The High Court recently held that costs do not fall to be taken into consideration in determining whether a judgment against a defendant is at least as advantageous to a claimant as proposals contained in the claimant’s Part 36 offer. The Court also considered what factors it should take into consideration, such as commercial realities and dishonest conduct, when deciding what Part 36 costs order it should make. This case concerned the preApril 2015 Part 36 costs consequences.
In Transocean Drilling UK Limited v Providence Resources PLC  EWHC 2611 (Comm), the Court was asked to determine the consequences of a Part 36 offer made by the Claimant (“Transocean”). Transocean had claimed damages following alleged delays by the Defendant (“Providence”) in the drilling of a well. Transocean was successful at first instance and was awarded around US$7.6 million, inclusive of interest, in December 2014. In February 2015, the High Court held that there should be no order for costs on the basis that, while Transocean was the successful party, Providence had been successful on issues on which around 70-75% of the costs of the litigation had been spent. Transocean’s unreasonable conduct of the litigation was also a pertinent factor in the determination.
Transocean appealed against part of the judgment and the Court of Appeal allowed the appeal in April 2016, the effect being that the judgment in Transocean’s favour was increased to over US$13.8 million. That was larger than the amount specified in a Part 36 offer (US$13 million inclusive of interest) made by Transocean on 8 August 2014. Transocean therefore applied for the Part 36 consequences to apply from the date of the expiry of the offer. Providence argued that, when the costs that would have been payable had the Part 36 offer been accepted were taken into account (roughly US$3.3 million), Transocean did not beat the offer.
Was the Part 36 offer engaged?
The Court rejected Providence’s submission that costs should be taken into account in determining whether Transocean beat its Part 36 offer (applying Mitchell v James and other  EWCA Civ 997). In considering whether the judgment against a defendant is more advantageous to a claimant than the Part 36 offer, Popplewell J stated that the “judgment” means what the trial judge decides on the substantive issues in the case, rather than the ancillary question of costs. In addition, the rule setting out when Part 36 is engaged only applies “on judgment being entered”, which Popplewell J said could not include a decision on costs. The sum awarded by the Court of Appeal was therefore more advantageous than the proposal contained in the Part 36 offer, and the Part 36 offer was engaged.
Was it unjust to apply the Part 36 consequences?
After finding that the Part 36 offer was engaged, the Judge then turned to consider whether the consequences of it were unjust and whether the just result remained that there should be no order for costs, as per the High Court’s decision in February 2015 (which Providence also submitted). Referring to Webb v Liverpool Women’s NHS Foundation Trust  1 WLR 3899, Popplewell J set out, among others, the following principles:
• the court’s discretion as to whether the costs consequences are unjust is derived from Part 36, not Part 44;
• discretion under Part 36 is not limited to the basis of assessment of costs, but extends to the incidence of costs;
• the court considers all the circumstances of the case, including the terms of the offer and the information available to the parties at the time when the Part 36 offer was made. Such circumstances also include the offeror’s conduct;
• by accepting the offer the offeree avoids ongoing litigation and further costs; and
• the court does not have an unfettered discretion to depart from the ordinary costs consequences. Indeed, the burden to show injustice is “a formidable obstacle to the obtaining of a different costs order”.
After setting out the principles, the Judge said that “[i]n most cases it will not be appropriate to embark upon an inquiry of how costs would be allocated in the absence of the Part 36 offer, either at the date of judgment or at the date of the offer”. However, given the particular course of these proceedings, the Judge determined that he was able to decide without much further inquiry that, at the date of the Part 36 offer, he would have made no order as to costs (based on the same factors leading to the decision in February 2015). He then considered whether he was bound to ignore the costs order he would have made under Part 44 when deciding whether it is unjust that the Part 36 consequences should apply. The Judge concluded that he was not bound to ignore what costs order he would have made, as the commercial reality was that both parties would have had costs well in their minds when considering the Part 36 offer. Taking into consideration those costs consequences, the Judge found that, at the time the Part 36 offer was made, Transocean’s offer was, in commercial terms, “too ambitious”. As Popplewell J stated “[h]ad it been accepted, Providence would have paid, and Transocean would have received, more than would have been the case had the court given judgment on liability and costs at the date of the expiry of the offer”.
However, regardless of any hypothetical situation at the date of the Part 36 offer, the Court of Appeal’s decision in April 2016 meant that Providence should nevertheless have accepted the offer, as, ultimately, the Court of Appeal awarded Transocean more than the amount it asked for in its Part 36 offer.
Considering the principles and policy of Part 36, namely encouraging settlement and the avoidance of wasted costs and time, the Judge stated that not accepting the offer meant that Transocean incurred further costs. In addition, other litigants were delayed because of the added court time and costs. Providence could also have made a counter-offer in response to the Part 36 offer to gain costs protection.
While Providence should have accepted the offer, the Judge concluded that, taking Transocean’s conduct (such as it seeking to deceive Providence by sending it a “deliberately doctored” report) and the finding that the Part 36 offer was “too ambitious” into account, it would be unjust that the full Part 36 consequences should follow. He held that Providence should pay Transocean’s costs from 30 August 2014 (the expiry date of the Part 36 offer), but without the other Part 36 consequences. This meant that costs were to be assessed on a standard basis, interest would not run at 10% on the principal sum nor on costs, and there would be no surcharge.
This case serves as a useful reminder of the principles a court will consider in determining whether the costs consequences of Part 36 are just. In certain (rare) circumstances, the court may consider it appropriate to contemplate how costs would have been allocated in the absence of a Part 36 offer, and the court may take account of the commercial reality of a Part 36 offer being rejected when considering the costs consequences that should follow. Litigants should also take note that the court may look at the conduct of the parties to determine whether it should deviate from the ordinary costs consequences under Part 36.