set out in CPR 36.17(4) at all, ie that the consequences of the rule are ‘all or nothing’ and cannot be severed by the court once the test of whether it is unjust to order the consequences has been navigated successfully against the paying party.
CPR 36.17(5) states:
In considering whether it would be unjust to make the orders referred to in paragraphs (3) and (4), the court must take into account all the circumstances of the case including—
(a) the terms of any Part 36 offer;
(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;
(c) the information available to the parties at the time when the Part 36 offer was made;
(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; and
(e) whether the offer was a genuine attempt to settle the proceedings.
10. For the Defendant I was referred to:
a. Thinc Group Limited v Kingdom [2013] EWCA Civ 1306;
b. Davison v Leitch [2013] EWHC 3092 (QB); and
c. Bataillion v Shone [2015] EWHC 3177 (QB).
11. In Thinc the Court was considering CPR r.36.14(3). That appears to be the predecessor of rule 36.17(4), which was replaced by rule 36.17(4) with effect from April 2015. That rule was in virtually identical terms to the current rule 36.17 save that 36.17 introduced the 10% additional sum in 36.17(4)(d).
12. The Court below in that case awarded only a proportion of the costs on the indemnity basis. On appeal, Macur LJ – with whom Arden and Ryder LJJ agreed – said at para. 22:
“There is no merit in [the Appellant’s] argument that the judge should have regarded the terms of CPR 36.14 (2) and (3) to mean that he must consider that his discretion as to costs at this stage was fettered by a bi-polar evaluation of “unjust” to mean that the successful party receives their costs on an indemnity basis or not and thereby fell into error by apportioning costs in percentage terms and on an indemnity basis for the relevant period. The phrase “unless it considers it unjust to do so” in CPR 36.14 (2) and (3) bear the obvious interpretation of “unless and to the extent of”.
13. The defendant’s argument was that by parity of reasoning the ordinary and natural meaning of the Rule presently before me is that the Court has a discretion as to whether, and to what extent, the consequences set out in Rule should apply to ensure justice is achieved between the parties.
14. As to Davison , Andrews J considered a claim in which the claimant had beaten her own Part 36 offer and sought the consequences under the Rule (again, as with Thinc, the rule in question was CPR 36.14). In assessing all of the circumstances of the case and whether it was just to do so, the court said at para. 73:
“Taking all these matters into account and paying due regard to the written submissions of both Counsel, I consider that it would not be unfair to the Defendant for some of the consequences of Part 36.14 to be visited on him but that it probably would be unfair for all of them to apply. Costs are always a matter of discretion. I consider that costs should remain on the standard basis but that interest should be awarded on the costs recoverable by the Claimant from the date at which the offer expired until the date of judgment, at a commercial rate of 2% above base. I shall also award the full sum produced by applying the prescribed percentage to the amount of the damages under (d). The CPR regime makes no distinction in this regard between damages for future losses on which interest would not normally run and damages in respect of past losses, but simply refers to the monetary award. However given that the full sum of £75,000 is awarded I consider it would be unfair to award an uplift of interest on the damages as well, and therefore no award is made under (a).”
15. It was urged on me that Davison was a ‘paradigm example of the Court considering it just to award some of the consequences under the Rule, but unjust to award them all’, and such was applicable here, too.
16. In Bataillion, Waksman J, applying CPR 36.17(4) ie the current version of the rule and the same as that for my consideration made an award of US $50,000 pursuant to subparagraph (d) of the Rule when entering judgment in the sum of US $2,161,54, whereas an application of the 10% criterion would have led to an automatic award of the maximum sum of £75,000 specified in sub-rule (d). The Defendant argued that Bataillon was a further example of the Court exercising a discretion under the Rule in order to achieve a ‘just’ outcome.
17. For the claimant it was said that since I had implicitly found that it was not unjust to order the additional sums in rule 36.17 it would not be open to me to select among them, and in this instance fail to award the 10% additional sum in sub-rule (d). The argument was that Part 36 is a self-contained procedural code, which concerns offers made under that part. I was referred to Gibbon v Manchester CC [2010] EWCA Civ 726 per Moore-Bick LJ:
“[Part 36] contains a carefully structured and highly prescriptive set of rules dealing with formal offers to settle proceedings which have specific consequences in relation to costs in those cases where the offer is not accepted and the offeree fails to do better after a trial”.
He also indicated at para. 4 that it was up to the parties whether or not to use Part 36 by making offers under it but that if it was used then (for the consequences of that Part to follow) the parties must abide by the requirements of the Part.
18. At para. 6 of the Gibbon case Moore-Bick LJ said this:
“Certainty is as much to be commended in procedural as in substantive law, especially, perhaps, in a procedural code which must be understood and followed by ordinary citizens who wish to conduct their own litigation. In my view, Part 36 was drafted with these considerations in mind and is to be read and understood according to its terms without importing other rules derived from the general law, save where that was clearly intended.”
19. I was referred to para 44 of the judgment of Jackson LJ in Fox v Foundation Piling Ltd. [2011] EWCA Civ 790. There the learned Lord Justice said this (in relation to the former, but similarly structured, rule 36.14):
“From this review of authority I draw the following conclusions. First, where one party makes a Part 36 offer and then achieves a more advantageous result than that proposed in his offer, the provisions of Rule 36.14 modify the court’s general discretion in respect of costs. This is important because parties who choose to use the Part 36 mechanism in their settlement negotiations need to have a clear understanding of the legal effects of making, accepting and rejecting offers under Part 36.”
20. I was taken to Smith v Trafford Housing Trust [2012] EWHC 3320 (Ch) in which Briggs J as he then was stressed that the purpose of Part 36 was to promote settlement and avoid unnecessary expenditure of costs and time, and that the burden to show injustice in the application of the provisions of Part 36 so as to escape them was a formidable obstacle.
21. As regards rule 36.17, the White Book editor at 36.17.1 says “ at the heart of Part 36 since it contains the careful balance of incentives that are intended to encourage parties to make and accept sensible settlement offers.”
22. Whilst preparing this judgment I became aware of Ayton v Jennison HQ12X03805 where an order of Master Fontaine was reversed by May J on appeal, in relation to rule 36.16. I drew the case to the attention of the parties and invited any observations. The Defendant sent short written submissions adopting Ayton and arguing that it supports the Defendant’s approach. The Claimant’s submissions in relation to Ayton stressed that the ‘injustice’ test was described by May J, consistently with other cases, was a ‘formidable’ hurdle. Albeit that Ayton includes section by section approach it did also apply an ‘overall’ approach (at para. 57) to the various costs penalties when considering ‘injustice’ and likewise it appears from the decision that Master Fontaine – whose decision was under appeal – had adopted an ‘overall’ approach and disapplied all parts of the penalties. The analysis put forward by the Claimant was that when considering the penalties one by one, in fact the only occasions when a discretion was actually exercised in Ayton were those in relation to sub-rules (a) and (c) where the wording of the rule necessarily imports some further discretion in that those sub-rules are couched in terms of percentages ‘not exceeding’ 10%. Furthermore the question whether the cost penalties were to be considered separately from each other was not actually in issue in Ayton , and hence it is not authority for that proposition.
23. In my judgment Ayton is consistent with the effective decision of Waksman J in Bataillion and also with the other cases cited by the Defendants (albeit the other cases related to the similar rule 36.14 prior to the addition of 36.17(4)(d) to the provisions). However in Ayton I note that the judgment was reached on appeal and therefore insofar as on point and not distinguishable, binds me (as does Thinc for the same reason, subject to the same caveats). Davison and Bataillon by contrast were first instance decisions of judges of coordinate jurisdiction to me and would be treated as binding on the basis of comity rather than precedent, unless I am satisfied they are wrong (see the well-established principles in cases such as Coral Reef Limited v Silverbond Enterprises Ltd and Another [2016] EWHC 874 (Ch) and various others as to the difference between precedent and comity to the effect that as between judges of coordinate jurisdiction (HCJ sitting as first instance judge, and Master, for example, or Circuit Judge and District Judge when both sit at first instance, the doctrine of strict precedent does not apply).
24. I confess I have doubts as to the helpfulness of the position set out in Ayton and the Defendant’s authorities, in that it seems to me that the Claimant’s argument founded on the apparent policy of rule 36.17 and the advantages of certainty are persuasive and the wording of rule 36.17(4) to my mind is itself indicative of the test of ‘injustice’ being intended to be apply globally to sub-rules (a)-(d). Furthermore the question of the severability of the cost penalties was not actually an issue in those cases so that I am in my judgment entitled to say that they are not ‘on point’ from the perspective of precedent in respect of the question posed for me to answer.
25. However it seems to me that the thrust of Thinc and of Ayton sufficiently demonstrate how the appellate courts have approached the application of this rule and its predecessor, even if the strict question at issue here was not in issue in those cases. The cases of Davison and Bataillion cannot therefore be said to be clearly wrong to the point that I should disregard those either. I therefore consider that whilst not strictly bound by precedent, it is the preferable construction for me consistent with judicial comity and consistency of approach generally (in what by now seems to be a reasonably ‘embedded’ approach to this rule) to hold that
it is open to the court to apply 36.17(4)(d), or not, or to the extent considered just, in any given case independently of parts (a)-(c) of that sub-rule. In other words with some reluctance, since given an entirely clear field devoid of examples from case law I might reach a different conclusion, I hold that the penalties are indeed severable and such has become the practical interpretation of the rule.
26. The following is moot given the above but I note that, even if one were to adopt the alternative construction proposed by the Claimant (and the one to my mind which is closer to the wording of the rule were I not properly required to respect and to take into account other decisions applying the rule), the court would still have to consider in the round the overall effect of applying all of the penalties in sub-rules (a)-(d) and hence there would be cases where the effect of one of the cost penalties (such as the 10% provision in (d)) would tip the court’s decision over the threshold of ‘injustice’ set by the rule even when approaching the rule on a non-severable basis as the Claimant contends I should. In that event, if the Claimant’s preferred construction were to be adopted, the receiving party would then gain none of the benefits of (a) to (d), which seems counterintuitive. Perhaps that is a point in favour of the construction applied by the authorities which I have referred to above and which are consistent with the Defendant’s ‘severed’ approach.
27. I must therefore consider whether, given the arguments which were presented to me by both sides in the event that I held that r.36.17(4)(d) did apply on a severable basis, it would be unjust to order that the additional sum of 10% provided for by rule 36.17(4)(d) must be paid in this case. The claimant pointed to the fact that rule 36.5(4) treats a Part 36 offer as being inclusive of interest until either the date of the period specified by rule 36.(1)(c) or 21 days after the date the offer was made. Thus it was said I should not be influenced on the ‘injustice’ point by the fact that it was the award of interest on the bill as assessed which had pushed the sum assessed above the level of the Part 36 offer. That was foreseen by the rules. I accept that.
28. The factors to be considered by the court in relation to the question whether it is unjust to order that the consequences of (part of) Part 36.17(4) apply are, in addition to all the circumstances of the case, set out in rule 36.17(5). I consider them next.
29. As to the terms of the offer, the point above as to inclusion of interest is an effective term of the offer but it seems to be [sic] to be essentially a neutral point on its own. The offer was clear and the fact it included interest is simply a consequence of the rules, and the total inclusive of interest was beaten.
30. I do not think that in most cases the extent to which an offer has been beaten is a very material factor since the rules provide a clear definition of ‘more advantageous’. In this case the offer was beaten by just short of £7,000 which is ‘more advantageous’ but it is nonetheless a very small percentage of a bill which had been greatly reduced.
Given that the court is – as I have found to be the case – empowered to apply the ‘injustice’ test on the basis of each cost consequence separately then
in my mind considerations such as proportionality of the cost penalty must be applied separately for each of the sub-rules in 3.17(4).
31. I thus do have to consider whether the large sum by way of penalty (10% of a bill assessed at over £400,000) compared with the very small percentage margin by which the offer was beaten, in an assessment where the bill was significantly reduced on assessment, would amount to a disproportionate windfall leading to injustice rather than just a windfall for the recipient which is consistent with the objective of the rules.
32. Equally I should bear in mind that if the court does not adopt a high bar for the exercise of its discretion (and here I refer to the description of the ‘injustice’ test as being a formidable hurdle in, eg, Ayton), the purpose of the cost penalty rules could be weakened or defeated.
33. In my judgment it is only where the cost penalty created by the 10% rule would be clearly disproportionate that one would incline to exercise the discretion to waive it. But, that said, if the court was unduly unwilling to exercise its discretion on facts such as these – for example requiring something akin to ‘exceptional circumstances’ then a party in the position of the Defendant might be discouraged from taking the risk of legitimately going as far as assessment at all, despite having various meritorious objections to the Bill as drawn and which have (in this case) been shown in many instances to be correct.
34. In terms of the stage of proceedings when the offer was made, I do not consider that the fact the offer was made (fairly close to the detailed assessment hearing) is of assistance materially to the Defendant. I could for example foresee a situation where an offer is made very early on at a stage before a party cannot reasonably know whether to accept or not, and that perhaps sometimes it might be unjust to give full force to the costs consequences if the paying party acted reasonably at the time in not accepting it. But in this instance it was an offer fairly close to final hearing and hence at a time when sufficient information was known for either party to take advice as to whether to accept.
35. Relatedly, turning to the information available to the parties when the offer was made, much the same points can be made: the offer was made at a time when sufficient information was known for the recipient to take an informed view as to acceptance. Indeed the Defendant made its own offers which fell somewhat short (by about £37,000 inclusive of interest on the bill). I do not accept that the pre-assessment skirmishing over some aspects of the bill and legal aid certificate referred to by the Defendant alter the position materially. Nonetheless where a bill is reduced by a large figure, and it appears to be known to both sides that a large reduction is on the cards as it was here, the ‘pitching’ of an offer becomes a more and more uncertain exercise and the merits or demerits of acceptance or rejection become far harder to judge.
36. No conduct points appear to arise in this case against the Claimant and none were taken by the Defendants. The Claimant points out that of relevance may be that the Defendant refused to make improved offers when invited to do so and pressed the Claimant to request a detailed assessment hearing or risk facing a penalty under rule 47.14.
37. Clearly the offer by the Claimant was a genuine attempt to settle (this is factor 36.17(5)(e)).
38. The Defendant argued that it would be grossly unjust to order the additional 10% in this case and that it would be a significant windfall (given the size of the assessed bill, especially relative to the extent by which the offer was beaten). I take on board and accept the point made by the Claimant that Part 36’s additional sum provisions are not intended to be compensatory: they are intended to be an incentive to settle and will be ineffective if they do not operate, so that the fact that the penalty appears more generous than a purely compensatory approach would warrant is not of great assistance. See McPhilemy v The Times Newspapers Ltd (No. 2) [2001] EWCA Civ 933 which was cited to me and also OMV Petrom SA v Glencore International AG [2012] EWHC 3320 (Ch). On the other hand, the rules do provide a discretion according to the ‘unjust’ test, by which the consequences can be disapplied so it cannot have been the rule-makers’ intention that a consideration of disapplying the consequences provided for in the rules is a process meant to disregard situations where a large non-compensatory penalty has arisen.
39. I have borne in mind that the 10% was not requested at the time of the assessment hearing, by mistake, but it would be disproportionate for me to say that a simple slip such as that by itself would make allowing the Claimant to recover the additional sum would be unjust.
40. Taken together in my mind the most significant factors are (1) the very small margin by which the offer was beaten relative to the much greater size of the bill (2) the fact that where a bill is reduced (and seems to have been expected to be reduced) significantly, it will on the whole generally be very difficult for a party to know precisely or even approximately to within a few percent, where to pitch an offer such that even a competent costs lawyer would operate close to chance level as to whether an offer is likely to be ‘over’ or ‘under’ at the end of the hearing, and (3) the large size of the 10% ‘bonus’ award relative to the margin by which the offer was beaten.
41. In all the circumstances
in my judgment the ‘bonus’ of 10% in this case would be a clearly disproportionate sum and it would be unjust to award it. That is also the case when one looks at the overall effect in the round of what would be the cumulative penalties in sub-rules (a)-(c) added to (d).
42. In terms of the costs of the second hearing at which the points on r.36.17(4)(d) were argued, I am minded to order the Claimant to pay those in any event on the basis that the argument was accidentally not pursued when it could have been at the end of the first hearing, especially given that as it has turned out I am also with the Defendant on the interpretation of the rule, if not on the eventual outcome. I shall not finally decide that until I have heard back from the parties on the issue of costs and consequential orders.
43. To summarise my judgment: consistent with examples cited to me from both appeal courts and courts of coordinate jurisdiction with myself, I hold that the court should apply the test of ‘injustice’ separately for each part of rule 36.17(4) as well as in the round, as was the approach in Ayton, and that
where one is considering the 10% ‘bonus’ under sub-rule (4)(d) it is appropriate to disallow that sum if in all the circumstances the level of bonus is clearly disproportionate relative to the margin by which the offer was beaten, especially where a bill has been significantly reduced on assessment and where the margin by which the offer is beaten is small.
There may well of course be other circumstances where one would disapply the sub rule but on the facts of this case I have concluded that this is a case where the award of the 10% figure would be disproportionate.
44. The parties should seek to agree an order reflecting this judgment, and in that event no attendance is necessary at handing down.
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Toby Moreton
Solicitor and client assessments: Introduction
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