The Court of Appeal’s decision in Telefónica UK Ltd v The Office of Communications (Ofcom) [2020] EWCA Civ 1374 is a reminder of the significant cost consequences should parties fail to reach a settlement prior to trial when an offer is made pursuant to Part 36 of the Civil Procedure Rules.

Background

Telefónica had obtained a judgment that was more advantageous than an unaccepted Part 36 offer it had made prior to trial. The trial judge awarded Telefónica costs on an indemnity basis from the date on which the relevant period for Ofcom to accept the offer expired and an “additional amount” of £75,000. On the basis that it would be unjust to do so, the trial judge declined to award Telefónica an enhanced rate of interest on the principal sum for which judgment was given, or the costs it had incurred after expiry of the relevant period.

The four “enhancements”

Under the English Court rules, a claimant who obtains judgment for a sum that is equal to or more than a Part 36 offer it has made is entitled to the following four “enhancements” set out in Civil Procedure Rule 36.17(4):

  1. interest on the whole or part of the principal sum awarded;

  2. costs (including any recoverable pre-action costs) on the indemnity basis from the date on which the relevant period expired;

  3. interest on those costs; and

  4. an “additional amount” capped at £75,000.

In this case, Telefónica as the successful claimant appealed against the trial judge’s refusal to award it the enhancements in CPR 36.17(4)(a) and (c). The trial judge had decided that to award these additional enhancements would be unjust, because the case had not been conducted by the defendant in an unreasonable way and so costs were not enlarged by its conduct. The successful claimant argued that the trial judge had given no proper basis for regarding the award of an uplifted rate of interest as unjust.

The Court of Appeal agreed. Delivering the leading judgment, Phillips LJ noted that there is no suggestion that the award of one of the enhancements should in any way undermine or reduce entitlement to the others. While it was open to a judge to order some but not all four enhancements, it would be “unusual” for the circumstances to yield a different result for only some of the enhancements and not others.

The Court rules require the court to consider whether it would be unjust to order the enhancements set out above. However, in this case Phillips LJ concluded that the defendant’s reasonable conduct was not in itself sufficient to render it unjust to award all four of the enhancements available under the Part 36 regime. The key question is which party was responsible for costs being incurred when they should not have been. In this case, the costs were incurred because the defendant could have, but did not, accept the claimant’s offers.

Phillips LJ also noted that in deciding not to award any enhanced interest at all, the trial judge had failed to take into account the court’s wide discretion as to the rate of the enhanced interest. The Court of Appeal therefore allowed the appeal and awarded the claimant enhanced interest on both the principal sum awarded and its costs, albeit at a reduced rate to that sought by the claimant.

Comment

The purpose of the Part 36 offer regime is to incentivise parties to conduct litigation collaboratively, and to engage constructively in a settlement process. The additional enhancements take account of the fact that an unsuccessful defendant could have avoided the costs of going to trial if it had accepted the claimant’s Part 36 offer. This means that even if a defendant does not conduct itself unreasonably in incurring costs during the proceedings, it will still be liable for all of the four enhancements provided for under the Part 36 regime if the claimant equals or does better than its offer at trial.

This case reiterates the importance of carefully considering any genuine attempts made to settle a dispute. The hard line taken by the courts against a party for incurring avoidable costs dovetails with current government Covid-19-related guidance encouraging parties to avoid and resolve disputes (see our previous Law-Now article on this topic). Regardless of the stage of a dispute, parties should keep settlement opportunities under review at all times, and seek legal advice if they are unsure of the legal implications of rejecting an offer to settle.

This Law-Now article was written with the assistance of Maxie Chopard, trainee solicitor at CMS.