Hammersmatch Properties (Welwyn) Limited v (1) Saint-Gobain Ceramics and Plastics Limited (2) Saint-Gobain Abrasives Inc  EWHC 2227 (TCC)
The Court had been asked to make a costs order following its earlier decision on a terminal dilapidations claim. The decision is a very useful reminder of how Part 36 will be applied by the Courts, and how serious the consequences can be.
In this case, the defendant tenant had made a Part 36 offer to settle, which was not accepted by the landlord. At trial, the landlord was awarded damages that were only slightly higher than the tenant's offer.
The tenant argued that the normal rule, that the winning party can recover its costs, should not apply because its offer was such a near miss. It argued that the Court should take account of its Part 36 offer in reducing the amount of the landlord's costs.
The Court did not accept the argument. It held that the Part 36 offer, although very near, was still not sufficient. The mere fact of a near miss was not sufficient to affect the costs order.
The Claimant was the landlord of a commercial building in Welwyn Garden City ("the Landlord"). The Defendant was the former tenant under a lease ("the Tenant"). When the lease expired, the Landlord served a schedule of dilapidations seeking £7,676,467.50. It eventually issued proceedings to claim the sum of £4,418,500.00, together with loss of rent and insurance rent at a rate of £752,498.00, per annum.
This was disputed by the Tenant. However, the Tenant did not make its arguments clear at an early stage. Its defence simply stated that full particulars would be forthcoming at a later stage.
As matters progressed, the Tenant made a Part 36 offer to settle the claim for £500,000. It later improved to £1 million. The landlord did not accept this and made a Part 36 offer of its own in the sum of £3.2 million.
Neither of the offers were accepted and the matter progressed to trial, where the Court awarded the Landlord damages in the sum of £900,000, plus £20,320 for the agreed cost of the schedules of dilapidations.
When interest was added to this sum, up to the last date of acceptance of the Tenant's Part 36 offer, this meant that the Landlord's award exceeded the Tenant's offer by just £3,637. For this reason, the parties had to go back to Court to have the position on costs determined.
Effects of Part 36
The normal rule under Part 36 is that the winning party can recover its costs. In this case, where its offer was so close to the actual award of damages, the Tenant argued that the normal rule should not apply. Instead, it argued that the Court should take account of the tenant's Part 36 offer in reducing the award on costs to the Landlord. The Tenant also argued that the Landlord had exaggerated its claim and failed on a number of issues.
Consequently, the Tenant argued that it would be appropriate to reduce the contribution to the Landlord's costs to 40%.
In response, the Landlord criticised the Tenant's conduct and relied upon its failure to articulate its case properly until two months prior to trial, and to respond properly to the schedule of dilapidations in good time. The Landlord argued that the absence of information provided by the Tenant about its defence meant that the Landlord could not properly assess the strength of the Tenant's case at the time that the offer was made.
The Landlord therefore claimed that there was no basis to depart from the general rule that the successful party should recover its costs.
The Court had to consider the following issues:
- As the Landlord had only just beaten the Tenant's offer, should the Court take the "near miss" Part 36 offer into account when awarding costs? Or should the offer be disregarded, as the Landlord did beat the offer, and the usual rule on costs apply?
- Should the conduct of the parties be taken into account when assessing costs? This related to both the Tenant's failure to comply with the pre-action points and the Landlord's pursuit of a claim that was significantly higher than the ultimate award.
- On which issues in the main claim had the parties succeeded and failed?
The Court gave very careful consideration to decisions in previous cases such as Carver v BAA Plc  EWCA Civ 412 and the subsequent comments made in Lord Justice Jackson's Review of Civil litigation.
Overall, the Court decided that the Part 36 offer made by the Tenant should not be taken into account in assessing costs liability. In doing so it referred to the recommendation of the Jackson Review that:
"It should be made clear that in any purely monetary case "more advantageous" … means better in financial terms by any amount, however small."
The Court found that to allow the Tenant's arguments would be to introduce uncertainty in the form of a "near miss" rule and that it would result in the Court being forced to speculate as to what the parties might have done and how they might have reacted to offers that were never actually made. Although the margin by which the Tenant failed was small, it was nonetheless a failure. The parties had sought the costs protection of Part 36, and this should be applied.
However, there were some small elements of the claim where the Landlord had failed and where the Tenant had succeeded. Consequently the Tenant was ordered to pay 80% of the Landlord's costs.
Our advice for litigants
This case goes to show the vital importance of pitching Part 36 offers at the right level.
If you are planning to make a Part 36 offer to settle, in a dilapidations claim or any other dispute, you should carry out a full evaluation of the strength of your case and the quantum of the claim in dispute so that you can make your offer at the correct level. Bear in mind that if your offer is not accepted and narrowly fails to beat judgment in favour of the other party at trial, it will not protect you on costs under Part 36.
Before submitting your offer it would be wise to take stock and consider whether a slightly more generous offer would be a better option. Similarly the offer should be reviewed carefully throughout proceedings, and a fresh offer made if appropriate.
Equally, the importance of receiving an offer from the other side cannot be underestimated. If you receive a Part 36 offer, you should seek detailed advice on the implications.
As an aside, in this case the Tenant's failure to engage in the proper pre-action process did not have a direct impact on costs. However it should be noted that the Dilapidations Protocol had not yet come into force at the time of the dispute and was instead considered best practice. It has now taken full effect, and litigants who ignore it can expect to be penalised on costs.
As a commercial consideration, had the Tenant undertaken the proper pre-action process, it is quite possible that the strength of its case would have shown the Landlord that the Part 36 offer was in fact pitched at a realistic level.