An interesting if not unusual decision has recently been reached in Transocean DrillingUK Ltd -v- Providence Resources PLC [2016] EWHC 2611 (Comm). In this instance Mr Justice Popplewell was required to hand down judgment dealing with the implications of costs following the acceptance of a Part 36 Offer and; to determine whether those costs should be taken into account when determining whether such Part 36 Offer had been beaten.

This case is of considerable significance as the Court does not generally determine issues regarding costs following the acceptance of a Part 36 Offer and further demonstrates the importance of the Parties’ conduct, when assessing what costs should be allowed.

In this case the Claimant was successful at trial in recovering damages of US$7.6 million however; the Claimant appealed the decision and damages were later recovered in the sum of US$14.6 million; which was more advantageous than the Claimant’s Part 36 Offer to accept US$13 million inclusive of interest.

It was the Claimant’s case that the Claimant’s Part 36 Offer of US$13 million, made on 8thAugust 2014, complied with CPR Part 36 and that the normal Part 36 consequences should follow; unless it would be unjust for them to do so. Further; the Claimant also submitted that there was nothing in these circumstances which would make it unjust.

The Defendant however sought to make the point that Part 36 was “not engaged because when one takes account of costs, Transocean did not achieve a result which was as advantageous as the outcome which its Part 36 offer was asking Providence to accept. If Providence had accepted the offer, it would have had to pay Transocean’s costs up to that date, assessed on the standard basis, pursuant to rule 36.10(1). Such costs are estimated at just under £3 million, which assuming they were reduced by 30% when assessed on a standard basis, would amount to approximately £2 million of recoverable costs. Converted into US$ at the then current rate, that amounts to approximately US$3.3 million. Accordingly, accepting the offer would have involved paying some US$16.3 million (US$13 million for principal and interest and US$3.3 million in costs) compared with the court outcome of approximately US$14.6 million by way of principal and interest to that date with no order for costs.

In determining whether Part 36 had been engaged, Mr Justice Popplewell made reference to Mitchell v James [2004] 1 WLR 158; and more specifically the comments of Peter Gibson LJ, with whom Potter LJ and Sir Murray Stuart-Smith agreed, that the offer did not engage Part 36 in the Mitchell case because it was not permissible to include within a Part 36 offer terms as to costs. Mr Justice Popplewell also went on to find, at Paragraphs 15 and 16, that “…costs do not fall to be considered when determining whether Rule 36.14(1)(b) has been satisfied.” and that “The starting point is that as Peter Gibson LJ observed at paragraph [31] of Mitchell, the word “judgment” naturally connotes what the trial judge holds or decides on the substantive issues in the case, as distinct from the ancillary question of costs which falls for consideration after the substantive issues have been decided.”

Mr Justice Popplewell also stated at Paragraph 21 that “As Peter Gibson LJ observed at paragraph 32 of Mitchell v James, the draftsman [of CPR Part 36] cannot have contemplated that the judge might have to evaluate the quantum of a Part 44 costs order, which is normally the function of a costs judge.” In considering the same Mr Justice Popplewell concluded at Paragraph 23 that “…Providence’s argument is contrary to the purpose of Part 36, which is to provide a clear rule so that it can be easily determined whether the party has or has not beaten the offer.” and that “It is often relatively straightforward for a party to identify the amount of principal and interest which it thinks it will recover, or which it will have to pay. If, however, it has to assess what costs order the judge will make at trial or what costs order the judge would make if the trial were taking place at the date of the offer or its expiry, the task is immeasurably more difficult. Again such uncertainty is inimical to the purpose of Part 36.”

In determining whether the Claimant had achieved judgment against the Defendant, at least as advantageous as the Claimant’s Part 36 Offer,  Mr Justice Popplewell found at Paragraph 26 that “It follows that in this case Part 36 is engaged. The principal and interest which form the judgment which is “being entered” is approximately US$14.6 million. That is more advantageous to Transocean than the proposal in the Part 36 offer that it would accept US$13 million inclusive of interest.”

Turning his attention to whether the Part 36 consequences were unjust, Mr Justice Popplewell referred to the principles considered in Webb v Liverpool Women’s NHS Foundation Trust [2016] 1 WLR 3899 and noted “…the court does not have an unfettered discretion to depart from the ordinary costs consequences set out in Rule 36.14. The burden to show injustice which rests on a claimant who has failed to beat the defendant’s Part 36 offer, or vice versa, is a formidable obstacle to the obtaining of a different costs order. If that were not so, then the salutary purpose of Part 36, in promoting compromise and the avoidance of unnecessary expenditure of costs and court time would be undermined: Smith v Trafford Housing Trust [2012] EWHC 3320(Ch) at [13(d)], approved in Webb.”

In essence “…the avoided consequences of accepting a Part 36 offer, in terms of costs and court time, are an important consideration in the discretionary exercise which arises under Part 36, both from the point of view of the parties and the public interest in the administration of justice.”. Mr Justice Popplewell dealt with this point at Paragraph 31 when he found “When one takes account of the difference in principal and interest between the sum offered and that awarded (about US$ 1.6 million), it is clear that Providence is worse off by having decided not to accept the offer… By not accepting the offer Providence has caused Transocean to incur almost £2 million of further costs, irrecoverable unless the effect of not accepting the offer is taken into account… It follows that if the policy underlying Part 36 is to be given effect in encouraging settlement and encouraging the parties to avoid wasted costs and court time, it can be said that the offer was one which Providence ought to have accepted.”

In clarifying the protection offered by CPR Part 36, Mr Justice Popplewell provided guidance at Paragraph 32 when he found “A further relevant consideration is that if Providence had been concerned that the offer of US$13 million was acceptable but for the costs consequences, it would have been open to Providence to make a counter offer explaining that position, and to do so on terms “without prejudice save as to costs” so as to gain costs protection.”

Turning to the issue of the Claimant’s conduct and the submissions made by the Defendant in respect of the same, Mr Justice Popplewell concluded “…A Part 36 offer by a claimant at anything less than 100% predicates that there may be points on which it loses, and that the costs protection which it purchases is protection against running points on which it fails… it is not unusual for a claimant to succeed on some but not all of its allegations. That is not of itself a reason for departing from the primary rule that the successful party should recover its costs: see Webb at paragraphs 24-28; nor should it be a factor which makes the normal Part 36 consequences unjust…Transocean’s offer was too high. There should, moreover, be some disapplication of the Part 36 consequences in any event to reflect the criticisms I have made of Transocean’s conduct, which was not merely unreasonable but dishonest.”

In considering all of the evidence and case law, Mr Justice Popplewell concluded “that it would be unjust that the full Part 36 consequences should follow, but it would not be right that they be disapplied in full. The overall justice of the position is that Providence should pay Transocean’s costs from 30 August 2014 but without the other Part 36 consequences. Such costs will be assessed on a standard basis, interest will not run at 10% on the principal sum nor on costs, and there will be no surcharge.”

As mentioned at the outset; this is an important judgement which I am sure will attract much attention and commentary and which highlights the importance of conduct and protective Part 36 Offers.

Should you have concerns about any Part 36 Offers you have made or; wish to discuss the costs consequences of the same, please feel free to contact our John Plunkett.