Part 36 – is it unjust to award CPR 36 consequences when the defendant does not have the money to pay? (Rawbank -v- Travelex)

This article supplements and updates one titled Consequences of Beating a Part 36 Offer: Injustice published on 12 June 2019.

The case of Rawbank SA -v- Travelex Banknotes Limited [2020] EWHC 1619 (Ch) related to a contract that the Defendant would provide banknotes totalling in excess of $40 million to the Claimant. Due to the Coronavirus pandemic the Defendant was suffering from financial difficulties such that it could not fulfil its contract with the Claimant, and required restructuring. However, the Defendant had no defence to the claim, it was simply unable to fulfil its contractual obligations. Judgment was entered against the Defendant which was more advantageous to the Claimant than the terms of a Part 36 offer the Claimant had made.

Giving judgment in relation to the consequences of CPR 36, the Court allowed some of the consequences under CPR 36.17(4), but declined to allow an “additional amount” as provided for by CPR 36.17(4)(d). This decision reinforces a number of previous judgments in relation to the application of Part 36.17, specifically:-

1. That the Court may adopt a cherry-picking approach and allow some of the consequences of CPR 36.17(4) but not others; and
2. The court does not have discretion to award an “additional amount” at a rate other than 10% – it is all or nothing,

What is interesting about this case, however, is why the judge declined to make the award of the additional amount.

The Part 36 offer was made on terms that “the Defendant paid £48,290,000 within 14 days of accepting the offer…” At paragraphs 35 – 37 of the judgment, Zacaroli J held that “…acceptance of the Part 36 offer could only be made by actually paying the sum referred to in it…” and that because the Defendant was insolvent, “…it would be unjust to make at least some of the orders identified in Rule 36.17(4)”. The Court effectively found that because the Defendant did not have the money to pay the settlement sum, it could not have accepted the offer, and furthermore the fact of the Defendant’s impecuniosity meant that it would unjust to award the additional amount set out in CPR 36.17(4)(d).

In summary: a party’s financial position is a relevant consideration when considering the injustice test.

This decision appears to contradict, at least in part, the earlier authority of  Cashman -v- Mid Essex Hospital Services NHS Trust [2015] EWHC 1312 (QB), in which it was held that the court cannot take into account the amount of the additional amount when considering the test on injustice. It is a logical extension of that principle that the fact of a defendant’s ability or inability to pay is not a relevant consideration for the court to consider.

Furthermore, the judge appears to have erred in finding that the Part 36 offer ” could only be [accepted] by paying the sums referred to in it…” as CPR 36.14(7) provides that if the settlement sum “is not paid within 14 days of acceptance of the offer… the claimant may enter judgment for the unpaid sum”. It is plainly wrong to say that a party which accepts a Part 36 offer will then be bound to prioritise payment of the settlement sum above secured creditors (as was suggested at paragraph 35 of the judgment); the defendant will simply become liable to pay the amount of the settlement sum. If the defendant does not do so, then the claimant will be entitled to enter judgment. That judgment will be an unsecured debt and will be dealt with in an insolvency in accordance with the usual order of priority.

This decision appears to be a departure from previous authority and raises some significant uncertainty surrounding the meaning of “injustice” in the context of CPR 36.17, which many lawyers had hoped had been settled by a number of judgments in 2018 and 2019. It remains to be seen whether Rawbank will set a new standard by which the test of injustice is measured, or whether future courts will distinguish the case on the basis of its somewhat unique factual background. In either case, it can only be hoped that a case will find its way to a higher court to give some clarity on the question of what precisely “injustice” is.

Should you have any questions, you can contact the team at CivilCosts@clarionsolicitors.com