The appellant (who was the defendant in the proceedings in the Central London County Court) appeals, with the permission of Briggs LJ, against the costs order made by His Honour Judge Bailey on 10 May 2016 that the appellant should pay 25% of the respondent’s costs on the standard basis, to be subject to detailed assessment if not agreed.

The underlying dispute concerned a contract for certain building work carried out by the respondent at a house in Victoria Square, London SWI, owned by the trustees of the appellant and occupied by her and her son and staff. In the particulars of claim served in October 2014, the respondent claimed some £151,000 said to be due under an invoice for the work carried out. As the judge found, it was accepted on behalf of the respondent that this was a fraudulent invoice concocted in collusion with the appellant to assist her in obtaining payment by the trustees of some £67,000 of the invoice alleged to relate to external works to the house, specifically to the roof which had collapsed, for which the trustees would be responsible, as opposed to internal works and redecoration, which were the appellant’s responsibility.

Given that the invoice was fraudulent, the judge had to assess the value of the works actually carried out. He referred at [14] of his main judgment to the true claim particularised in a schedule served in April 2016, a month before trial, in the sum of £65,319. He rejected that as the basis of valuation and also rejected a submission by counsel then acting for the respondent that he should simply adopt the figures set out in the report of an expert surveyor instructed by the respondent. Rather, the judge went carefully through the various items of work, putting a value on them and making allowance where appropriate for poor workmanship. As appears from the post-judgment costs discussion, the figure he arrived at was £30,324.42 to which he added 20% VAT to arrive at a gross sum of £36,389.30.

From that fell to be deducted certain sums already paid by the appellant. As the judge said at [50] of the main judgment: “It is common ground that the defendant has paid the claimant a total of £26,600 for the works.” This consisted of three items:

In relation to the first payment there was a dispute between the parties, referred to in their respective witness statements, which the judge had to resolve. At [50] of his judgment he recorded that although the respondent asserted that, whilst this first tranche was undoubtedly paid over for the works, it had been appropriated by the appellant herself to pay for two carpets acquired for her in India by Ms Rohatgi, a director of the respondent, and brought back to be placed in the salon and dining room of the house. At [51] the judge referred to Ms Rohatgi’s evidence that she brought the carpets back, handed the appellant a receipt for what she had paid, eight lakh rupees, and the £10,000 already paid was appropriated by the appellant to pay for the carpets. He noted that in support of that evidence, Ms Rohatgi referred to an email of 8 April 2014 where the appellant said: “Already paid the carpet with the £10,000 cheque from my friend.”

At [52] the judge said that he accepted Ms Rohatgi’s evidence on this point and found that £10,000 of the £26,600 went towards the carpets. From the context, it is quite clear that he was referring to the first £10,000 paid on 19 October 2013. Given that that £10,000 went towards the carpets, a separate transaction from the building works, the sum to be deducted from the gross sum due of £36,389.30, as already having been paid on account of the works, was £16,600 (representing the £6,600 VAT credit and the second £10,000 paid on 8 February 2016), so that the judge arrived at a judgment figure of £19,788.97 as set out in paragraph 1 of his order of 10 May 2016.

In fact, on 24 August 2015, the appellant’s solicitors had made a Part 36 offer which stated, inter alia:

“Our client’s position is that the value of the works undertaken and the balance payable is the sum of £15,000. They offer this sum in full and final settlement of your client’s claim, along with costs to date…

This offer is intended to have the consequences of Part 36 of the CPR, as amended. If the offer is accepted within 21 days of your receipt of this letter, we consider that this brings the matter to a close, and our client will pay to your client your client’s cost(s) to the date of such agreement…If you do not agree to the proposed settlement, your clients will be liable for our client’s costs in accordance with CPR Rule 36.10 [presumably intended to be a reference to Rule 36.17]. For the avoidance of doubt this offer relates to the whole of the Claimant’s claim.”

Because the judge had concluded that judgment should be entered for £19,788.97, he also concluded that the respondent had beaten the Part 36 offer, hence his order that the appellant pay the respondent’s costs, although because of the fraudulent, exaggerated claim and various other aspects of the respondent’s conduct of which he disapproved, he only awarded the respondent 25% of its costs. In the post judgment on costs, it was accepted by the appellant’s then counsel that the Part 36 offer equated to a gross figure of £32,000 less the £16,600 already paid. The judge reflected this in his judgment on costs where he said that the respondent had obtained judgment for a gross sum of £36,300 odd when the most offered was £32,000 gross, so the respondent had obtained more than the Part 36 offer.

By an Appellant’s Notice dated 25 May 2016, the appellant originally appealed against the whole of the judge’s order, contending that he had erroneously applied VAT to the cost of the works. Correspondence with the judge on that subject ensued and, on 30 November 2016, he effectively accepted that argument and amended paragraph 1 of his order to read: “There be judgment for the Claimant against the Defendant in the sum of £14,275.49 (being the sum due for the work carried out …assessed at £30,275.49, less £16,600 paid by the Defendant in respect of such work).”

Further correspondence was sent to the judge in December 2016 in which the appellant’s solicitors argued that the judgment sum was now less than the Part 36 offer, so that the judge should amend his costs order pursuant to Part 36. The respondent’s solicitors argued that the case was indistinguishable from the decision of the Court of Appeal in Macleish v Littlestone [2016] EWCA Civ 127; [2016] 1 WLR 3289, so that since the £10,000 paid on 8 February 2016 was a payment on account of the appellant’s liability, it had the effect of reducing the Part 36 offer to £5,000. The judge informed the Civil Appeals Office that he did not propose to respond to the correspondence, which we take to mean that the judge was sensibly declining to review his order further, given that the relevant issue was now before the Court of Appeal.

The sole ground of appeal in the Amended Grounds is that the revised sum payable of £14,275.49 was less than the sum of £15,000 in the Part 36 offer and the judge had failed to consider or apply the provisions of CPR 36.17.

Given the critical significance of the decision of the Court of Appeal in Macleish v Littlestone to the issue on this appeal, I propose to consider it in some detail before summarising the parties’ submissions. In that case, the claimant landlord sued the defendant tenants for damages for breach of repairing obligations in a lease, in an amount of about £75,000. The particulars of claim were served with the claim form on 30 January 2013, appending a schedule of dilapidations. On 15 February 2013, before the defence was served, the defendants made a Part 36 offer to settle for £35,000 in full and final settlement. That offer said that if it was accepted within 28 days payment would be made in full.

On 1 March 2013, the defendants served the defence in which they admitted liability in an aggregate amount of £17,504, by reference to specified amounts in their version of the schedule of dilapidations, some of which admitted items in the claimant’s schedule in full, others in part. On 7 March 2013, still before the 28 day period for acceptance of the Part 36 offer expired, the defendants’ solicitors wrote saying they had been instructed to arrange for payment of £17,504 pursuant to the defence. The claimant’s solicitors replied the same day saying the payment would be accepted on account of the claim only. On 12 March 2013, the defendant duly made the payment to the claimant’s specified bank account.

At trial, the judge awarded the claimant damages of some £48,500 in respect of dilapidations. With other items and interest, the overall judgment was for some £55,500. Taking account of the payment of £17,504 together with a further payment of £36,314.52 made by the defendants after the judgment had been sent out in draft, the judge found a balance due to the claimant of £1,644.59. The judge then considered the Part 36 offer in the context of costs. The defendants sought to argue, as they had in correspondence before the trial, that the offer should be aggregated with the £17,504 admissions payment for the purposes of determining whether the claimant had obtained a judgment more advantageous than the Part 36 offer. The judge rejected that argument and ordered the defendants to pay the claimant’s costs of the action.

Before the Court of Appeal, it was common ground that for the purposes of assessing the value of the judgment as at the date when the 28 day period in the Part 36 offer expired, 15 March 2013, taking account of interest until that date, the correct figure was some £49,500. The Court of Appeal rejected the defendants’ argument that their £17,504 admissions payment was to be aggregated with the £35,000 Part 36 offer to equate to an overall offer of £52,504, more than the value of the judgment.

Briggs LJ gave the lead judgment. His analysis of the effect of the admissions payment on the Part 36 offer is at [19] to [26] of the judgment:

“19.

In my judgment the true analysis of the relationship between the Part 36 offer and the admissions payment is as follows. First, the Part 36 offer was, from start to finish, an offer to settle the entirety of the claimant's claim for £35,000, no more and no less. Nothing in the correspondence about, or the making of, the admissions payment made any reference to the Part 36 offer.

20.

Secondly, the admissions payment was plainly made, and indeed accepted, on the basis that it was a payment on account following admissions, against the claimant's entire claim. It did not cease to be the same claim for damages for dilapidations and interest which had been originally pleaded, merely because part of it was admitted, and a payment made in accordance with those admissions. Thus it would, plainly, fall to be taken into account as a part payment of any larger sum awarded by way of damages, as indeed it later was.

21.

Thirdly, the admissions payment was, for the same reason, liable to be taken into account as a part payment in advance of the £35,000 that would have been due and payable to the claimant if, thereafter, he accepted the Part 36 offer. This does no violence to Rule 36.11(6) which is plainly not intended to deprive the defendant of the benefit of a part-payment made on account, after admissions, between the making of a Part 36 offer and its acceptance, at least if (as here) both the offer and the payment were made in respect of the same claim. The result is that, had the claimant accepted the Part 36 offer on or after 15 March, the net sum payable would only have been £17,496.

22.

Fourthly, the judge was correct to award damages and interest in the full sum of £51,501.30 (ignoring the adjustments for service charges and insurance premium rebate), treating the admissions payment as something to be taken into account, rather than as reducing the quantification of the damages payable. Plainly, therefore, the claimant obtained a judgment more advantageous than the value of the Part 36 offer, within the meaning of rule 36.14(1)(a) so that she was correct to award the claimant his costs of the proceedings.

23.

I consider that the critical flaw in the defendants' primary case is that it fails to address the obvious reality that an admitted payment on account of a claim, following a Part 36 offer in a higher amount must, in the absence of any agreement to the contrary, be taken as being made as much on account of the Part 36 offer to settle the claim as it is made on account of the claim itself. During argument I put to Mr Pepperall the example of a claim for £40,000 followed by a defendant's Part 36 offer of £35,000, then followed by a defendant's payment after admissions of £30,000. Would the claimant, upon acceptance of the Part 36 offer, obtain a net £5,000, or £65,000, on account of the £40,000 claim? Mr Pepperall boldly submitted that the defendant would be obliged to pay £65,000, after which he would no doubt sue his solicitors for placing him in that absurd predicament. In my view, the absurdity derives from the submission that Part 36 produces that result on those facts.

24.

The absurdity is, in my view, by no means confined to a case where aggregating the Part 36 offer and the admissions payment would produce a sum larger than the claim. It arises from the fact that the admissions payment is made on account. By that I do not mean that it is an "interim payment on account" within the meaning of the Civil Procedure Rules, which is a payment which may be ordered, or made voluntarily, without prejudice to the payer's case, rather than following an admission that the amount of the payment is due: see generally Part 25.1(k), 25.6, 25.8 and 25.9. The admissions payment was not that kind of interim payment, but it was plainly a payment on account of the claimant's claim. This is the express basis upon which the claimant insisted, in his letter of 7 March, and the money was then paid by the defendants without demur, following receipt of that letter. I would have reached the same conclusion about the nature of the payment, even if no such letter had been written.

25.

It is not in my view merely a question of absurdity. The general thrust of the CPR, and of Part 36 in particular, is both to encourage parties to make sensible offers to settle the claim and also to take sensible steps to limit the issues between them. These are separate objectives. Part 36 serves the first, while admissions serve the second. Payment following admissions may stop interest running, and will avoid the cost of the claimant having to obtain interim judgment on the admissions.

26.

There is nothing inconsistent in a defendant both wishing to encourage settlement by making an offer to settle the whole claim, then making one or more smaller payments outright pursuant to admissions, while leaving the Part 36 offer open for acceptance throughout. The continuing offer encourages settlement while the admissions payment narrows the issues. There is no reason why the admissions payment should be intended to improve the value of the offer to settle the whole claim. It is made for a different purpose. If Mr Pepperall's analysis were correct the defendant would have to withdraw the Part 36 offer to prevent it being aggregated with the admissions payment. As the Rules then stood, such a withdrawal could only be made within the relevant period with the permission of the court: see Part 36.3(5). The present position is more complicated: see Part 36.10, but no more amenable to the making of an early admissions payment during the relevant period.”

Briggs LJ then went to consider whether this analysis was inconsistent with that of Moore-Bick LJ in LG Blower Specialist Bricklayer Ltd v Reeves [2010] EWCA Civ 726; [2010] 1 WLR 2081 (heard at the same time as Gibbon v Manchester City Council). In that case, the claimant had a claim in debt for some £15,800, within which was an amount of £650 for plumbing works. Two months after proceedings were issued, the defendants made a Part 36 offer to settle of some £8,000 inclusive of interest, which was rejected. Three months later, the defendants paid the plumbing bill. At trial, the claimant recovered £8,375. In looking at the impact of the Part 36 offer, the District Judge considered that the plumbing bill had to be deducted from the amount of the offer. Whether that was correct or not, the amount of the judgment still exceeded the Part 36 offer. Hence what Moore-Bick LJ had to say about the deduction at [37] was obiter:

“Since the plumbing bill was still outstanding when the May offer was made, the District Judge was wrong to deduct it when considering the value of that offer. The effect of paying the plumbing bill was to reduce the value of the claim against Mr. and Mrs. Reeves by £649.36 and to that extent it made the May offer, which they left open for acceptance, more attractive.”

In Macleish, Briggs LJ noted at [31] that this statement had been obiter and not the subject of adversarial argument. He also said at [32] that, unlike Macleish, LG Blower was a claim in debt not for damages and at [34] that there may have been a good reason for not treating the plumbing payment as a payment made on account of the same claim as that in respect of which the Part 36 payment had been made. However, at [35], he said:

“Nonetheless, were it necessary to do so, I would respectfully differ from Moore-Bick LJ's analysis which, being contained in obiter dicta, is not binding on this court. For my part, I cannot see what was wrong with the district judge's approach. The plumbing item formed part of the claim which Mr and Mrs Reeves offered to settle by their May offer. If the claimant builder had accepted that offer after payment of the plumbing item, he would in my view have been obliged, and Mr and Mrs Reeves entitled, to take the payment of the plumbing amount into account. Since the district judge deducted the plumbing amount from the amount for which he would otherwise have given judgment, I find it difficult to fault his view that the value of the Part 36 offer should have been similarly discounted, when comparing it with the value of the judgment. In the present case the judge did not deduct the admissions payment from the damages for which she gave judgment. She therefore had no need to deduct it from the amount of the Part 36 offer when comparing like with like, but nor, by the same token, was there any need for her to add it to the Part 36 offer for the purpose of comparison, by enhancement or otherwise. Her analysis was, in my view, straightforward, simple and correct.”

It is quite clear from the last few sentences of that paragraph, that Briggs LJ considered that, if the judge had deducted the admissions payment from the amount of damages for which she gave judgment (as the judge did in this case by deducting the amount of £16,600 from the damages awarded), the correct approach to consideration of whether, for the purposes of CPR 36.17, the claimant had recovered a judgment more advantageous than the Part 36 offer would have been to make a corresponding deduction from the Part 36 offer, in order to compare like with like.

On behalf of the appellant, Mr Andrew Morrell submitted that the reasoning of Briggs LJ in Macleish should be limited to cases of admissions or cases where the paying party made it clear when making a payment that it was also intended to reduce the amount of an earlier Part 36 offer. In other cases, despite a payment being made which was otherwise silent as to what it related to, the Part 36 offer remained open for acceptance in its full amount. He submitted that any presumption of law for which Mr Steven Thompson QC for the respondent contended arose in Macleish not from the payment but from the admission. The purpose of an admission was to narrow the issues between the parties, so that the extent of the pleaded case was reduced and the Part 36 offer only went to that reduced case. It would be dangerous to extend the reasoning in Macleish to a case such as the present, as it would make a payment which was otherwise silent as to what it related to, tantamount to an admission.

Mr Morrell referred the Court to the notes in the White Book (Civil Procedure 2017 Vol. 1 at 36.17.2) discussing the decisions in LG Blower and Macleish:

“In LG Blower Specialist Bricklayer Ltd v Reeves [2010] EWCA Civ 726; [2010] 1 WLR 2081; [2010] 2 All ER 258 CA, Moore-Bick LJ suggested, obiter, that where a defendant makes a payment to the claimant after the date of the Pt 36 offer (not being an interim payment made generally on account of the claim) such that the value of the claim is reduced, the Pt 36 offer becomes more attractive. While there is much to be said for this view, it was doubted by Briggs LJ in Littlestone v Macleish [2016] EWCA Civ 127; [2016] 1 WLR 3289, CA. In Littlestone, the Court of Appeal held that a later payment was made “on account” of both the claim generally and the Pt 36 offer (despite it not being an “interim payment”) such that it was no longer open to the offeree to obtain payment of the offer without giving credit for the payment. Given these decisions, where an offeror makes a subsequent payment, it would be prudent for them to make clear whether such payment is (1) made on account of the claim and offer (as in Littlestone), (2) intended to be a voluntary interim payment, or (3) is made in addition to the offer such that it makes the offer more attractive. If the offeror fails to clarify the position, the offeree should consider seeking clarification. While the request may be out of time under the r.36.8 machinery, the court is unlikely to be sympathetic to an offeror who fails to clarify their intentions in response to such enquiry and who seeks to profit from any uncertainty created.”

Mr Morrell submitted that where, as in the present case, the respondent had not sought clarification as to whether the payment was also intended to reduce the amount of the Part 36 offer, either the payment was to be taken to be one made in addition to the Part 36 offer or, to the extent there was ambiguity, that should be resolved against the respondent who had not sought clarification but was seeking to resile from the terms of the offer.

On behalf of the respondent Mr Steven Thompson QC submitted it was common ground, as found by the judge at [50] of his judgment, that the second payment of £10,000 was “for the works”, in other words, it was on account of the works. The analysis of Briggs LJ in Macleish applied as much to a payment on account as to an admissions payment. What was critical to his analysis was not the fact of the admission but the nature of the payment as a payment on account of the claim, to be contrasted with an interim payment on account under Part 25 of the Civil Procedure Rules or a voluntary payment without prejudice to the payer’s case: see [24] of Briggs LJ’s judgment. The payment in the present case was equally a payment on account of the claim and should have the same effect on the Part 36 offer as in Macleish.

Mr Thompson QC submitted that the advice in the White Book about seeking clarification was obviously sensible, but did not alter the position that, where the paying party had not sought to qualify its payment by saying that it had no effect on the Part 36 offer or to provide clarification to that effect, the default position should be a presumption of law that a payment on account of the claim has the effect of reducing the Part 36 offer correspondingly. Furthermore, the analysis that there was a rebuttable presumption of law did not cut across the “self-contained code” of Part 36 (so described by Moore-Bick LJ in Gibbon at [5]) since the Part 36 offer was reduced as a matter of law by a payment of account (unless the paying party stipulated otherwise), so that the provisions of Part 36.9 about changing the terms of a Part 36 offer did not apply.

In my judgment, Mr Thompson QC is correct that the critical aspect of the reasoning of Briggs LJ in Macleish is not the fact of the admission of liability but that the admissions payment made was a payment on account of the claim, reducing the defendants’ liability for the claim as a whole. This is clear from [24] of his judgment, where he contrasts that sort of payment on account of a claim with an interim payment on account under Part 25 (where the Court can if appropriate order repayment of the interim payment: see Part 25.8(2)(a)) or a voluntary payment without prejudice to the payer’s case (which again will obviously be repayable if the payer defeats the claim).

Furthermore, that Briggs LJ intended his analysis to be applicable to any payment on account of a claim is clear from his criticism of Moore-Bick LJ’s analysis in LG Blower at [35] of his judgment. If, as Mr Morrell suggested, it was the admission which was critical in Macleish rather than the nature of the payment as a payment on account, it is difficult to see why Briggs LJ doubted Moore-Bick LJ’s obiter statement and supported the approach of the district judge in that case, since LG Blower was not a case of an admission of liability in a pleading followed by an “admissions payment” but simply an out and out payment of part of a claim, in effect a payment on account of the claim as a whole.

Therefore, I consider that the reasoning in Macleish is equally applicable to any payment on account of a claim as it is to an “admissions payment”. The second payment of £10,000 in this case was not simply some unattributed payment but, as was common ground and as the judge found, a payment for the works and thus on account of the works or on account of the claim. I agree with Mr Thompson QC that, where such a payment is made, there is a presumption of law that it is also on account of the earlier Part 36 offer as Briggs LJ found at [23]. The contrary conclusion would lead to the absurd results he identified in that paragraph.

It seems to me that if the paying party wishes to prevent the presumption from operating, it is incumbent on that party either to state expressly at the time the payment is made that it is not intended also to reduce the amount of the earlier Part 36 offer or to provide clarification to that effect promptly after the payment was made. The appellant did neither in the present case and accordingly, what Mr Thompson QC described as the default position applies, that there is a presumption that the £10,000 payment reduces both the liability in respect of the claim and the amount of the Part 36 offer.

This conclusion does not lead to uncertainty which is inimical to the purpose of Part 36 as Mr Morrell suggested. If the paying party wishes to avoid the operation of the presumption on the basis that a payment is a voluntary interim payment or not intended to reduce the amount of an earlier Part 36 offer, it should say so. If it does not do so and a payment on account of the claim is made without any such qualification, then parties will know where they stand. The analysis in [23] and [24] of Briggs LJ’s judgment in Macleish will apply and the presumption will operate.

Furthermore, I do not consider that the application of Briggs LJ’s analysis to all payments on account of a claim (where the paying party does not provide some form of qualification as identified in the previous paragraph) has the effect of cutting across the Part 36 regime. Given that the presumption operated as a matter of law, there was no need for the defendant to serve a notice of change in the terms of the Part 36 offer pursuant to CPR 36.9(2). In other words, an unconditional payment on account of the sums claimed in the proceedings, made after the date of a Part 36 offer, results in the amount of the Part 36 offer being correspondingly reduced unless the payer makes it clear to the other party, at any time prior to judgment or acceptance of the Part 36 offer, that it is not to be so treated.

For these reasons, I consider that, on a proper analysis, the judgment obtained by the respondent (even after the judge’s adjustment pursuant to his order of 30 November 2016) was more advantageous than the Part 36 offer. Accordingly, the judge’s order in respect of costs cannot be faulted and the appeal must be dismissed.

I agree.