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Part 36 offers in Part 47 assessments: all clear now so no reason still to be confused

In the 14 June 2019 blog entitled Part 36 offers in Part 47 Assessments: all clear now or still confused, the case of Horne v Prescot was considered in the context of the validity of Part 36 offers in detailed assessment proceedings. In Horne, Nicol J had decided that an offer to accept the sum of £82,000 “in full and final settlement of her [the claimant’s] claim for costs exclusive of interest and exclusive of the costs of assessment“(emphasis added) was a valid offer under Part 36. It followed that when the offer was rejected and the costs were assessed at £91,807, the claimant became entitled to the benefits available under CPR 36.17(4)(a)-(d). These included an additional amount of 10% of the assessed costs, enhanced interest at up to 10% over base rate on both the assessed costs and the costs of assessment, with the latter to be paid on the indemnity basis.

Expensive it is, therefore, for a paying party who unwisely rejects a Part 36 offer to find that when the receiving party does better than the offer, the benefits under CPR 36.17(4) take effect automatically, but the key issue in Horne was the way in which the offer in relation to interest was treated by the court (post).

The starting point is CPR 36.5. To be valid:

(1) A Part 36 offer must—

(a) be in writing;

(b) make clear that it is made pursuant to Part 36;

(c) specify a period of not less than 21 days within which the defendant will be liable for the claimant’s costs in accordance with rule 36.13 or 36.20 if the offer is accepted;

(d) state whether it relates to the whole of the claim or to part of it or to an issue that arises in it and if so to which part or issue; and

(e) state whether it takes into account any counterclaim.

(4) A Part 36 offer which offers to pay or offers to accept a sum of money will be treated as inclusive of all interest until—

(a) the date on which the period specified under rule 36.5(1)(c) expires; or

(b) if rule 36.5(2) applies, a date 21 days after the date the offer was made.”

The Practice Direction 47.19 continues

“… Where an offer to settle is made under Part 36 or otherwise, it should specify whether or not it is intended to be inclusive of the cost of the preparation of the bill, interest and VAT. Unless the offer states otherwise, it will be treated as inclusive of these”.

That begs the question (as was the case in Horne), is an offer expressed to be “exclusive of interest” nonetheless a valid offer conferring the benefits under CPR 36.17(4). If it is not, it’s a disaster for receiving parties or their solicitors, if, by adding the magic words “exclusive of interest” or “exclusive of the costs of assessment” or both, they have taken the offer outside the strict boundaries of CPR 36.5 so the “offer” is not one made under Part 36 at all. If that is the case, all the benefits under sections (4)(a)-(d) of the rule will be lost.

Take this theoretical example: the winner and receiving party offers to accept £501,000 in settlement of their claim for costs in the bill “exclusive of interest”. The court then assesses the costs at £500,000. If the interest is disregarded, the paying party has “won” to the extent that CPR 36.17(4) is not engaged. But that is to ignore the interest which is payable on the costs under section 17 of the Judgments Act 1838 at 8% from the date of judgment. When that is calculated, any figure above £1,000 when added to the assessed costs will mean that the receiving party has “won”, so the paying party will be required to stump up another £50,000 under the rule, plus enhanced interest, plus costs of assessment on the indemnity basis (meaning there will be no proportionality issues under CPR 44.3(5) to worry about).

Now take this real life case of Hochtief (UK) Construction Ltd v Atkins Ltd, decided by O’Farrell J on 11 November 2019 after the June blog was published. The claimant offered to settle for £875,000 on 19 May 2017. That offer was not accepted. Judgment for the claimant at trial for £802,475 was then given on 31 July 2017, so the claimant did not better the offer. However, when agreed interest on the damages awarded of £77,372 was added, the claimant had beaten the offer by £4,847 so became entitled to an additional sum under CPR 36.17(4) of £65,123 (because the allowance is 5% above £500,000), interest assessed at 6% over base rate on damages and on recoverable costs from 21 June 2017, being the last date on which the offer could have been accepted, plus costs on the indemnity basis, also from 21 June 2019. Expensive for the defendant and another lesson that a “near-miss” is not good enough.

The distinguishing feature in Hochtief, however, is that the interest was agreed, so the actual construction of the Part 36 offer was never in issue. It was common ground that the addition of the interest had tipped the recovery over the top of the offer, so Part 36.17(4) was engaged and with it, all its bag of goodies.

What happens if the situation had been as it was in Horne and the offer had been made “exclusive of interest”?

In Horne, Nicol J found that the part that interest played in detailed assessment proceedings to be “qualitatively different from that in the substantive litigation”. That was because “the claim” was to the costs claimed in the bill and interest had no part to play in what the costs judge was required to decide because it arose as an entitlement conferred by the Judgments Act. The only jurisdiction reposing in the costs judge concerning interest was to be found in CPR 47.8(3) and CPR 47.14(3), which permitted the court to curtail the period for which interest can be charged on the costs, but only where the receiving party has failed to commence detailed assessment proceedings within the time limit set out in the rules (not the case in Horne). It followed that in detailed assessment proceedings, interest would be added automatically by virtue of the Judgments Act. It did not need to be claimed but because of PD 47.19, it was prudent for solicitors to specify whether or not the offer excluded interest, otherwise it would be treated as being inclusive.

For these reasons, Nicol J held that the offer, even though exclusive of interest, was one that was valid under CPR 36.5, so the claimant could fill his shopping trolley with the benefits conferred under CPR 36.17.

Now consider King v City of London Corporation decided on 18 December 2019. The facts were that the claimant in detailed assessment proceedings had offered to accept £50,000 for costs “exclusive of interest”. The bill was then assessed at £52,470, so on the face of it, the claimant, having bettered the offer, was entitled to the rewards under CPR 36.17(4), namely the additional 10% of the assessed costs (so £5,247), indemnity costs of the assessment and enhanced interest.

Not so fast, said the Court of Appeal, per Newey and Coulson LJJ with whom Nugee LJ agreed, albeit “with reluctance”. In their view, the offer was not one which had complied with the requirements of CPR 36.5(4) that such offers are to be treated as inclusive of interest so none of the CPR 36.17(4) benefits were payable. That was so notwithstanding the provision in PD 47.19 that an offer to settle made under CPR 36 should specify whether or not it is intended to include interest: the practice direction, they said, cannot “control” CPR 36, and it supplements not that Part, but Part 47.

As for the wording of CPR 36.5(4), in Nugee LJ’s view at paragraphs 30 and 33:

“I do not think it is important either that CPR 36.5(4) begins with the words ‘A Part 36 offer’. It cannot be inferred from this that a valid offer need not include interest… CPR 36.5(4) states that a Part 36 offer ‘will be treated as inclusive of all interest’. That can perfectly well be read as indicating that an offer which is not to include interest cannot be a valid Part 36 offer.”

Having concluded that an offer made “exclusive of interest” cannot be a valid Part 36 offer in the proceedings, the court went on to decide whether it made any difference if, instead, it had been advanced only in the detailed assessment. It did not; per Coulson LJ who gave the second judgment at paragraph 70:

“There are two main reasons for that. The first is an application of the straightforward principle that the same words in the same part of the CPR cannot have two opposite meanings, depending on the stage that the litigation has reached. That would be contrary to all the usual rules of construction”.

In differing with Nicol J in Horne, he continued at paragraph 71:

“… I do not agree with the proposition that it is somehow impossible for interest to be in issue in costs assessment proceedings, because the rate and therefore the total amount due has been fixed by way of the underlying judgment. I accept that in most costs assessments, there will not be a dispute about interest. That was the case in Horne v Prescot. But it is not uncommon for the parties to argue about the period for which interest can apply, with the paying party taking a point about the delay on the part of the receiving party in producing its bill, and arguing that, in consequence, the claim for interest on those costs should be disallowed in whole or in part.”

For his part, Arnold LJ came to the conclusion that the appeal should be dismissed, but with reluctance. He went on to explain at paragraph 86:

“… the issue merits consideration by the Civil Procedure Rules Committee. In my opinion there are arguments in favour of permitting Part 36 offers to be made which are exclusive of interest, at least in assessment proceedings if not in the general run of claims. If the Committee decides, however, that offers exclusive of interest should not be permitted, then I would suggest that rule 36.5 be amended to say so in terms. At the very least, PD 47 paragraph 19 should be revised.”

The upshot for practitioners?

It is not difficult! Do not trespass outside the express wording of Part 36.5. If you do, the offer will be valid, but it will not be a Part 36 offer so none of the CPR 36.17(4) benefits will apply. In these circumstances, you may have to answer to your client for having failed to secure the additional 10% if the offer is bettered, and if that is £75,000, it will be a hefty hit on the office account if the firm’s insurers are not to become involved. Be aware, too, that the judgment of Nicol J in Horne v Prescot is not good law and that, as a result of King, there is now no reason whatsoever still to be confused!

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