INCREASED INTEREST AND COSTS AFTER CLAIMANT BEATS ITS OWN PART 36 OFFER: JUDGMENT FOR THREE TIMES MORE THAN CLAIMANT’S OFFER

In Thai Airways International Public Company Ltd -v- KI Holdings Co Ltd [2015] EWHC 1476 (Comm) Mr Justice Leggat made slight modifications to the additional amounts to be awarded to a claimant which had beaten its own part 36 offer.  It is one of those cases where the sums involved are so high that the additional £75,000 (which was awarded) is almost a drop in the ocean.

“Thai offered to accept payment of US$36m in settlement of its claim and Koito’s counterclaim. Koito chose not to accept the offer and in the event Thai has obtained a judgment for nearly three times the amount which it offered to accept.”

THE CASE

The claimant obtained judgment for US$82,732.284, €19,857,165 and THB 4,640,417.  It had made a Part 36 offer in October 2013 to settle for US£36m.

THE PROVISIONS OF PART 36

The judge considered the issues relating to CPR 36.17(4) and the appropriate approach of the court.

  1. In these circumstances Thai relies on CPR 36.17(4), which stipulates that, where the claimant obtains a judgment against the defendant  which is better in money terms than the proposals contained in a claimant’s Part 36 offer:

“the court must, 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 period starting with the date on which the relevant period expired;

(b) costs … on the indemnity basis from the date on which the relevant period expired;

(c) interest on those costs at a rate not exceeding 10% above base rate; and

(d) … an additional amount, which shall not exceed £75,000 …”

The relevant period for accepting Thai’s offer expired on 15 November 2013. I shall return to items (a), (c) and (d), which Thai also claims. In relation to costs, Thai relies on CPR 36.17(4)(b) pursuant to which Thai is entitled to all its costs of the proceedings, to be assessed on the indemnity basis, from 15 November 2013, unless the court considers it unjust to make such an order.

  1. Even if Thai had not made this Part 36 offer, I should have considered it appropriate in this case to apply the general rule and order Koito to pay Thai’s costs of the proceedings. Although Thai has not succeeded on every single issue, it has been overwhelmingly successful on the points which mattered most in terms of financial recovery – in particular, the entitlement to recover the costs of the Jet leases (apart from the third year) and most of the sub-issues which affected that claim. Apart from the correct legal approach to “betterment”, which did not ultimately affect the result of the Jet lease claim, the issues on which Koito succeeded were very much secondary issues both in terms of the time which they occupied at the trial and their financial consequences. The point has often been made that in any complex commercial litigation the successful party is unlikely to succeed on every issue and should not necessarily be deprived of part of its costs on that account. Moreover, even if I might otherwise have made some very modest percentage reduction in the costs awarded, I do not think it appropriate to do so in circumstances where (a) throughout the proceedings until it abandoned its defences very shortly before the trial, Koito was contesting liability as well as the quantum of damages and (b) thereafter Koito was continuing to dispute that it was liable to pay any money at all to Thai (and was doing so against the background of Thai’s Part 36 offer).
  2. The next question is whether Thai is entitled to its costs on the indemnity basis for the period after 15 November 2013. As mentioned, the presumption embodied in CPR 36.17(4) is that such an order should be made, unless the court considers that it would be unjust to do so. In so far as Koito has submitted, therefore, that it had “sound reasons” for not accepting Thai’s offer and that it was “not unreasonable” for Koito not to accept the offer, that is not the applicable test: see Matthews v Metal Improvements Co Inc [2007] EWCA Civ 215, paras 32-34.
  3. In considering whether it would be it unjust to make an order under CPR 36.17(4), the court is required by CPR 36.17(5) to take into account all the circumstances of the case including certain specified matters. Those matters include the stage in the proceedings when the offer was made, the information available to the parties at the time when the offer was made, and the conduct of the parties with regard to the giving of or refusing to give information for the purpose of enabling the offer to be made or evaluated.
  4. Koito has argued that it would be unjust to make an order under CPR 36.17(4), in particular because Thai allegedly failed to disclose the evidence relied on in support of its claim in a timely way.
  5. I do not feel able to judge, nor do I think it necessary to decide, whether Thai failed to disclose evidence in a timely way. It is clearly right, however, that the information needed to establish what losses Thai had suffered as a result of Koito’s breaches of contract was in the possession of Thai. Probably the most important issue in the case in terms of its financial consequences was whether the delays in delivery of five A330-300 aircraft caused by Koito’s failure to deliver the seats was in turn the cause of Thai’s decision to lease three B777-300ER aircraft from Jet. Koito could not make an informed judgement about that question until it received Thai’s witness statements. Witness statements – including the statement of Chokchai Panyayong, which dealt with this question at length – were exchanged on 1 August 2014. They were followed on 11 September 2014 by the joint report of Thai’s aviation and accounting experts, Mr Bull and Mr Dearman, which set out in comprehensive detail the basis for Thai’s damages claims. Although the calculation of Thai’s losses continued to be refined up to and indeed during the trial, once Koito had received Thai’s joint expert report Koito in my view had ample information to enable it to take a realistic view about the quantum of the claim.
  6. The conclusion that I have reached is that it would not be just to order that Thai’s costs should be assessed on the indemnity basis for any period before 3 October 2014. That is because I consider that it would be unjust to subject Koito to the financial risks of not accepting Thai’s Part 36 offer until such time as Koito was in a position to take an informed view of the quantum of the claim. That position was reached, as I see it, by 3 October 2014, by which time Koito had had 21 days to take stock of Thai’s expert evidence.
  7. Thereafter, it was entirely Koito’s choice to continue to dispute liability until 20 January 2015, to continue until mid-way through the trial to deny that entering into the Jet leases was a step taken in reasonable mitigation of loss, and to continue until the end of the trial to deny that it was liable to pay any money to Thai.
  8. Accordingly, costs will be assessed on the indemnity basis from 3 October 2014 and on the standard basis for the period before that date.
  9. Thai also applies for an interim payment on account of its costs. It has provided a costs summary which shows costs of over £5m and invites the court to order a payment on account of some £2.9m. Koito suggests that the sums incurred by Thai are far higher than the amounts likely to be found reasonable and proportionate on a detailed assessment of its costs, or at least that there is insufficient information to conclude otherwise, and submits that any payment on account of costs should be far lower than the amount sought by Thai.
  10. Approaching the matter on the basis that it is appropriate to require Koito to pay on account a sum which the court can feel confident, despite limited information, that Thai will recover on a detailed assessment of its costs, I will set the amount of the payment at £2m.”

INTEREST AND THE ADDITIONAL £75,000

  1. Koito does not dispute that Thai is entitled to be paid interest on the damages and costs awarded to Thai, from the date each relevant amount was incurred. There is an issue, however, as to the appropriate rate of interest.
  2. Leaving aside for the moment Thai’s claim to be awarded an enhanced rate of interest under Part 36, Thai claims interest under section 35A of the Senior Courts Act 1981 at a commercial rate. Under that statutory provision the court may only award simple interest. If a party wishes to claim interest on a compound basis, it can only do so by claiming interest as damages and proving the amount of its actual loss: see Sempra Metals Ltd v Inland Revenue Commissioners [2008] AC 561. Thai has not made such a claim.
  3. Thai initially proposed that simple interest at 5% is a reasonable commercial rate to take in awarding statutory interest. The reason given was that the parties had previously agreed 3.5%, compounded annually, for the Jet lease finance costs. It is not legitimate, however, to avoid the statutory limitation on the basis on which interest can be awarded under the Senior Courts Act by claiming interest at a higher rate than would otherwise be appropriate.
  4. In Vis Trading v Nazarov [2013] EWHC 491 (QB), in a judgment on consequential issues dated 27 March 2013, I followed Andrew Smith J inFiona Trust and Holding Corp v Privalov [2011] EWHC 664 (Comm) in concluding that 2.5% over 6 month US dollar LIBOR is an appropriate rate of interest on a claim made in US dollars by a reasonably creditworthy commercial party which operates outside the United States. As stated in a report approved by the Committee of the London Maritime Arbitrators Association, quoted in both cases, “this would be a reasonable average rate to charge a reasonably creditworthy company for an unsecured [short-term] loan”. In its reply submissions Thai did not seek to pursue a claim for any higher rate of interest than this. According to published information, during the period relevant to Thai’s claim, the 6 month US dollar LIBOR rate has at all times been less than 1% and has generally been around 0.5%. In 2014 the average rate was 0.329%.
  5. Koito pointed out that the assumption underlying the spread of 2.5% over LIBOR is that the claimant is “a reasonably creditworthy company” and argued that a downwards adjustment is appropriate to reflect the fact that Thai is not merely reasonably creditworthy but highly creditworthy. As evidence of this, Koito relied on Thai’s 2014 Annual Report, which reported revenues in that year of over US$6 billion and also states that Thai’s weighted average interest rate for its borrowings in US dollars in 2014 was 2.18%.
  6. Although Koito may well be right that Thai is a more than reasonably creditworthy company, there is insufficient evidence to enable me to find that either Thai itself or companies with its general characteristics were able to obtain short term unsecured loans during the relevant period at a lower spread than 2.5% over LIBOR. In particular, there is no evidence to support Koito’s surmise that Thai’s close connections with the government of Thailand enable it to borrow money at sovereign rates. Nor do I think it right to attach any weight to the interest rate figure in Thai’s 2014 Annual Report. It appears from that report that the vast majority of Thai’s US dollar liabilities in 2014 were loans with a term of 1 – 5 years or longer than 5 years. It cannot be assumed that the rates payable on such loans are comparable to the rate payable on short term borrowings which is the relevant benchmark in awarding interest. In addition, Thai has drawn attention to the fact that its weighted average interest rate for its liabilities in US dollars, as shown by the financial statements which were included in the trial bundles for the years 2010 to 2012, was 4.46% in 2010, 7.07% in 2011 and 7.07% again in 2012 – rates which in the latter two years were substantially higher than 2.5% above 6 month US dollar LIBOR. (Thai appears to have had no liabilities in US dollars in 2013.)
  7. In the absence of evidence which would justify a different spread, I therefore consider that an appropriate rate of interest to award is 2.5% over 6 month US dollar LIBOR. Neither party suggested that different rates of interest should be applied to the much smaller sums claimed in Euros and Thai Baht – or for that matter to the claims for costs made in sterling – and I consider that specifying different interest rates for each of these currencies would be an unnecessary refinement. Subject to Thai’s claim for an uplift under Part 36, therefore, the same rate will apply to all relevant interest calculations.
  8. Thai claims interest under CPR 36.17(4)(a) and (c) on damages and costs at the maximum rate of 10% above base rate from 15 November 2013. For the same reasons as applied in relation to the claim for indemnity costs, I consider that it would be unjust to award interest at an enhanced rate for the period before 3 October 2014, but that there is no injustice in doing so thereafter.
  9. As for what uplift should be awarded, Koito argues that the court should not start with the assumption that it should award the maximum enhanced rate of interest and that awarding interest at 10% above base rate would give Thai a windfall of many millions of dollars above the actual cost to it of not being paid its damages earlier.
  10. What Koito describes as a “windfall” is an incentive deliberately created to promote the policy underlying Part 36 of encouraging parties to make and accept sensible offers of settlement. The fact that the rate awarded is higher than the actual cost of borrowing (even allowing for the fact that interest paid on actual borrowings would be compounded) is not a valid objection. Nevertheless, I accept the point that the 10% uplift is a ceiling and not a guideline. In deciding what uplift to apply, I think it relevant to take account of the fact that interest rates are currently at what is historically a very low level so that awarding the maximum uplift would result in a significantly higher percentage uplift from an ordinary commercial rate than would at other times have been the case. That said, the judgment rate of interest still stands at 8% and I consider that this would be an appropriate rate to apply in the present case.
  11. Thai is also entitled to receive the additional amount of £75,000 specified in CPR 36.17(4)(d).””

CPR 36.17

It always helps to look at the rule in detail.

Costs consequences following judgment

36.17

(1) Subject to rule 36.21, this rule applies where upon judgment being entered—

(a) a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer; or

(b) judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant’s Part 36 offer.

(Rule 36.21 makes provision for the costs consequences following judgment in certain personal injury claims where the claim no longer proceeds under the RTA or EL/PL Protocol.)

(2) For the purposes of paragraph (1), in relation to any money claim or money element of a claim, “more advantageous” means better in money terms by any amount, however small, and “at least as advantageous” shall be construed accordingly.

(3) Subject to paragraphs (7) and (8), where paragraph (1)(a) applies, the court must, unless it considers it unjust to do so, order that the defendant is entitled to—

(a) costs (including any recoverable pre-action costs) from the date on which the relevant period expired; and

(b) interest on those costs.

(4) Subject to paragraph (7), where paragraph (1)(b) applies, the court must, 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 period starting with the date on which the relevant period expired;

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

(c) interest on those costs at a rate not exceeding 10% above base rate; and

(d) provided that the case has been decided and there has not been a previous order under this sub-paragraph, an additional amount, which shall not exceed £75,000, calculated by applying the prescribed percentage set out below to an amount which is—

(i) the sum awarded to the claimant by the court; or

(ii) where there is no monetary award, 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.

(5) In considering whether it would be unjust to make the orders referred to in paragraphs (3) and (4), the court must 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;

(d) the conduct of the parties with regard to the giving of or refusal to give information for the purposes of enabling the offer to be made or evaluated; and

(e) whether the offer was a genuine attempt to settle the proceedings.

(6) Where the court awards interest under this rule and also awards interest on the same sum and for the same period under any other power, the total rate of interest must not exceed 10% above base rate.

(7) Paragraphs (3) and (4) do not apply to a Part 36 offer—

(a) which has been withdrawn;

(b) which has been changed so that its terms are less advantageous to the offeree where the offeree has beaten the less advantageous offer;

(c) made less than 21 days before trial, unless the court has abridged the relevant period.

(8) Paragraph (3) does not apply to a soft tissue injury claim to which rule 36.21 applies.

(Rule 44.2 requires the court to consider an offer to settle that does not have the costs consequences set out in this Section in deciding what order to make about costs.)

RELATED POSTS ON PART 36 AND COSTS

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