Commercial Court considers costs and interest following Part 36 offer - Thai Airways International Public Company Ltd v KI Holdings Co Ltd and another [22.05.15]

KI Holdings Co Ltd (KIHL) entered into an agreement with Thai Airways to provide seats for five new A330-300 aircraft. In breach of contract, KIHL were unable to fulfil the order and were ordered to pay damages of US$82,732,284 and THB4,640,417. The court then considered costs, and interest on costs and damages.

Costs award

Thai Airways had made an offer pursuant to Part 36 to accept payment of US$36 million on 24 October 2013. KIHL chose not to accept the offer and Thai Airways obtained judgment for nearly three times that amount at trial.

Thai Airways claimed indemnity costs from the date of the expiry of the relevant period on 15 November 2013. The presumption embodied in rule 36.17(4) of the Civil Procedure Rules (CPR) is that such an order should be made unless the court considers that it would be unjust to do so. The court was required by rule 36.17(5) to take into account “all the circumstances of the case”, and these included the stage in proceedings when the offer was made, the information available to the parties and the conduct of the parties in relation to the provision of information to enable the offer to be made or evaluated.

Witness statements and expert reports containing comprehensive details of Thai Airways’ losses were not exchanged until 11 September 2014. The Judge held that it would be unjust to order Thai Airways’ costs to be paid on the indemnity basis for any period before 3 October 2014 (i.e. 21 days after receipt of Thai Airways’ expert evidence), as this would subject KIHL to the financial risk of not accepting Thai Airways’ Part 36 offer despite being unable to take an informed view of the quantum of the claim.

Interest

Pursuant to rule 36.14(a) and (c), Thai Airways claimed interest on damages and costs at the maximum rate of 10% above base rate. KIHL argued that awarding such interest would give Thai Airways a substantial windfall. The court was not persuaded by this argument on the basis that what KIHL described as a ‘windfall’ is, in fact, an incentive deliberately created to promote the policy underlying Part 36, namely encouraging parties to make and accept sensible offers of settlement.

In reaching his decision, the Judge pointed to the fact the judgment rate of interest still stood at 8% and considered that an appropriate rate to apply. The court also awarded Thai Airways the maximum amount of £75,000 specified in rule 36.17(4)(d) in recognition of it obtaining a judgment at least as advantageous as its own Part 36 offer.

Comment

Defendants not wishing to be penalised for failing to accept Part 36 offers may now seek to argue that they were unable to reach an ‘informed’ view of quantum until a later date in the litigation, thus providing scope to deprive a successful claimant of a substantial costs benefit.

Claimants should therefore consider disclosing quantum information at the same time as making early Part 36 offers in order to ensure they obtain an indemnity costs award if later successful.

The court’s award of 8% interest on damages and costs amounts to a substantial financial punishment. It is now clear that Judges will not shy away from imposing the mandatory penalties pursuant to rule 36.17 where early settlement could have been achieved, and this should serve as a stark deterrent to any party which ignores sensible early settlement proposals.