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.

Matthew Rose is an Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com and 0113 222 3248. You can contact the Clarion Costs Team on 0113 246 0622.

Part 36 – offer to pay by instalments

A party to proceedings (usually the defendant / paying party) may sometimes want to make an offer to pay the settlement sum by instalments. Whilst this is possible to do by Part 36, it does have an effect on the effect of the offer.

CPR 36.6(2) provides that a defendant’s Part 36 offer which offers to pay “all or part of the sum at a date later than 14 days following acceptance of the offer will not be treated as a Part 36 offer unless the offeree accepts”. The effect of this rule is that where a defendant makes an offer to pay by instalments:-

  1. If it is accepted then it will be treated in the usual way as a Part 36 offer. Therefore, Part 36.13 will apply (the defendant will pay the claimant’s costs up to acceptance, payment must be within 14 days etc);
  2. If it is not accepted and the defendant goes on to beat it, then CPR 36.17 will not apply.

It is important to note that this rule only applies to defendants’ part 36 offers – a claimant may make a Part 36 offer to accept payments by instalment and it will be treated as a Part 36 offer in the usual way.

The rules do appear to create a lacuna where a claimant makes a Part 36 offer including payments by instalments but where the offer includes a counterclaim or adverse claim. I am not aware of any existing authority on this point; it is likely that this is because this only affects a very small number of claims. In my view, it is likely that the court would construe such an offer as being a claimant’s offer for the purpose of CPR 36.6(2) unless it related solely to a counterclaim, in which case I think that it would be treated as being a defendant’s offer in accordance with CPR 20.2(2)(b).

Matthew Rose is a Solicitor on the Costs team at Clarion Solicitors. Contact him at matthew.rose@clarionsolicitors.com or on 0113 222 3248.

INTEREST IS NOT PAYABLE ON AN ADDITIONAL AMOUNT AWARDED UNDER CPR 36.17(4)(d)

Where the Court awards an “additional amount” under CPR 36.17(4)(d) as a claimant / receiving party beating its own Part 36 offer, the additional amount will not attract “enhanced” interest under CPR 36.17(4)(a).

In FZO -v- Adams & Anor [2019] EWHC 1286 (QB) the court allowed an additional amount under CPR 36.17(4)(d), but held that interest under CPR 36.17(4)(a) – enhanced interest at 10% above base rate – was not payable on that amount. Giving judgment, Mrs Justice Cutts found that the construction of CPR 36.17(4)(d) was that the “additional amount” was not a “sum awarded” and that the words “additional” and “amount” mean that the award is in addition to the enhanced interest at CPR 36.17(4)(a).

It should be noted that CPR 36.17(4) states that where the claimant has beaten their own offer the court “…must, unless it considers it unjust to do so, order that the claimant is entitled to…” and thereafter lists the consequences (enhanced interest, additional amount, etc). This does not appear to accord with the judge’s acceptance of the defendant’s submission that the additional amount is not a “sum awarded”. On the construction of CPR 36.17(4) it seems that those consequences are sums awarded by the court, albeit they are sums which the court is bound to award save where it considers it to be unjust.

Notwithstanding, the second strand of the judge’s reasoning appears wholly sound insofar as the “additional amount” is additional to the other consequences and therefore not itself subject to those consequences.

However, practitioners should be aware that this applies only to interest arising under CPR 36.17(4)(a). As the additional amount is a sum which a party is ordered to pay, and (as above) is a sum which the court orders that party to pay, it is a judgment debt and thus interest will, in the author’s opinion, arise under section 17 of the Judgments Act 1838 at the rate of 8% should payment not be made within the prescribed period (14 days pursuant to CPR 40.11 unless otherwise ordered)

Matthew Rose is an Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com and 0113 222 3248. You can contact the Clarion Costs Team on 0113 246 0622.

A PART 36 OFFER WHICH EXCLUDES INTEREST MAY BE VALID

A Part 36 offer in detailed assessment proceedings may be valid where it excludes interest under the Judgments Act 1838.

In Horne -v- Prescot (No.1) Ltd [2019] EWHC 1322 (QB) the Court held that a Part 36 offer on costs which excludes interest is a valid Part 36 offer, contrary to Ngassa -v- The Home Office [2018] EWHC B21.

CPR 36.5(4) states that a “part 36 offer… [for] a sum of money will be treated as inclusive of all interest…” In Ngassa it was held that therefore an offer which purported to exclude interest was not a valid Part 36 offer and therefore would not attract the consequences of Part 36.

However, in Horne the judge found that in detailed assessment proceedings, interest accruing under section 17 of the Judgments Act 1838 does not form part of the claim for costs, as it is a statutory entitlement in respect of which the Court is not required to make any finding. Therefore, unlike interest which may form a part of substantive proceedings (for example interest under the Late Payment of Commercial Debts (Interest) Act 1988) which forms part of the claim and must be Ordered by the Court, Judgments Act interest does not form a part of the “claim” for costs, and is not required to be ordered by the Court (though it may be disallowed).

Whilst the judgment in Horne is both legally sound and eminently sensible, as CPR 36 was not drafted with detailed assessment proceedings in mind (indeed until 2013 it was not possible to make a Part 36 offer in costs proceedings and is only now applicable due to a modification to Part 47 specifically applying Part 36 to detailed assessment) practitioners should bear in mind that Horne is a first instance decision and a different court on a different day may find differently. It may be prudent for practitioners to continue to include interest in Part 36 offers on costs until further authority clarifies the position. It is however a useful judgment to deploy where there is any dispute as to the validity of an offer.

Matthew Rose is an Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com and 0113 222 3248. You can contact the Clarion Costs Team on 0113 246 0622.

CONSEQUENCES OF BEATING A PART 36 OFFER: INJUSTICE

UPDATE [22/10/20] – the case of Rawbank -v- Travelex has introduced further matters for the court to take into account. Read more here:  Part 36: is it unjust to award CPR 36 consequences when the defendant does not have the money to pay 

There have been various cases recently on how the courts consider whether it would be “unjust” to apply the consequences of CPR 36.17. 

In White -v- Wincott Galliford Limited [2019] EWHC B6 (Costs) it was held that it would be unjust to allow an additional amount (CPR 47.17(4)(d)) for the whole of a claim where the offer had only related to some of the issues.

In Invista Textiles & Anor -v- Adriana Botes & Ors (costs judgment unreported) it was held that there is a high bar to demonstrate injustice. The ratio of the judgment suggests that the amount by which an offer has been beaten is at least not the only criterion which the Court should consider. Where a defendant / paying party seeks to argue that it would be unjust to allow some of all of the consequences of CPR 36.17 claimants / receiving parties would do well to refer to this authority as an example of the threshold for “injustice” which must be met.

It should also be noted that the court has previously held that the amount of the additional amount itself cannot be taken into account when considering whether it would be “just” to award the consequences of Part 36.17 per Cashman -v- Mid Essex Hospital Services NHS Trust [2015] EWHC 1312 (QB). In that case, the court on appeal held that the assessing officer had erred in refusing to award the additional amount “not because he considered the making of such an award unjust, but because he thought it unjust to make an award of the required amount”.

There is currently some inconsistency in the judicial approach to the application of the test of injustice. In the opinion of the author, the test is a high bar (supported by White and Invista) and the mere fact that the additional amount of 10% may appear high does not of itself render the consequence “unjust”. The consequences of CPR 36.17 are intended to be punitive and the purpose of the exception for “injustice” is not to allow judges to “soften the blow” to a litigant which has failed to accept a Part 36 offer, but to avoid genuine injustice where there are “exceptional” circumstances.

Matthew Rose is an Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com and 0113 222 3248. You can contact the Clarion Costs Team on 0113 246 0622.

Consequences of beating a Part 36 offer may be varied by the Court

***THIS JUDGMENT HAS NOW BEEN SUPERSEDED***

Senior Courts Costs Office extends the principle in JLE v Warrington & Hamilton Hospitals NHS Foundation Trust [2018] EWHC B18 (Costs).

In JLE  Master McCLoud held that where a Part 36 offer is beaten at a hearing, the Court has the power to consider the justness of each of the consequences of CPR 36.17 individually. In that case, the Court held that whilst it would not be unjust to allow costs on the indemnity basis or interest at the rate of 10% over base rate, it would be unjust to allow the uplift of 10% (often known as the “penalty payment”) given the amount by which the offer was beaten.

Following judgment in Andrews & Anor -v- Retro Computers & Anor [2019] EWHC B2 (Costs), there was a hearing to determine consequential orders on 5th March 2019.

Prior to the Oral Assessment of the Claimants’ costs, the Claimants had made Part 36 offers in the sum of £40,000. The bill of costs was ultimately assessed in the sum of a little more that £43,000 (inclusive of interest). Accordingly the Claimants submitted that they were entitled to the full range of orders under CPR 36.17. After finding that the Claimants should be entitled to additional interest and costs on the indemnity basis, Maser Friston considered whether or not to allow the “penalty payment” of 10% of the amount of the bill as assessed.

The Deputy Master pointed out that the Claimants had beaten the amount of the assessed bill by “only” 7.5%, and therefore considered that the uplift of 10% would be too high and therefore was minded to disallow the uplift under CPR 36.17(4)(d) on the basis that to do so would be unjust.

The Claimants submitted that pursuant to JLE the court had the power to “deconstruct” CPR 36.17 and to consider the unjustness or otherwise of each consequence individually, and that Master McCloud had held that the consequences of CPR 36.17 were not “all or nothing”. Therefore, they argued, that the Court had a general discretion not only to allow or disallow the penalty uplift, but where it considers that an uplift of 10% would be unjust, the Court may reduce the amount of the penalty uplift to a just level. The Court is therefore not constrained to disallow the penalty uplift in full if it considers that 10% is too high.

Following these submissions, Deputy Master Friston allowed an uplift of 7.5%, commensurate with the proportion by which the Claimants had beaten their offer.

Summary

The Court has the power to vary the percentage level of the uplift proscribed at CPR 36.17(4)(d). The proscribed rate is therefore a cap, not an entitlement, but if the Court finds that to allow the entirety of the 10% uplift would be unjust it is not bound to disallow the uplift entirely.

Every case will be decided on its own merits, but it seems reasonable that where a Claimant has beaten its own offer by less than 10%, the uplift should in principle be allowed in proportion to which the offer has been beaten.

The Claimants were represented by Richard Wilcock of Exchange Chambers, assisted by Matthew Rose of Clarion Solicitors.

The effect of Payments on Account on Part 36 and Judgment

The case of Gamal -v- Synergy Lifestyle [2018] EWCA Civ 210 has reinforced the position that a payment on account does not “increase” the value of a paying party’s Part 36 offer when considering whether the offer has been “beaten” for the purpose of CPR 36.17.

Case Summary

The original action between Synergy Lifestyle (the Claimant / Respondent), and Ms Nivin Gamal (the Defendant / Appellant) related to a claim for unpaid invoices. For ease of reading, the parties are referred to throughout as the Claimant and Defendant respectively. There were various issues relating to the fraudulent nature of the invoices, applicability of VAT, payment or a carpet in October 2013, and the level of costs payable as a result, however these have been omitted for the sake of simplicity and ease of reading.

29 October 2013 – Defendant paid the Respondent £6,600

October 2014 – Claim issued for £151,000

24 August 2015 – Defendant’s CPR 36 offer of £15,000

8 February 2016 – Defendant pays £10,000 to the Claimant

10 May 2016 – Judgment for the Claimant in the sum of £14,275.49 (assessed at £30,275.49 less £16,600 already paid by the Defendant in respect of that work) and the Defendant pay the Claimant’s costs.

The Defendant appealed on the basis that she had beaten the CPR 36 offer of £15,000 and that the judge had failed to properly apply CPR 36.17.

Judgment on Appeal

Giving Judgment, Flaux LJ placed great reliance upon the earlier authority of MacLeish -v- Littlestone [2016] EWCA Civ 127. In that case, Briggs LJ had held that a Part 36 offer was made to settle the entirety of the claim, and that admissions made by a defendant do not have the effect of modifying the Part 36 offer such that it applied only to those parts of the claim which remained in dispute (i.e. a Part 36 offer made in respect of the whole of the claim relates to the whole of the claim, whether or not part of that claim is subsequently admitted).

In Gamal, the court extended this principle to apply not only where a payment had been made following admissions but to any payment on account whether or not an admission had been made. The effect of the payment on account was to reduce the amount which the Defendant could ultimately be ordered to pay, and therefore to a corresponding reduction to the Part 36 offer. As such, the Court dismissed the appeal, held that the Part 36 offer had not been beaten, and upheld the award of costs.

Summary

In summary, the judgment reinforces what many would consider to be the “common sense” position. A payment on account is just that; a payment in anticipation of a future liability. It therefore does not have the effect of making a defendant’s offer more attractive or a claimant’s offer less attractive.

The discussion regarding a “reduction” to the Part 36 offer in the judgment may be somewhat confusing, however this is simply because there are two ways of looking at the issue:-

1. The court gave judgment for £23,675.49[1], distinct from the balance of £14,275.49 payable once credit was given for the payments applicable payments on account (i.e. those made after the date of the offer). Looked at in this way,  the Defendant had obviously not beaten her own offer.

2. The court gave judgment for £14,275.49 (as a result of the payments on account), however just as the payment on account reduced the judgment sum, it also reduced the level of the Defendant’s Part 36 offer (i.e. the offer of £15,000 became £5,000 once the payment on account was applied). This is the approach the court adopted.

Both of the approaches above arrive at the same conclusion though by different methods.

All practitioners should note that whether a payment is “on account” is open to judicial interpretation however the general presumption is that payments made during the currency of a claim are payments on account unless specifically stated otherwise.

Matthew Rose is a Solicitor and Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him on 0113 222 3248 or by email at matthew.rose@clarionsolicitors.com.

[1] In fact, the court assessed the value of the work at £30,275.49, which was necessary as the Claimant admitted that the invoices it had submitted were part of a fraud between it and the Defendant. However, the Claimant had already paid £6,600 towards this work in satisfaction of invoices prior to the commencement of proceedings. Therefore, the total value of the work done was found to be £30,275.49 but the total value of the claim against the Defendant was £23,675.49.

Part 36 – a Technical Guide

A reflection on the proper construction of CPR 36 offers, changes to the rules, and service

Pursuant to the judgment in Gibbon v Manchester City Council[i]  and Carillion v PHI Group[ii], an offer which does not comply with the form requirements of CPR 36.5 will not have the automatic costs consequences of a CPR 36 offer. The court will, of course, be able to take into account the fact of the offer when determining the appropriate costs order to make, however the very purpose of making a CPR 36 offer is to obtain the benefit of the automatic costs consequences which it provides. Furthermore it is doubtful that, upon finding that an offer did not comply with CPR 36, the court could award the costs consequences of CPR 36 ‘in any event’ as there is no other statutory mechanism by which a court could award, for example, an uplift on damages or costs as prescribed by CPR 36.17.

It is therefore of critical importance that offers comply with the form requirements of CPR 36.5.

Changes to the Rules after April 2013

Under the old rules, an offer which was intended to have the costs consequences of CPR 36 needed to provide that the defendant (or paying party) would be liable to pay the claimant’s (or receiving party’s) costs pursuant to CPR 36.10.

It is important to note that this has now changed, and CPR 36.5(1)(c) states that the offer must state that the defendant will be liable for costs in accordance with rule 36.13 (or 36.20 in the case of claims which no longer continue under the RTA or EL/PL protocols).

It is therefore extremely important that firms check their precedent documents to ensure that they are updated to refer to the new rule. The consequence of failing to do so could be that the court will find that the offer is not a valid CPR 36 offer and therefore does not have the intended consequences.

The Relevant Period

CPR 36.5(1)(c) also states that a CPR 36 offer must specify a period of not less than 21 days (‘the Relevant Period’) within which the defendant would be liable to pay the claimant’s costs.

As the rules of service apply to CPR 36 offers[iii], the 21 day period can begin only on the date on which the offer is served. An offer which states that the Relevant Period will expire ’21 days from the date of this letter’, or ’21 days from your receipt of this letter’ [iv] will be held to be defective. Furthermore, when calculating the Relevant Period it is necessary to consider the ‘clear day’ rule[v], and thus the 21 day period cannot include the date of service of the offer itself.

For example, an offer letter sent by 1st class post on 1st June 2015 (a Monday) would be deemed served on 2nd June 2015 (a Tuesday)[vi], the first day of the Relevant Period will therefore be on 3rd June 2015 (a Wednesday) and the last day will be on 24th June 2015 (a Wednesday). The party in receipt of the CPR 36 offer will therefore be able to accept the offer within the Relevant Period so long as Notice of Acceptance is deemed served on or before 24th June 2015.

Methods of Service

Both a CPR 36 offer and Notice of Acceptance must be served by one of the methods set out in CPR 6.20. An important point to note, therefore, is that a CPR 36 offer cannot be made or accepted by email unless the party to whom the offer or acceptance is being sent has agreed to accept service by that method in accordance with CPR 6 PD 4.1(1), in other words that that party has given written notice that it will accept service by that method.

Matthew Rose is a Solicitor in the Costs and Litigation Funding department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com, or the Clarion Costs Team on 0113 2460622.

[i] [2010] EWCA Civ 726

[ii] [2011] EWHC 1581 (TCC)

[iii] CPR 36.7(2)

[iv] Thewlis v Groupama Insurance Co Ltd. [2012] EWHC 3 (TCC)

[v] CPR 2.8(3)

[vi] CPR 6.20