The Court of Appeal’s decision gives guidance on how the court should exercise its discretion to award interest at up to 10% above base rate where a claimant beats its own Part 36 offer, disagreeing with suggestions in previous case law that an award of enhanced interest under Part 36 should be purely compensatory. Instead, an award may be pitched at a level designed to incentivise defendants to act reasonably in seeking to settle litigation and to mark the court’s disapproval of any unreasonable or improper conduct.
The judgment makes it clear that the level of interest must be proportionate to the circumstances of the case, and that 10% above base rate should not be regarded as a starting point. However, the recognition that an award of enhanced interest under Part 36 need not be entirely compensatory may mean that the court is prepared to award higher levels of interest than previously where a claimant beats its own Part 36 offer, particularly where the defendant has acted unreasonably.
The Court of Appeal did however stress that appeals on issues of this kind should in future be rare, as the judge’s discretion as to the appropriate rate of enhanced interest is a wide one and the Court of Appeal would not often be persuaded to interfere with it.
Background
The claimant made a Part 36 offer on 9 April 2014 offering to settle its claim for US$35 million (inclusive of interest). The defendant did not respond or make any counter-offer. Instead, as the judge said, it “defended the claim up hill and down dale at a lengthy trial”. On 13 March 2015 the claimant was awarded damages of some US$40 million plus interest.
Under the relevant provisions of CPR Part 36, where a claimant obtains a judgment that is more advantageous than its own Part 36 offer, the court must (unless it considers it unjust to do so) order that the claimant is entitled to certain benefits, including:
- an additional amount of up to £75,000 (calculated as 10% of the first £500,000 awarded and 5% of the next £500,000);
- indemnity costs from expiry of the relevant offer period; and
- enhanced interest on both damages and costs, at up to 10% above base rate, for some or all of the period following that date.
In this case, the High Court (Flaux J) awarded interest on the judgment sum at a rate of US$ LIBOR plus 2.5% up to the end of the offer period, and at a rate 3.5% higher from that point onwards. Interest on costs (which were payable on the indemnity basis) was awarded at 2.5% up to the end of the offer period, and 4.5% thereafter. Referring to previous case law (in particular Petrotrade v Texaco [2000] EWCA Civ 512 and McPhilemy v Times Newspapers Ltd [2001 EWCA Civ 871), the judge concluded that the court could not penalise the defendant for the way it conducted the case by awarding the claimant more by way of uplift on interest than would legitimately compensate it for the disruptions and difficulties the litigation had caused.
The defendant appealed against the rates of interest awarded from expiry of the offer period, claiming that interest should have been awarded on both damages and costs at the maximum rate specified in Part 36, namely 10% above base rate.
Decision
The Court of Appeal overturned the first instance decision on interest, concluding that Flaux J had been wrong to conclude that an award of interest under Part 36 was entirely compensatory. The comments in Petrotrade and McPhilemy had been obiter, so not binding, as to the basis of awarding enhanced interest on damages. The court was bound by McPhilemy to decide that the rate of interest on costs (as opposed to damages) should be such as to achieve a fairer result for the claimant than would otherwise have been the case, but that did not mean it had to be purely compensatory.
In the Court of Appeal’s judgment, the court undoubtedly has a discretion to include a non-compensatory element to the award of interest, but the level of interest awarded must be proportionate to all the circumstances of the case, including the length of time before judgment, whether the defendant took entirely bad points or behaved unreasonably in continuing to defend the litigation despite the offer, and what level of disruption was caused by the refusal to negotiate or accept the offer.
In some cases, a higher rate will be needed to provide the appropriate incentive to defendants to engage in reasonable settlement discussions, to settle litigation at a reasonable level and at a reasonable time, and to mark the court’s disapproval of any unreasonable or improper conduct. The court added:
“The culture of litigation has changed even since the Woolf reforms. Parties are no longer entitled to litigate forever simply because they can afford to do so. The rights of other court users must be taken into account. The parties are obliged to make reasonable efforts to settle, and to respond properly to Part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court’s powers can be expected to be used to their disadvantage. The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process.”
Here the relevant circumstances were the defendant’s refusal to engage in settlement discussions or to respond to the Part 36 offer, the fact that the eventual award was very significantly greater than the Part 36 offer itself, and “perhaps most of all” the defendant’s conduct of the litigation, including that it was guilty of lying. The court commented that it was “hard to imagine a case in which there would be greater justification for the award of a 10% enhanced interest rate” on the damages. The sum of US$2.6 million that the defendant would be required to pay might be 6.5% of the ultimate award, which did not seem excessive or disproportionate, even taken in conjunction with the other three orders being made (as to indemnity costs, the £75,000 additional amount, and an enhanced interest award on the costs). The court noted, however, that if the period had been five years instead of 10½ months, things might well have been different.
It was also appropriate to award the maximum rate of enhanced interest on costs, largely for the same reasons, as this was “a very bad case of the defendant simply ignoring a proper offer and running up the costs thereafter”.
