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||Neutral Citation Number:  EWCA Civ 195
||Case No: 2008 Folio 417
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MR JUSTICE FLAUX
Case No: 2008 Folio 417,  EWHC 666 (Comm)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||27 March 2017
B e f o r e :
THE CHANCELLOR OF THE HIGH COURT
LORD JUSTICE KITCHIN
LORD JUSTICE FLOYD
|| OMV PETROM SA
||GLENCORE INTERNATIONAL AG
Mr Duncan Matthews QC and Mr Andrew Fulton (instructed by Withers LLP) for the Appellant
Mr Richard Southern QC and Mr Fionn Pilbrow (instructed by Clyde & Co) for the Respondent
Hearing date: 7th March 2017
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Sir Geoffrey Vos, Chancellor of the High Court:
- This appeal raises a straightforward but important point concerning the interest that the court may award when a claimant's CPR Part 36 offer is rejected, but the claimant achieves a greater award at trial. The claimant, OMV Petrom SA ("Petrom"), made a Part 36 offer on 9th April 2014 offering to settle the litigation for US$35 million inclusive of interest together with costs. The defendant, Glencore International AG ("Glencore"), did not respond to or accept that offer or make any counter-offer. Instead, Glencore defended the claim up hill and down dale at a lengthy trial that began on 20th January 2015, after it had been adjourned from its original 6th May 2014 start date. On 13th March 2015, the judge, Mr Justice Flaux (as he then was), handed down his judgment awarding Petrom damages (without interest) in the sum of US$40,071,913. According to the judge in his judgment on interest delivered on 26th March 2015, Petrom's case on liability "rested in large measure on the evidence of witnesses who were liars and Glencore put Petrom through the hoops of having to establish liability, in a very flagrant case of fraud, in a manner which was wholly unreasonable".
- Against this background, the judge awarded Petrom interest on the judgment sum up to the expiry of the Part 36 offer at the rate of 6-month US$ LIBOR plus 2.5% (the "Agreed Rate") totalling over US$44 million, and from the expiry of the Part 36 offer up to judgment at the Agreed Rate plus 3.5% per annum totalling some US$2.2 million, together also with further interest after judgment. In addition, the judge ordered Glencore to pay the sum of £75,000 under what was then CPR Part 36.14(3)(d) plus interest, and to pay Petrom's indemnity costs (in sterling, of course) plus interest at a rate of 2.5% per annum up to the expiry of the Part 36 offer, at a rate of 4.5% per annum between that date and judgment, and at a rate of 8% per annum (the judgment rate) thereafter. The rates differed according to whether the amounts in issue were in sterling or dollars.
- Petrom challenges in this appeal (with the permission of Lewison LJ) the rates that the judge ordered on both the judgment sum and on the costs for the period between the expiry of the Part 36 offer on 30th April 2014 until judgment on 13th March 2015. Petrom claims that the judge ought to have awarded a rate of interest enhanced by the maximum amount of 10% per annum allowed under what was then CPR Part 36.14(3)(a) and (c).
- Petrom contends that the judge wrongly concluded first that the essential function of CPR Part 36.14(3)(a), as to interest on the award, was compensatory, so that the level of interest could not exceed what legitimately compensated Petrom for the disruption and difficulties of the litigation, and secondly that the essential function of CPR Part 36.14(3)(c), as to interest on costs, was to reflect the cost of money. In both cases, Petrom says that the judge ought to have concluded that a party who has behaved unreasonably "forfeits the opportunity of achieving a reduction in the rate of additional interest payable" as Lord Woolf MR held at paragraph 76 in Petrotrade Inc v. Texaco Ltd  EWCA Civ 512,  1 WLR 947 (the "Petrotrade case"). Petrom submits that the power to award enhanced interest enables the court to disapprove of and to discourage unreasonable conduct, that enhanced interest should be fixed at a level which creates an appropriate incentive to settle, and that having regard to Glencore's conduct and to the absence of any meaningful incentives to settle under CPR Part 36.14(3)(b)-(d), this was a clear case to award interest at the maximum level of 10% above base rate.
- Conversely, Glencore maintains that the judge was right, because the Petrotrade case and McPhilemy v. Times Newspapers Ltd and others  EWCA Civ 871,  1 WLR 934 (the "McPhilemy case") which followed it, have concluded that these CPR provisions are compensatory, and these decisions have been applied consistently for over 14 years. The provisions are not intended to be penal, but to achieve a "fairer result" for claimants by providing for enhanced interest on damages and costs, including disruption caused by the distraction of senior management. Although CPR Part 36.14(3)(d) which allows for an additional award of up to £75,000 is penal, it is relatively new, and its relative inadequacy in a case of this size is no reason for the court to overturn the compensatory basis of CPR Part 36.14(3)(a) and (c).
- Before dealing with these competing arguments, I should first set out the relevant provisions of the CPR and a very brief resume of the long and complex history of this unfortunate litigation.
The relevant provisions of the CPR
- CPR Part 36.14 (which is now contained in materially the same form in CPR Part 36.17) provided as follows:-
"Costs consequences following judgment
(1) This rule applies where upon judgment being entered
(b) judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer.
(3) Subject to paragraph (6), where rule 36.14(1)(b) applies, the court will, unless it considers it unjust to do so, order that the claimant is entitled to
(a) interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the relevant period starting with the date on which the relevant period expired;
(b) his costs on the indemnity basis from the date on which the relevant period expired; and
(c) interest on those costs at a rate not exceeding 10% above base rate
(d) an additional amount, which shall not exceed £75,000, calculated by applying the prescribed percentage set out below to an amount which is
(i) where the claim is or includes a money claim, the sum awarded to the claimant by the court; or
(ii) where there is only a non-monetary claim, the sum awarded to the claimant by the court in respect of costs
|Amount awarded by the court ||Prescribed percentage
|Up to £500,000 ||10% of the amount awarded
|Above £500,000 ||10% of the first £500,000 and (subject to the limit of £75,000) 5% of any amount above that figure
(4) In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3) above, the court will take into account all the circumstances of the case including
(a) the terms of any Part 36 offer;
(b) the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;
(c) the information available to the parties at the time when the Part 36 offer was made; and
(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated."
Essential factual background
- Petrom is a Romanian oil company. Petrom's claim against Glencore related to 32 shipments of oil made between 1993 and 1996, bought by its predecessors through an agent, Petrolexportimport SA ("Petex"). Instead of the crude oil types known as "Iranian Heavy" and "Gulf of Suez Mix", Glencore's predecessor, Marc Rich & Co AG, supplied a blend of various crude oils misleadingly described as "Gulf of Suez Crude Oil Blend". These were of lesser worth than the standard types, both in terms of their chemical properties and economic market value. In May 2002 a whistle-blower approached Petex, but not Petrom, and divulged the details of the deceit. Petex and the whistle-blower agreed to split the costs and proceeds of London-based arbitration proceedings against Glencore. Petex obtained an award in its favour on 16th January 2006, but its claim for damages failed on the basis that it had recovered its commission under all the contracts; further, and more seriously, as an agent it should have brought proceedings on behalf its principal, Petrom, which had still not been informed of the arbitration at all. Petex ultimately informed Petrom of the fraud in April 2006, and assigned to Petrom its rights under the relevant supply contracts with Glencore. Petrom commenced its own arbitration proceedings, as well as proceedings in the High Court for the tort of deceit. The arbitration proceedings failed, as Petrom's claim was res judicata by virtue of the first arbitration.
- Petrom failed to strike out part of Glencore's defence in these proceedings (see Blair J's judgment in OMV Petrom SA v. Glencore International AG  EWHC 242 (Comm)). Flaux J gave judgment for Petrom in OMV Petrom SA v. Glencore International AG  EWHC 666, and the Court of Appeal dismissed Glencore's appeal on 21st July 2016 (see Christopher Clarke LJ's judgment, with whom Black and Kitchin LJJ agreed, in OMV Petrom SA v. Glencore International AG  EWCA Civ 778). Flaux J rejected Glencore's evidence that it had made Petex aware of the true nature of the crude oil, and also Glencore's submission that any deception was attributable to Petex. Petrom succeeded in deceit and was awarded substantial damages as I have said. As Flaux J concluded at paragraph 155 of his judgment: "The representations made by Glencore in the bills of lading and other shipping documents, together with the commercial invoices, certificates of conformity and letters of indemnity which it produced and procured with a view to getting paid for, in each case, a cargo of Iranian Heavy or [Gulf of Suez Mix] which was in fact a blend were false representations and Glencore knew those representations were false".
- Glencore's appeal to the Court of Appeal raised an interesting point of law on the assessment of damages, which was, however, ultimately unsuccessful.
The Petrotrade case
- The facts in the Petrotrade case were very different from the facts here. There, the claimant sought and obtained summary judgment for some $140,000 for breach of contract. The judge had refused to award either enhanced interest or indemnity costs after the claimant beat its own Part 36 offer. The Court of Appeal upheld that refusal, but the ratio of the decision concerned the opening words of the then CPR Part 36.21(1) to the effect that "This rule applies where at trial
". In paragraph 58, Lord Woolf MR said "Those words are not to be ignored. They mean that the rule does not apply where, as in this case, summary judgment is given under Part 24". The remainder of his judgment was obiter. The present CPR Part 36.14(3), of course, starts with the quite different words: "This rule applies where upon judgment being entered
- Nonetheless in the later parts of his judgment, Lord Woolf said this:-
62. However, it would be wrong to regard the rule as producing penal consequences. An order for indemnity costs does not enable a claimant to receive more costs than he has incurred. Its practical effect is to avoid his costs being assessed at a lesser figure.
63. The ability of the court to award costs on an indemnity basis and interest at an enhanced rate should not be regarded as penal because orders for costs, even when made on an indemnity basis, never actually compensate a claimant for having to come to court to bring proceedings. The very process of being involved in court proceedings inevitably has an impact on a claimant, whether he is a private individual or a multi-national corporation. A claimant would be better off had he not become involved in court proceedings. Part of the culture of the CPR is to encourage parties to avoid proceedings unless it is unreasonable for them to do otherwise.
In the case of a corporation, corporation senior officials and other staff inevitably will be diverted from their normal duties as a consequence of the proceedings. The disruption this causes to a corporation is not recoverable under an order for costs.
64. The power to order indemnity costs or higher rate interest is a means of achieving a fairer result for a claimant.
65. There are circumstances where a just result is no order for costs or no interest even where the award exceeds an offer made by a claimant. Part 36.21 does no more than indicate the order which is to be made by the court unless it considers it is unjust to make that order. The general message of Part 36.21, when it applies, is that the court will usually order a higher rate of interest than the going rate. As to what the additional rate of interest should be, it is not possible to give specific guidance.
- Having reminded himself that the then CPR Part 36.21 did not in fact apply to that case, Lord Woolf nevertheless said in paragraph 72 that it was "still necessary" to consider whether, if it did apply, the judge ought to have exercised his discretion to award indemnity costs or enhanced interest. He said this:-
75. If it is accepted that a court has power to depart from the going rate because of a claimant's offer
The court would have to take into account all the circumstances in considering whether it would be just to make an order of enhanced interest.
76. Looking at the facts of this case, it is relevant that no-one suggests that the defendants were otherwise than bona fide in disputing the claim. They may have been wrong as to their assessment of the legal position but it is not a situation where the conduct of the proceedings justifies any specific criticism. If there is cause to criticise a party, then, in accord with the policy of the CPR, I would not say that this would justify increasing the rate of enhanced interest to punish that party. It would, however, mean because the party had behaved in that way, the party had forfeited the opportunity of achieving a reduction in the rate of additional interest payable. This is not the position.
77. The amount of the claim is also a relevant factor. If a claim is small, enhanced interest has to be at a higher rate than if the claim is large, otherwise the additional advantage for the claimant will not be achieved. In this case the sum involved was neither particularly large nor particularly modest. The conclusion that I would come to is that, if the matter was one for my discretion at first instance, I would award in the region of 4 per cent above base rate for the appropriate period."
- Finally, Lord Woolf refused to endorse Mr David Foskett QC's approach in Little v. George Little Sebire & Co The Times 17th November 1999, (BAILII:  EWHC B8 (QB)) that the court should take 10% above base as the starting point.
The McPhilemy case
- The McPhilemy case concerned a libel action where the claimant had made a Part 36 offer that was exceeded by the jury's ultimate award. The Court of Appeal held that, since in defamation cases, the jury took account of all relevant matters in making an award, it was unjust to award enhanced interest under the then CPR Part 36.21, though it would award indemnity costs and enhanced interest on those costs.
- Chadwick LJ (with whom Longmore and Simon Brown LJJ agreed) recited the guidance offered by Lord Woolf in the Petrotrade case (which had not been available to the trial judge) and said at paragraph 11 that the trial judge's approach could, therefore then be seen as flawed. He continued as follows after dealing with the facts of that case:-
"19. It is plain, as Lord Woolf
pointed out in the Petrotrade case, that paragraphs (2) and (3) of CPR 36.21, in conjunction with paragraph (4), are intended to provide an incentive to a claimant to make a Part 36 offer. The incentive is that a claimant who has made a Part 36 offer (which is not accepted) and who succeeds at trial in beating his own offer stands to receive more than he would have received if he had not made the offer. Conversely, a defendant who refuses a Part 36 offer made by a claimant and who fails to beat that offer at trial is at risk of being ordered to pay more than he would have been ordered to pay if the offer had not been made. But those incentives have to be set in the context that, as this Court emphasised in the Petrotrade case, CPR 36.21 is not to be regarded as producing penal consequences. The powers conferred by the rule to order indemnity costs or a higher rate of interest are intended to provide 'a means of achieving a fairer result for a claimant' (see paragraph 64 in Lord Woolf's judgment, to which I have already referred). Exercise of the powers cannot achieve 'a fairer result' if it leads to the claimant receiving more than can properly be regarded as a full and complete recompense for having to resort to, to pursue and to endure the strain and anxiety of, legal proceedings. An exercise of the powers which led to the claimant receiving more than could properly be regarded as compensation, in that enlarged sense, would, necessarily in my view be penal in nature. It could only be supported on the basis that there was a need to punish the defendant by requiring him to pay an amount which went beyond any amount needed to compensate the claimant. But, subject to the limitation that the powers are intended to be used in order to achieve a fairer result for the claimant and not to punish the defendant, it is plain that they are to be used in order to redress elements, otherwise inherent in the legal process, which can properly be regarded as unfair.
20. Two of those elements, which many would regard as obviously unfair, were identified by Lord Woolf
in the Petrotrade case. First, an award of costs on the standard basis will, almost invariably, lead to the successful claimant recovering less than the costs which he has to pay to his solicitor. So, although he has been successful, he is out of pocket. Costs on an indemnity basis should avoid that element of unfairness. Second, neither costs on an indemnity basis nor interest awarded under section 35A of the Supreme Court Act 1981 will compensate the successful claimant for the inconvenience, anxiety and distress of proceedings or (where the claimant is a corporation) the disruption caused by the diversion of senior management from their normal duties. Interest at an enhanced rate, that is to say at a rate which is higher than the rate which would otherwise be ordered, under section 35A of the 1981 Act, may redress that element of unfairness.
22. An order, under paragraph (3) of CPR 36.21, for the payment of costs on an indemnity basis does not give rise to a risk of double compensation. The purpose for which the power to order the payment of costs on an indemnity basis is conferred, as it seems to me, is to enable the court, in a case to which CPR 36.21 applies, to address the element of perceived unfairness which arises from the fact that an award of costs on the standard basis will, almost invariably, lead to the successful claimant recovering less than the costs which he has to pay to his solicitor.
- In relation to the award of interest on costs, Chadwick LJ said this at paragraph 23 of his judgment:-
"Nor do I see any injustice, in principle, in an order under paragraph (3)(b) of CPR 36.21 for the payment of interest on the costs which are the subject of the order which I would make under paragraph (3)(a). The purpose for which the power to order interest on costs under that paragraph is conferred is, I think, plain. It is to redress, in a case to which CPR 36.21 applies, the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment see Hunt v R M Douglas (Roofing) Ltd  1 AC 398, 415F. So, in the ordinary case, the successful claimant who has made payments to his own solicitor on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs on an indemnity basis. He will get interest on his costs from the date of the order (whether he has actually paid them or not); but he will get nothing to compensate him for the cost of money (or the loss of the use of money) which he has had to bear before trial in relation to payments which he has made on account of costs. An order under paragraph (3)(b) of CPR 36.21 enables the court to achieve a fairer result in that respect. But, having regard to the point which, as it seems to me, paragraph (3)(b) is intended to meet, I would order payment of interest at a rate which reflects (albeit generously) the cost of money say, 4% over base rate; and I would direct that interest runs, on the costs to which the order applies, from the date upon which the work was done or liability for disbursements was incurred".
- Simon Brown LJ, with whom Longmore LJ also agreed, said this at paragraph 28:-
The Judge below
wrongly directed himself that an indemnity costs order under CPR 36.21 is of a penal nature and implies condemnation of the defendant's conduct and so would be unjust unless the defendants have behaved unreasonably in continuing the litigation after the offer. That misunderstands the rationale of the rule. It is not designed to punish unreasonable conduct but rather as an incentive to encourage claimants to make, and defendants to accept, appropriate offers of settlement. That incentive plainly cannot work unless the non-acceptance of what ultimately proves to have been a sufficient offer ordinarily advantages the claimant in the respects set out in the rule. Given that in a defamation action it would generally be unjust to award interest on the damages, let alone at an enhanced rate, it becomes even more important that a Part 36.21 order is made as to costs, irrespective of whether or not the claimant is represented under a conditional fee arrangement. Otherwise the rule will simply become ineffective in this area of litigation, an area where to my mind it should play a prominent part."
The judge's judgment
- The judge dealt with these two cases as follows in paragraphs 6-12 of his judgment. He first said at paragraph 9 that he had "considerable difficulty" with paragraph 76 of Lord Woolf's judgment, describing the reasoning as "circular". He then said this after referring to the McPhilemy case:-
"11. It does seem to me that there is a tension between Lord Woolf MR's judgment at para 76, on the one hand, and Chadwick LJ's judgment at para 19-21 in McPhilemy, on the other. Certainly those passages of Chadwick LJ's judgment which I have just read, seem to me to focus very clearly on the concept of compensation of the claimant for those elements of the overall effect of proceedings, which he had to pursue since the date of the Part 36 order, which are not otherwise compensated for in terms of the amount for interest or costs and, in particular, he clearly has in mind the disruption that is caused in a case of a corporation, such as Petrom in the present case, by the fact that senior management have to engage in litigation rather than in their normal duties
12. It does seem to me, trying to make sense of the two judgments together, that although the court can take account of the conduct of Glencore in, as I said, fighting this case to the bitter end in an entirely unreasonable manner, what the court cannot do is penalise Glencore for the way in which they conducted the case by awarding Petrom more by way of uplift on interest than legitimately compensates Petrom for the disruption and what might be described the disruptions and difficulties which this litigation has inevitably caused them.
13. Doing the best I can to reflect that approach and ensuring that I am not penalising Glencore for its conduct, it does seem to me that Mr Matthews is wrong in submitting that the court should take the full 10 percent figure. It seems to me that a lower enhancement or uplift is appropriate in the circumstances of this case."
- The judge dealt with enhanced interest on the costs at paragraphs 21-23 of his judgment. He set out what Chadwick LJ had said at paragraph 23 of the McPhilemy case and then said:-
"It seems to me that Mr Southern is right about this, that what this provision is intended to do is to reflect, albeit generously, the cost of money and, therefore, what one is looking for is an uplift on what the rate would otherwise be which is nothing like the 10 percent rate, which is the maximum under the rule. It seems to me that the appropriate uplift for that period of time, which is some ten months, the rate should be 4 percent over base".
The parties' arguments
- I have already set out the main arguments advanced by the parties. Mr Duncan Matthews QC, leading counsel for Petrom, submitted that the judge's approach robs Part 36 of its effectiveness. There is a tension between the existing authorities, which pre-date Jackson LJ's reforms which introduced the penal provision in CPR Part 36.14(3)(d). Glencore, Mr Matthews submitted has, by its conduct, forfeited the opportunity of achieving a reduction in the rate of additional interest payable. The McPhilemy case was not a decision about the appropriate rate, but about the different and prior discretion to order enhanced interest at all. The content and policy of the CPR has moved on such that the Court of Appeal should consider the matter afresh. Mr Matthews points to the decisions in Halsey v. Milton Keynes General NHS Trust  1 WLR 3002 and PGF II SA v. OMFS Company 1 Limited  EWCA Civ 1288 as indicating that unreasonable conduct in the form of a refusal to mediate may attract costs sanctions as an overt penalty, to the tougher approach to relief from sanctions explained in Mitchell v. News Group Newspapers Limited  1 WLR 795 and Denton v. TH White Limited  1 WLR 3926, and to the general direction of travel represented by Jackson LJ's reports and their references to a scheme of penalties and rewards. Finally, Mr Matthews submits that Chadwick LJ's decision to allow the cross-appeal and to award interest on the costs award was per incuriam because it was based on his mistaken understanding that the provision had been conferred to redress the element of perceived unfairness which arose from the general rule that interest is not allowed on costs paid before judgment (see paragraph 23 of Chadwick LJ's judgment set out above). In fact, the present CPR Part 44.2(6)(g) allowing "interest on costs from or until a certain date, including a date before judgment" had been introduced some 2 years before the McPhilemy case on 26th April 1999.
- Mr Richard Southern QC, leading counsel for Glencore, relies on a number of cases in addition to the Petrotrade and McPhilemy cases. In DHL v. Erinaceous  EWHC 3479 (QB) and Barnett v. Creggy  EWHC 1316 (Ch), Hamblen and David Richards JJ respectively awarded an uplift of 4%. Jackson LJ's judgment in Pankhurst v. White  Costs LR 392 expressed the view at paragraph 37 that awards of enhanced interest were "not intended to be compensatory", but went on to say that such an approach was "not open to this court". Mr Southern also undertook a detailed review of the legislative history of the introduction of the £75,000 penalty into CPR Part 36.14(3)(d). That was a carefully considered limit that was the result of extensive consultation, and was, says Mr Southern, intended to be the only penal provision and to set a clear limit to the extent of non-compensatory penalties that can be imposed under CPR Part 36.14(3). Paragraph 39 of Jackson LJ's judgment in Pankhurst supra makes clear that increasing the amount of penal interest available to successful claimants under CPR Part 36.14 was a matter for the law reformers and the Rule Committee and not for judicial innovation. Finally, Mr Southern makes the compelling point that the amount of enhanced interest that the judge actually awarded amounted to some US$1.2 million or 3% of the damages awarded. Petrom is seeking a 10% uplift which would amount to an additional 4% which would increase the penalty by some US$1.4 million to a total of some US$2.6 million or about 6.5% of the damages awarded. That, submitted Mr Southern, would be wholly anomalous, when only a 5% penalty is imposed on damages between £500,000 and £1 million under the new CPR Part 36.14(3)(d).
- It should be kept firmly in mind that there are two separate challenges to Flaux J's order. CPR Part 36.14 allowed four different orders to be made in favour of a claimant in Petrom's position, each of which "will [be made] unless [the court] considers it unjust to do so". The four orders were, in the order of the rule, enhanced interest on the award, indemnity costs, enhanced interest on the indemnity costs, and an additional amount based on the amount of the judgment (up to £1 million) of up to £75,000. CPR Part 36.14(4) required that the court takes "all the circumstances of the case" and 4 (now 5) stated matters into account in considering whether it would be unjust to make each of these orders. It does not seem to me to be inevitable that the relevant "circumstances" will necessarily be identical for each of the four orders that the court will make, unless it would be unjust to do so.
- The distinction which Mr Matthews makes between the decisions to make each of the four orders, on the one hand, and the decisions as to the rate to award under CPR Part 36.14(3)(a) and (c), on the other hand, must also be kept firmly in mind. This is a case in which the levels of interest are challenged rather than the decision to award enhanced rates of interest in the first place.
- Next, it seems to me that we should be clear about whether either or both of the Petrotrade and McPhilemy cases is binding on the Court of Appeal. As I have already pointed out, the Petrotrade case is certainly not binding on us, as its ratio was simply that the relevant rule at that time did not apply where summary judgment had been granted. Nonetheless, Lord Woolf's guidance on a subject of this kind must be given the greatest respect.
- As regards the McPhilemy case, once again I do not think it is binding on us as regards the basis of awarding enhanced interest on the award. Mr Southern accepts that the court's comments on this aspect were obiter, but submits that the decision as to interest on costs was ratio. The reasons are a little more complex than in relation to the Petrotrade case, because Chadwick LJ's judgment is a little confused as between the distinct issues that affected (a) the award of enhanced interest, and (b) the award of indemnity costs. The judge, Eady J, had refused both applications. It is not easy to disentangle his reasons from Chadwick LJ's judgment, but it is clear at least that he thought that enhanced interest was inappropriate because the jury's award in a libel case "takes account of everything down to the moment of their verdict". Chadwick LJ then identified 4 further reasons that the judge gave for rejecting any order under Part 36.21(2) and (3) of the rule then current, namely the proximity of the trial when the offer was made, the defendants' funding of the costs of the claim, an unusual public interest element, and the fact that the offer required a retraction and an apology. Chadwick LJ then refers to a further reason given by the judge, of which he plainly disapproved, namely his view that awarding indemnity costs implied the court's disapproval, which he thought it did not. After citing paragraphs 62-64 of the Petrotrade case relating primarily to indemnity costs, Chadwick LJ said that this guidance was not available to the judge and that "it follows that this is a case in which the basis on which the judge exercised his discretion can now be seen to have been flawed", and that the "judge thought, wrongly, that the order for indemnity costs that he was invited to make
was punitive in nature and would be seen as indicating some measure of disapproval of the defendant's conduct which he did not regard as merited and which he did not intend. Those considerations were unfounded and should have been left out of account". As a result, said Chadwick LJ, the judge's discretion had to be set aside and the court had to form its own view on whether it would be "unjust to make the orders for which paragraphs (2) and (3) of rule 36.21 provide". Those paragraphs related to enhanced interest and indemnity costs respectively.
- Chadwick LJ, therefore, set aside the judge's exercise of discretion on both enhanced interest and indemnity costs, when the error identified (his view about the disapproval implied by an award of indemnity costs) related only to the decision the judge made to refuse indemnity costs and not to the decision to refuse enhanced interest. The latter decision involved no error by the judge according to Chadwick LJ's own judgment, and indeed when Chadwick LJ came to remake the decision as to enhanced interest, he made the same decision again on the same basis: see paragraphs 17 and 18. In these circumstances, whilst Chadwick LJ undoubtedly took the view that any order under CPR Part 36.21(2) and (3) was compensatory rather than penal, those views (which I have set out at length above) were obiter, anyway so far as concerned the circumstances in which an award of enhanced interest might be considered unjust. Nonetheless, of course, the views expressed by the Court of Appeal in the McPhilemy case are also entitled to the greatest respect.
- As regards Chadwick LJ's decision on enhanced interest on costs, that was indeed ratio, because it was the decision made on a cross-appeal. Nor do I think that the decision was per incuriam, even if Chadwick LJ's reference to the reason for the introduction of the provision is a little hard to untangle. The power to award enhanced interest on costs under Part 36 may indeed have been further to redress the perceived unfairness arising from the Hunt v. R M Douglas decision. The power to award interest on costs before judgment now in CPR Part 44.2(6)(g) was certainly not the same as the power in CPR Part 36.14(3)(c). All Chadwick LJ said, however, as to the exercise of the power to award interest on costs was that it enabled the court to achieve a fairer result in respect of payments of costs made on account, and should generously reflect the cost of money. On this aspect, Mr Matthews submits that one can see that the provision allowing interest on costs is obviously not compensatory so that the provision allowing enhanced interest on the award must not be either. I am not sure that much is gained from what he described as this "backwards" approach.
The award of enhanced interest under CPR Part 36.14(3)(a)
- I repeat first that the decisions concerning whether to award enhanced interest at all are to be regarded separately from decisions as to the rate of the enhancement. The McPhilemy case dealt only with the first question in relation to CPR Part 36.14(3)(a). CPR Part 36.14(4) sets out the basis on which the court is to consider whether it would be unjust to award enhanced interest, and the judge's decision to do so in this case is not challenged; nor, in my judgment, could it be.
- The question here is, therefore, whether the judge was right to think that "what the court cannot do is to penalise Glencore for the way in which they conducted the case by awarding Petrom more by way of uplift on interest than legitimately compensates Petrom for the disruption and what might be described as the problems and difficulties which this litigation has inevitably caused them". In essence, in considering the rate of enhanced interest to give Petrom, the judge accepted that the award of enhanced interest was entirely compensatory. He was, in my judgment, wrong about that for the reasons I will try shortly to give.
- First, I should say that I do not regard the specified rate of 10% as a starting point. The words of the rule provide for enhanced interest to be awarded "at a rate not exceeding 10% above base rate". That does not make the figure of 10% a starting point. It makes it the maximum possible enhancement.
- Secondly, in my judgment, the objective of the rule has always been, in large measure, to encourage good practice. As Lord Woolf put it in the Petrotrade case, "Part 36.21(2) and (3) create the incentive for a claimant to make a Part 36 offer", and a party who has behaved unreasonably "forfeits the opportunity of achieving a reduction in the rate of additional interest payable". Chadwick LJ in the McPhilemy case said that it was "an incentive to encourage claimants to make, and defendants to accept, appropriate offers of settlement".
- In my judgment, the likelihood that the provisions for all four possible awards are not entirely compensatory is supported by the negative formulation of CPR Part 36.14(3)(a) to the effect that "the court will, unless it considers it unjust to do so, order that the claimant is entitled to [the four awards]". If the rule-makers had intended to say that all or any of the awards were only to be made if they represented compensation for litigation inconvenience, it would have been very easy to say so.
- The whole thrust of the CPR after Jackson LJ's reforms is to use both the carrot and the stick, as can be seen from the court's rulings in Denton supra and in PGF II SA supra where Briggs LJ said this at paragraphs 40 and 56:-
"40. The foregoing analysis is enough, on the face of the correspondence between the parties, to justify a conclusion that the defendant's silence in face of two requests to mediate was itself unreasonable conduct of litigation sufficient to warrant a costs sanction, without the need for the detailed point by point analysis of the Halsey guidelines, carried out both before the judge and on this appeal, on the basis of the allegation that silence amounted to a deemed refusal. But the sanction imposed by the judge followed his determination that there had indeed been a refusal, and that it had been unreasonable.
56. The court's task in encouraging the more proportionate conduct of civil litigation is so important in current economic circumstances that it is appropriate to emphasise that message by a sanction which, even if a little more vigorous than I would have preferred, nonetheless operates pour encourager les autres".
- In Denton supra, Lord Dyson MR and I said this at para 43:-
"The court will be more ready in the future to penalise opportunism. The duty of care owed by a legal representative to his client takes account of the fact that litigants are required to help the court to further the overriding objective. Representatives should bear this important obligation to the court in mind when considering whether to advise their clients to adopt an uncooperative attitude in unreasonably refusing to agree extensions of time and in unreasonably opposing applications for relief from sanctions. It is as unacceptable for a party to try to take advantage of a minor inadvertent error, as it is for rules, orders and practice directions to be breached in the first place. Heavy costs sanctions should, therefore, be imposed on parties who behave unreasonably in refusing to agree extensions of time or unreasonably oppose applications for relief from sanctions. An order to pay the costs of the application under rule 3.9 may not always be sufficient. The court can, in an appropriate case, also record in its order that the opposition to the relief application was unreasonable conduct to be taken into account under CPR rule 44.11 when costs are dealt with at the end of the case. If the offending party ultimately wins, the court may make a substantial reduction in its costs recovery on grounds of conduct under rule 44.11. If the offending party ultimately loses, then its conduct may be a good reason to order it to pay indemnity costs."
- If it were right to say that the provision for additional interest were entirely compensatory, the 10% cap would only rarely be engaged (as the judge's order demonstrates), and then probably only in unusual cases where, for example, the period of the enhanced interest award was very short. First instance courts would be required to engage in a complex and unnecessary exercise aimed at identifying what the prolongation of the litigation has cost the successful party in terms of wasted management time and other on-costs. This would be the kind of undesirable satellite litigation, perhaps involving detailed evidence, of which the court spoke in Denton supra. Moreover, the range of possible additional costs that might be caused by the litigation would be boundless. It would all depend on the particular type of litigation and the particular situation of the claimant concerned. Such additional costs might include the loss of profitable commercial contracts, additional loan costs and many other types of damage.
- Moreover, the argument that the Jackson reforms demonstrate that the existing provision was not intended to be penal, in my judgment, proves too much. The Jackson reforms undoubtedly introduced a penal award of up to £75,000 as an additional sum calculated on the basis of the amount of the court's award or, in the absence of such an award, the amount of the claimant's costs. But whatever the consultation papers show as to what consultees thought about the nature of the existing provisions, Jackson LJ's final report had said expressly at paragraph 1.1 of Chapter 41 that the existing Part 36 was "backed up by a scheme of penalties and rewards in order to encourage the making of reasonable settlement offers and the acceptance of such offers".
- In my judgment, the use of the word 'penal' to describe the award of enhanced interest under CPR Part 36.14(3)(a) is probably unhelpful. The court undoubtedly has a discretion to include a non-compensatory element to the award as I have already explained, but the level of interest awarded must be proportionate to the circumstances of the case. I accept that those circumstances may include, for example, (a) the length of time that elapsed between the deadline for accepting the offer and judgment, (b) whether the defendant took entirely bad points or whether it had behaved reasonably in continuing the litigation, despite the offer, to pursue its defence, and (c) what general level of disruption can be seen, without a detailed inquiry, to have been caused to the claimant as a result of the refusal to negotiate or to accept the Part 36 offer. But there will be many factors that may be relevant. All cases will be different. Just as the court is required to have regard to "all the circumstances of the case" in deciding whether it would be unjust to make all or any of the four possible orders in the first place, it must have regard to all the circumstances of the case in deciding what rate of interest to award under Part 36.14(3)(a). As Lord Woolf said in the Petrotrade case, and Chadwick LJ repeated in the McPhilemy case, this power is one intended to achieve a fairer result for the claimant. That does not, however, imply that the rate of interest can only be compensatory. In some cases, a proportionate rate will have to be greater than purely compensatory to provide the appropriate incentive to defendants to engage in reasonable settlement discussions and mediation aimed at achieving a compromise, to settle litigation at a reasonable level and at a reasonable time, and to mark the court's disapproval of any unreasonable or improper conduct, as Briggs LJ put the matter, pour encourager les autres.
- The culture of litigation has changed even since the Woolf reforms. Parties are no longer entitled to litigate forever simply because they can afford to do so. The rights of other court users must be taken into account. The parties are obliged to make reasonable efforts to settle, and to respond properly to Part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court's powers can be expected to be used to their disadvantage. The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process.
- In these circumstances, and for the reasons I have given, the judge's discretion in this case was exercised on the wrong basis, so this court must re-exercise it.
- The circumstances relevant to the determination of the appropriate rate of enhanced interest were Glencore's refusal to engage in settlement discussions or to respond to the Part 36 offer, the fact that the eventual award was very significantly greater than the Part 36 offer itself, and, perhaps most of all, Glencore's conduct of the litigation as described by the judge in his judgment on this issue. It is, however, by no means automatic that the 10% uplift will be appropriate, because, as Mr Southern pointed out, the outcome of applying that rate has to be considered, alongside the overall effect of the 4 awards that are being made (if they are) under Part 36.14(3). Here, however, it is hard to imagine a case in which there would be greater justification for the award of a 10% enhanced interest rate. The sum of US$2.6 million that Glencore will be required to pay may be 6.5% of the ultimate award. That does not seem to me to be an excessive or disproportionate amount, even taken in conjunction with the other 3 orders being made (as to indemnity costs, the £75,000 based on 10% of the award between zero and £500,000 and 5% of the award between £500,000 and £1 million, and an enhanced interest award on the costs see below as to the latter). If the period had been 5 years instead of 10½ months, things might well have been different. But it was not. The judge made it clear that Glencore was guilty of lying. It ignored the Part 36 offer that was made, and shunned any mediated solution. Its conduct was deplorable, if not outrageous. Glencore is not excused by having raised an arguable, if unsuccessful, point of law on appeal. A blank refusal to engage in any negotiating or mediation process, and the use of a vast asset base to seek to frustrate a claimant's attempts to reach a compromise solution should be marked by the use of the court's powers to discourage such conduct.
- In my judgment, the judge ought in this case to have imposed the full 10% uplift for the enhanced rate of interest on the award in this case.
The award of enhanced interest on costs under CPR Part 36.14(3)(c)
- As I have said, I do think that we are bound by the McPhilemy case to decide that the assessment of the rate of interest on costs should be such as to achieve a fairer result for the claimant than would otherwise have been the case. That does not, however, indicate that some of the factors I have already mentioned may not be relevant. Moreover, once again I do not regard the award as purely compensatory. As I have also said, different factors may in practice apply to the enhanced interest under CPR Parts 36.14(3)(a) and (c). That is because account may need to be taken of how the costs, on which an enhanced rate of interest is claimed, were incurred. It could have been, for example, that despite the fact that it was unreasonable to refuse the Part 36 offer, the conduct of the litigation was itself reasonable, so that the costs on which enhanced interest was sought were not incurred in contesting bad points or dishonesty by the defendants. That is not this case but in some cases, it would be a serious consideration.
- I have considered carefully the judge's approach to the award of enhanced interest on the costs. He applied paragraph 23 of the McPhilemy case as he was entitled to do, but I think he fell into error, through no fault of his own, by failing to take into account some of the other factors I have mentioned including in particular the fact that the costs on which enhanced interest was claimed were largely incurred unreasonably in advancing a dishonest and unreasonable defence. In these circumstances, this court should exercise the discretion afresh. I would hold that the correct rate of enhancement is once again the maximum of 10% per annum for the reasons I have mostly already given. I do, however, also think that the factors I mentioned above in relation to the enhanced rate of interest under CPR Part 36.14(3)(a) were also relevant to the interest award on the costs, because this was a very bad case of the defendant simply ignoring a proper offer and running up the costs thereafter.
- In my judgment, therefore, the judge ought also to have imposed the full 10% uplift for the enhanced rate of interest on the costs in this case.
- For the reasons I have given, I would allow the appeal and replace the enhanced rate of interest on both (a) the award for the period from the date the Part 36 offer lapsed until judgment, and (b) the costs with an award of interest at a rate of 10% over base rate.
- I should not leave the case without saying that, in my judgment, appeals on issues of the kind raised in this case should in future be rare. The judge's discretion as to the appropriate rate of enhancement under Part 36.14(3) is a wide one as I have explained and I would not expect the Court of Appeal often to be persuaded to interfere with it.
Lord Justice Kitchin:
- I agree.
Lord Justice Floyd:
- I also agree.
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