Costs not to be considered when assessing whether Part 36 offer has been beaten

by Allen & Overy LLP
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Transocean Drilling UK Ltd v Providence Resources Plc [2016] EWHC 2611 (Comm), 20 October 2016 

An assessment of whether a Part 36 offer has been beaten at trial does not involve any consideration of the extent of the parties' costs. The assessment was to be made only on the basis of the judgment obtained on the substantive issues.

Part 36 of the Civil Procedure Rules (CPR)

Part 36 encourages parties to settle their claims, with negative costs consequences for a party that declines an offer and then obtains a less favourable result at trial.  This case concerned the question of whether, when deciding whether a party has beaten a Part 36 Offer at trial, any account should be taken of the extra costs that have been incurred in bringing the case to trial.

Part 36 provides that if either:

  • a defendant does not accept a claimant's offer and the claimant then obtains a judgment which is at least as advantageous as its offer; or

  • a claimant does not accept a defendant's offer and the claimant fails to obtain a more advantageous judgment; and

  • the party which made the offer can access the Part 36 costs rules, which tend to be more favourable than the costs orders which will ordinarily be made under Part 44.  The Court is not told of any Part 36 offers until after it has reached its decision on the substantive issues.

Facts

Transocean Drilling UK Ltd (the claimant) had made a Part 36 offer to Providence Resources Plc (the defendant) which was rejected.  At trial the claimant failed to obtain as much in damages as it had offered to accept in its Part 36 offer. The claimant won on some but not all of its claims and was awarded approximately USD 7.6 million inclusive of interest.  Its previous Part 36 offer had offered to accept USD 13 million inclusive of interest.  The offer had stated that the sum did not include costs, and drew attention to the fact that if it were accepted, Providence would be liable to pay the claimant's costs up until the date the offer was accepted, on the standard basis (Part 36).

The parties did not inform the court of the Part 36 offer because the sum awarded to the claimant fell well short of its offer. In making its decision regarding costs under Part 44 of the CPR, the trial judge determined that although the claimant had won the litigation, there should be no order as to costs.

The claimant successfully appealed, which increased the judgment sum to approximately USD 14 million. The case was returned to the trial judge for a decision on costs. The claimant contended that the more favourable Part 36 costs consequences should apply because it had beaten its offer to accept USD 13 million.

The defendant claimed that the offer had not been beaten because, if the effect of the trial judge's original order under Part 44 that each party would bear its own costs was taken into consideration, the total sum that the claimant would recover (estimated to be USD 14.6 million) was less than if the defendant had accepted the claimant's offer and had had to pay the claimant's costs on the standard basis to the date on which the offer was accepted (estimated to be USD 16.3 million).

Costs not relevant to whether Part 36 Offer has been beaten

The court analysed the relevant provisions in Part 36, together with case law. The court also considered the practical implications of the defendant's contention, which if correct would require the trial court to undertake an exercise that involved:

  • summarily assessing the parties' costs (unless those costs had been agreed), which the court noted was ordinarily a task for a costs judge, not a trial judge;

  • the court then making hypothetical decisions regarding the treatment of costs, both under Part 44 and Part 36;

  • comparing the sums that the winning party would obtain when both the substantive judgment and each of the alternative costs calculations were taken into consideration in order to determine which was more favourable to the winning party. 

Through this analysis the court formed the view that the draftsman of Part 36 could not have intended that the assessment of whether Part 36 was engaged should involve any consideration of the parties' costs. The assessment was to be made only on the basis of the judgment obtained on the substantive issues.

Comment

If the defendant's argument had been held to be correct it would have undermined the efficacy of the Part 36 regime in all but the most simple of cases.

Weighing up the various contingencies and uncertainties inherent to litigation in order to determine what offer to make or whether to accept an offer is often already a difficult process for parties. If a step were introduced by which a party would be required to estimate both the cost consequences of the offer being accepted at that point in time against the potential cost consequences of running the matter to trial, with the treatment of those costs being determined under Part 44, it would become too impractical for parties to perform the necessary analysis involved in order to make, accept or reject an offer with any degree of confidence. This would be likely to seriously undermine the purpose of Part 36, which is to encourage settlement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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