Walker Residential Ltd. v Davis & Anor

This is a case about a costs order which was made on 8 September this year by Deputy Master Behrens. The costs order arises in the context of the Civil Procedure Rules Part 36. That part contains provisions about offers to settle, payments into court and their costs consequences.

In circumstances which I will describe fully later, the claimant was pursuing a claim against the defendants. The defendants paid £85,000 into court, that being a so-called Part 36 payment, and on 31 March of this year the claimant filed a notice accepting the £85,000. The claimant’s case is that, under a combination of the detailed provisions of Part 36, it was entitled as of right to an order for its costs on the standard basis down to the date when it accepted the payment. However, the defendants brought an application which came before the Deputy Master. In relatively unusual circumstances and in a way which the parties had not previously anticipated, the result of the hearing before the Deputy Master was that the claimant was not entitled to an automatic order for its costs. Instead the Deputy Mater ordered the claimant to pay the defendants’ costs from a date in early April 2004.

The claimant has appealed against the Deputy Master’s decision, with permission to appeal granted by the Deputy Master. I am going to allow the appeal and order that the claimant be entitled to its costs of the claim up to 31 March this year, that being the date when it served its notice accepting the payment into court of £85,000.

I will first set out the relevant provisions of Part 36 and then I will make some general observations on how they work. Anyone reading a transcript of this judgment will probably need, when reading those general observations, to refer back from time to time to the wording of the provisions.

Rule 36.1 is introductory. Nothing of significance turns on it in this case, but I will set it out:

Rule 36.2(1) defines “a Part 36 payment” and “a Part 36 offer”:

One consequence is that an offer to settle made before proceedings begin is not a “Part 36 offer” as defined. That is not to say that a potential defendant cannot make an offer to settle a threatened claim before proceedings begin. Indeed, the system encourages potential defendants to do precisely that. But pre-commencement offers to settle are not Part 36 offers within the definition. By the same token, for payments by way of offer to be Part 36 payments as defined, they have to be payments made into court and they also have to be made after the commencement of proceedings.

Rule 36.10 is about pre-commencement offers. As I have said, they are not “Part 36 offers”, but they may in some circumstances have consequences under Part 36 after proceedings have been commended. Most of rule 36(10) is relevant to this case. So far as relevant it reads as follows:

Rule 36.11(1) covers Part 36 offers or (relevantly to this case) Part 36 payments which are made after the commencement of proceedings but 21 days or more before the start of the trial. It reads as follows:

Rule 36.11(2) deals with Part 36 offers or payments made after the commencement of proceedings, but less than 21 days before the start of the trial. I need not set out its detailed terms, but in one of the situations which it describes it provides that the claimant may only accept the offer or payment with the permission of the court. That provision is picked up by Rule 36.11(3) which is as follows:

Rule 36.13(1) is the provision which the claimant says applies to this case so as to entitle it to an automatic order for costs, with no discretion in the court to withhold the order. It is as follows:

Rule 36.13(4) provides:

Before I leave rule 36.13, I should point out that rule 36.13(2), which is not directly in point in this case, ends with the words “unless the court orders otherwise”. It is worth noting that those words do not appear at the end of rule 36.13(1), the paragraph which is in point in this case.

I also quote rule 36.16:

I now make a few general comments before turning to the specific circumstances of this case. I assume a claimant who is advancing a money claim of some sort, for example (like this case) a claim for damages. The simplest Part 36 situation is one where he has commenced his claim and, after he has done so, the defendant makes an offer to settle the whole claim by making a Part 36 payment into court. If the Part 36 payment is made more than 21 days before the date of the trial, the claimant does not need the court’s permission to accept it, provided he accepts by written notice within 21 days after the Part 36 payment was made: rule 36.11(1). In such a case, the claimant is entitled to his costs up to the date of serving the notice of acceptance. That is an automatic entitlement, and it is specifically provided for by rule 36.13(1). The court has no discretion to refuse the costs order. Indeed, the claimant does not need to obtain a bespoke court order to obtain his costs. Under rule 36.16 he files a request for payment in the practice form and the Court Funds Office pays the sum out of court to him. As respects a court order, the matter is covered by rule 44.12(1)(b), which I set out earlier. The effect of the rule is that a deemed costs order on the standard basis comes into existence.

In this case the claimant says, and I agree, that rules 36.11(1) and 36.13(1) applied, and that it has an absolute entitlement to its costs. The claimant also says, and I also agree, that under rule 44.12(1)(b) it had the benefit of a deemed order for its costs.

A different point of a general nature to make is this. The rules distinguish between cases where a claimant can accept a Part 36 payment without the court’s permission and cases where a claimant requires the court’s permission to accept the payment. One situation where the court’s permission is required is spelled out in rule 36.11(2), the details of it do not matter. Another such situation is where a pre-commencement Part 36 payment which was made into court more than 21 days before the start of the trial is accepted more than 21 days after it was made: see the terms of rule 36.11(1). Another such situation, which is important in this case, arises under rule 36.10(4). Rule 36.10, it will be recalled, deals with cases where a pre-commencement offer to settle was made, and then after commencement of the action a Part 36 payment is made into court of an amount which is at least as large as the pre-commencement offer. Rule 36.10(4) provides that a Part 36 payment of that sort cannot be accepted without the permission of the court.

I should mention at this point that there are additional requirements in Part 36.10, including a time limit requirement which is at the heart of the issue before me.

The importance of the court’s permission being required for a Part 36 payment to be accepted is that, where the permission is required, rule 36.13.(1) does not apply, so that the claimant’s entitlement to his or its costs is not automatic. Where the reason why the court’s permission is required is that the case is covered by rule 36.11(2), rule 36.11(3) expressly says that “the court will, if it gives permission, make an order as to costs”.

In other cases where the court’s permission is required (including, relevantly for this appeal, cases to which rule 36.10(4) applies) there is no express provision like rule 36.11(3), but in my opinion the court can grant permission on conditions: see rule 3.1(3). One condition could be that the costs order should be other than an order requiring the defendant to pay the claimant’s costs, or requiring the defendant to pay the whole of the claimant’s costs. As I will explain later, the Deputy Master considered that he could bring this case within rule 36.10(4) and, having brought it within that sub-rule (or so he considered), he made the order under appeal whereby, instead of ordering the defendants to pay the whole of the claimant’s costs of the claim, he ordered the claimant to pay the defendants’ costs from a date in April 2004.

(1) The underlying dispute arose from a contract whereby the defendants, who are trustees for an individual, sold an area of land to the claimant company, which is a property development company. The defendants had said that the property did not include a landfill site, but it turned out that it did. The claimant advanced a claim for damages for misrepresentation.

(2) A claim form was not issued until October 2004, and was not served until February 2005. However, on 18 March 2004, months before the commencement of proceedings, the defendants’ solicitors wrote offering to pay £85,000 plus the claimant’s reasonable costs to date in settlement of the claimant’s claim. That offer was not a Part 36 offer because proceedings had not commenced. There was no payment into court, nor indeed could there have been at that pre-commencement stage. The letter did, however, refer to rule 36.10. It was headed “Without Prejudice (Save as to Costs)”.

(3) The next day, 19 March 2004, the claimant’s solicitors replied to the defendants’ solicitors rejecting the offer. From that date the offer no longer existed, but it was nevertheless a fact (potentially relevant to rule 36.10(1)) that the defendants had made an offer to settle the dispute before proceedings were begun. It was also the case that the detailed terms of the offer made by the defendants complied with the conditions of rule 36.10(2)(a) and (b) which I have quoted earlier. I need not refer to those aspects of rule 36.10 again.

(4) Time moved on and, as I have said, the claimant issued a claim form in October 2004 and served it in February 2005. The deemed date of service was 11 February 2005.

(5) If the defendants wished to be able to rely on their offer of 18 March 2004 as a pre-commencement offer to settle falling to be taken into account in relation to costs under rule 36.10, then on the face of it rule 36.10(3) required them to make a Part 36 payment into court of at least £85,000 and to make it not later than 25 February 2005. That was the date falling 14 days after the deemed date of service of the claim form: see rule 36.10(3)(a). However, 25 February 2005 came and went, and the defendants did not make any Part 36 payment.

(6) On 8 March 2005 the defendants served a Defence to the claim.

(7) Also on 8 March 2005 the defendants paid £85,000 into court and gave to the claimant a notice of payment in in a standard form. The notice is headed “Notice of Payment into Court (In settlement - Part 36)”. The notice states:

On 9 March 2005, the day after the actual date when the £85,000 was paid into court by the defendants, the claimant’s solicitors wrote to the defendants’ solicitors as follows:

(9) The claimant’s solicitors received no reply. Thus, they received nothing to put them on notice that the defendants intended to regard the payment into court as coming within rule 36.10, notwithstanding the indisputable fact that it had not been made within 14 days of the service of the claim form although that is what rule 36.10(3)(a) required.

(10) It will be recalled that the defendants’ notice of payment into court (see (7) above) ended with a note that if the claimant wished to accept the payment into court without needing the court’s permission, the claimant should complete form N243A/Form 201 and send it to the Court Funds Office with copies to the defendants and to the court. In fact there was a further requirement; the claimant had to do those things by 31 March 2005: see rule 36.11(1). On 31 March 2005 the claimant’s solicitors did complete Form N243A/Form 201 and sent it to the required addresses. The form is headed “Notice of Acceptance and Request for Payment (Part 36)”, and the relevant wording contained in it was:

(11) I was told that within a few days the Court Funds Office did pay the £85,000 to the claimant’s solicitors. That fact does not appear to have been specifically before the Deputy Master, but it is the case and no-one has suggested that I should overlook it.

(12) As matters appeared at that stage, the claimant had accepted £85,000 in satisfaction of its claim (which I mention had been formulated in the Claim Form and Particulars of Claim as a claim for a very much greater amount), and the claimant was also entitled to its assessed costs of the action: that was the normal consequence of a claimant accepting a payment into court. Further, it was expressly provided for in the circumstances of this case by rule 36.13(1). The claimant was also beneficiary of a deemed order for its costs to be paid, that order arising under rule 44.12(1)(b).

On 2 June 2005, the claimant’s solicitors wrote to the defendants’ solicitors enclosing various documents by way of initiation of the process of assessment of its costs.

(13) The claimant and its solicitors may have thought that they were fortunate that the defendants had not used the procedure under rule 36.10 whereby they could have opposed the recovery of costs by the claimant for the period after the claimant had refused the defendants’ first offer of £85,000, the offer which had been made in March 2004. Nevertheless, given that that procedure had not been used, the claimant and its solicitors could have been forgiven for thinking that the matter was over, except for the assessment of the costs which it would recover. However, the claimant’s solicitors received a letter dated 9 June 2005 from the defendants’ solicitors. The letter enclosed by way of service an application notice.

(14) The application notice is dated 27 May 2005, but as far as I know, the first that the claimant and its solicitors knew about it was on receipt of the letter of 9 June. I read Part A of the notice:

On the face of matters the application notice was plainly inconsistent with the automatic costs effect provided for by rule 36.13(1). The notice made no reference to that rule, or indeed to rule 36.10. It appeared to proceed on the basis that the question of costs of the action was still at large generally before the court.

(15) The application was listed to be heard before the Deputy Master on 8 September. Counsel for each party, Mr James for the defendants and Mr Hutton for the claimant (the counsel who have also appeared before me on this appeal), prepared skeleton arguments. Mr James’ skeleton did address the apparent obstacle of rule 36.13(1). I will read three short paragraphs from it, which are at the beginning of a section headed “III Does the court have discretion?”:

Thus, Mr James was seeking to invoke rule 3.10 of the CPR to overcome the obstacle. Rule 3.10 does not in fact use the word “irregularity”; it refers to “an error of procedure such as a failure to comply with a rule or practice direction”. Mr James’ argument as that it was an error of procedure that the Part 36 payment had not been made by 25 February 2005. The court, so it was submitted, could make an order remedying the error. If the court did so, the case came within rule 31.10. The claimant would thereupon need the permission of the court to accept the Part 36 payment (see rule 36.10(4)) and the court thereby had a discretion over the issue of costs.

I preface a detailed analysis of the Deputy Master’s decision by recording that he obviously took the view that, looking at the matter generally, the claimant did not deserve to recover from the defendants its costs of the period after 12 March 2004. On the contrary, the fair thing was that the defendants should recover from the claimant their costs attributable to that period. I can well understand why the Deputy Master reacted in that way. On 12 March 2004, the defendants had offered to settle by paying £85,000 and the claimant had refused the offer. A year later, after significant costs had been incurred by the defendants (or so I presume) they again offered £85,000 and this time the claimant accepted it. Looking at the matter broadly, I share the Deputy Master’s reaction that the defendants, not the claimant, should get the costs attributable to the period after the original offer had been refused. Suppose that the defendants had paid the £85,000 into court by 25 February 2005 within the 21 days required to comply with rule 36.10(3)(a). The claimant could not then have accepted the £85,000 without the consent of the court. There would have had to be a hearing to consider whether the court should give its consent. The Master or Deputy Master hearing the matter in that situation would almost certainly have attached a condition to its consent, namely that the claimant must pay the defendants’ costs for the period after 12 March 2004. The claimant would have had no realistic chance of appealing successfully against a decision to that effect.

Such, I can well see, was the Deputy Master’s broad reaction. The problem, however, was that the defendants had not paid the £85,000 into court by 25 February 2005, so that the conditions of rule 36.10 were not fulfilled. Further, the combination of rules 36.11(1) and 36.13(1) seemed plainly to provide in mandatory terms that the claimant was entitled to all of its costs up to 31 March 2005. As I have said, Mr James’ suggested route for overcoming that problem was via rule 3.10. The Deputy Master did not accept Mr James’ submission on that point. He considered that a failure to make a payment by a date was not “an error of procedure such as a failure to comply with a rule or a practice direction”. I entirely agree, and I would add that the correctness of the Deputy Master’s view on this point is underlined by the circumstance that the payment which the defendants in fact made on 8 March was a perfectly valid Part 36 payment. The fact that it was not paid by 25 February did not mean that it was in any way a nullity.

However, the decision records that the Deputy Master had himself suggested a different route whereby the case could be brought within rule 36.10 after all. The route relied on the general power of the court conferred by rule 3.1(2)(a) to extend time limits:

The time limit relevant in this case was the time limit in rule 36.10(3)(a) whereby, if the conditions of rule 36.10 were to be satisfied, the defendant had to make a Part 36 payment within 14 days of service of the claim form. The Deputy Master held that the power to extend time in rule 3.1(2)(a) applied to the rule 36.10(3)(a) time limit, as it applied to other time limits found at numerous places throughout the CPR. The Deputy Master said:

His decision then considered that question for several paragraphs. He concluded that he should extend time. Further (an important point so far as the present appeal is concerned), when announcing his decision to that effect he believed that, once he extended the time, it automatically followed that the claimant was liable to pay the defendants’ costs from March 2004:

However, at that stage in the hearing Mr Hutton (counsel for the claimant) pointed out to the Deputy Master that he was wrong in what I have just quoted him as saying. Let it be accepted (1) that the Deputy Master had power to extend the time limit; (2) that in his discretion he was going to extend it; and (3) that that caused rule 36.10 to become applicable. It did not automatically follow that the claimant was liable to pay the defendants’ costs from April 2004. All that followed was that, by virtue of rule 36.10(4), the claimant could not accept the £85,000 without the consent of the court. After discussion the Deputy Master added a supplement to his judgment. He said that he had been in error in saying that the costs followed automatically under rule 36.10. Rather the position was that “in giving permission, the court would then consider as a matter of discretion what should happen as regards costs”. His decision, however, remained that the claimant should recover its costs only until 8 April 2004. By implication (although he did not expressly say so) his view was that the claimant should pay the defendants’ costs after 8 April 2004. The order which he made was to that effect.

As I have said, I sympathise in a general way with why the Deputy Master felt the way he did. However, I cannot agree with his conclusion. I can accept that the time limit in rule 36.10(3)(a) is capable of being extended under rule 3.1(2)(a), and I can accept that in some circumstances such an extension of time could make a difference to the costs outcome. Suppose that in this case the defendants, instead of simply making a Part 36 payment into court on 8 March 2005, supported by the standard form notice of payment into court, had issued an application notice applying for an order extending their time to make the payment into court, that the court had made the order, and that the defendants had then made the payment. That would have brought the matter within rule 36.10, and if the claimant had wanted to accept the payment it would have known where it stood: it would have needed the court’s permission to accept it and the court could, and in all probability would, have given permission on condition that the claimant paid the defendants’ costs after 12 April 2004.

That, however, was not what happened. When the payment into court was made it was not a payment to which rule 36.10 applied. No extension of time had yet been applied for or ordered. Further, and even more critically, when the claimant accepted the Part 36 payment, it was entitled to accept it as of right and did not need the permission of the court. I repeat the critical wording of rule 36.13(1):

The indisputable fact was that the claimant accepted the £85,000 Part 36 payment on 31 March 2005, and did not need the permission of the court to do so. I do not see how that fact can be changed retrospectively by a subsequent order of the Deputy Master extending the defendants’ time to make into court a payment falling within rule 36.10(3)(a). The difficulty in the defendants’ way -- a difficulty which the Deputy Master addressed only scarcely if at all -- is that, before he made the order extending time for the payment to be made, the payment had in fact already been made and other things had already happened to which automatic and mandatory legal effects attached. One effect was that under rule 36.13(1) the claimant was automatically entitled to its costs of the proceedings up to 31 March 2005 (the date of its service of notice of acceptance of the payment). I do not see how the Master’s decision to extend the particular time limit to which his decision related can have changed that effect. Another associated effect was that, by virtue of rule 44.12(1)(b), there was a deemed order that the defendants must pay the claimant’s costs to 31 March 2005 on the standard basis. I do not see how the Deputy Master’s subsequent decision to extend time can have in some way removed that order.

A further effect was that the claimant had the right to obtain payment out of court of the £85,000 by making a request in the practice form (rule 36.16). The fact was that the claimant did make such a request, and did receive the £85,000. I do not see how the Deputy Master’s decision can have retrospectively nullified that effect, or can cause the fact of the lawful and proper receipt of the £85,000 to be disregarded.

Mr Hutton helpfully submitted to me that, to achieve the result to which the Deputy Master came, it was not enough for him simply to have the power and to exercise the power to extend the time limit in rule 36.10(3)(a). On the facts of this case, at least three other matters needed to be within the power of the court. They are as follows:

A number of authorities were cited to me. I do not in general find them of assistance and I hope that I will be forgiven if I do not deal with them all. I will, however, mention the decision of the Court of Appeal in Flynn v Scougall[2004] EWCA (Civ) 873, [2004] 1 WLR 3069. The case dealt with an unusual situation where a defendant had made a payment into court but had applied by application notice to reduce the payment (see rule 36.6(5)), but the claimant gave notice accepting the full unreduced payment before the defendant’s application notice could be heard. It was a very specialised situation. There was an evident clash between two provisions (rule 36.6(5) and rule 36.11(1)), for which the court had to fashion a pragmatic solution. There is no such clash here, and neither the decision nor the observations of the court in Flynn v Scougall deflect me from my conclusion.

For the foregoing reasons my opinion is that, even if the Deputy Master had jurisdiction to make the order which he made extending the defendants’ time under rule 36.10(3)(a) (and I am prepared to accept that he did have that jurisdiction), it does not follow in the circumstances of this case that he also had jurisdiction to deprive the claimant of the mandatory costs order in its favour which arose under the combination of rules 36.11(1), 36.13(1) and 44.12(1)(b). It follows that I must allow the claimant’s appeal.

I add briefly that Mr Hutton submitted to me that, even if the Deputy Master did have jurisdiction to do what he did, he erred in law in the manner in which he exercised the discretion. The submission was that it would have been different if the defendants’ application to extend time had bee made before the claimant validly accepted the defendants’ Part 36 offer. However, in the situation which actually existed when the matter was before the Deputy Master, he ought not to have exercised his discretion as he did. When the claimant decided to accept the Part 36 offer, it believed, and rightly believed, that as well as receiving £85,000 in satisfaction of its claim, it would also receive all of its costs to 31 March 2005. The Deputy Master’s exercise of discretion (if he had a discretion) effectively deprived the claimant of the option of refusing the Part 36 payment because of unacceptable costs consequences and fighting the case. I see force in Mr Hutton’s point, but given my view that the Deputy Master did not have the discretion which he purported to exercise, the issue does not need to be decided and I say no more about it.