ABFA Commodities Trading Limited v Petraco Oil Company SA

The order to be made in respect of costs and interest, in particular having regard to the offer made by Petraco under Part 36.

The amount of any interim payment on account of costs.

Whether the court should make a declaration confirming that VTB Commodities has no interest the amount held by PCB Byrne LLP to the order of the court.

The interest rate under the Judgments Act 1838.

the Part 36 Offer satisfied the requirements of CPR Part 36; and

Petraco has “beaten” the Part 36 Offer.

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—

… [W]here paragraph (1)(b) applies, the court must, unless it considers it unjust to do so, order that the claimant is entitled to—

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—

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.”

The effect of CPR r 36.17(4) is that the court does not have an unfettered discretion to depart from the stipulated consequences of failing to beat the Part 36 offer, and the burden on a party who has failed to beat the Part 36 offer to show that it would be unjust for the stipulated consequences to follow is a “formidable obstacle” to the obtaining of a different order.

The factors identified r 36(17)(5) are not exhaustive, and the court can have regard to all of the circumstances of the case (Adrian Smith v Trafford Housing Trust [2012] EWHC 3320, [13] and Lilleyman v Lilleyman (No 2) [2012] EWHC 1056 (Ch), [16]).

In Walsh v Singh [2010] EWHC 1167 (Ch), no order for costs was made, a “beaten” Part 36 offer notwithstanding.

In Sulaman v Axa Insurance plc [2009] EWCA Civ 1331, the Court of Appeal rejected an appeal against a costs order which awarded the claimant only a third of her costs, applying the beneficial consequences of beating the Part 36 Offer only to that third ([19]-[20]).

In Lilleyman v Lilleyman (No 2) [2012] 1 WLR2801, Mr Justice Briggs gave the party who had “beaten” the payment in only 80% of its costs from the date of the payment in, with the Part 36 benefit of interest on those costs applying to the 80% order.

In Ahuja Investments Ltd v Victory Game Ltd [2021] EWHC (Ch), the court awarded the claimant 75% of its costs, and otherwise applied the Part 36 enhancements.

First, he argued that the principal focus under this factor is on the circumstances of the making of the offer and the provision of information in relation to it (relying on Lilleyman v Lilleyman (No 2) [2012] 1 WLR 12801, [14], [16]).

Second, he rightly noted that I had already marked my disapproval of Petraco’s conduct by refusing to enforce the undertaking in respect of loss of $1.6m which I found to be established.

“The protection of a generous Part 36 offer would enable the offering party to conduct its part in the litigation at the offeree’s potential expense without regard to the obligations and constraints which the achievement of the overriding objective now place upon civil litigants.”

While I accept that there will be criticisms of the other side’s conduct in a case which might merit a CPR Part 44 allowance absent a Part 36 offer, but which would not be sufficient to make it unjust to apply the CPR 36.17(4) consequences in their full width, the conduct in this case was sufficiently serious and prolonged that I have concluded it does need to be reflected in the orders made by the court, the Part 36 Offer notwithstanding.

First, the amount of the offer which was said to be only 4-6% of the amount then claimed. I am satisfied that this understates the position but accept that the offer involved a relatively limited discount on the value of the claim:

Second, at a “without prejudice” meeting on 27 September 2019, Stephenson Harwood LLP informed PCB Byrne LLP that Petraco would be making a Part 36 offer “less a nominal sum in order to get enhanced interest and costs if they succeed at trial”. This is apparent from an internal PCB Byrne LLP email sent after the meeting, privilege in which was waived, and which I accept is broadly accurate (there having been a mis-recollection on the Mishcon de Reya side prior to waiver as to what was said at the meeting). I accept that it is likely that Petraco sought to pitch the Part 36 Offer so as to gain the benefit of the Part 36 regime while maximising the amount recoverable if the offer was accepted. That of itself does not engage factor (e): most decisions in litigation are tactical. The issue is whether they succeeded in that aim.

Third, it is said that this was not a claim with overwhelming prospects of success. I agree with that assessment. Petraco succeeded at trial because I upheld its case on difficult and eminently arguable issues of Russian law.

While factor (e) is identified in CPR 36.17(5) as one of five “circumstances of the case” which must be “taken into account”, alongside factors which clearly have weight rather than all or nothing effect, in those cases in which the court has found that there has been no genuine attempt to settle, this has been regarded as a factor sufficient on its own to disapply the Part 36 regime altogether (Yieldpoint Stable Value Fund LP v Kimura Commodity Trade Finance Fund Ltd [2023] EWHC 1512 (Comm), Sleaford Building Services Ltd v Isoplus Piping Systems Ltd [2023] EWHC 1643 (TCC)).

There is also authority which suggests that the court will ordinarily apply all the beneficial incidents of beating a Part 36 Offer or none of them: see JLE v Warrington & Halton Hospitals NHS Foundation Trust [2019] 1 WLR 6498, [23(iv)] and [32] approved by Phillips LJ in Telefonica UK Ltd v Office of Communications [2020] EWCA Civ 1374, [42]. At first blush, that might be thought curious because CPR 36.17 embraces consequences of two different kinds:

There is no general principle that where an otherwise successful party has put forward a dishonest case in relation to an issue in the litigation, the general rule that costs follow the event is thereby wholly displaced.

The court's powers in relation to the putting forward of a dishonest case include (a) disallowance of that party's costs in advancing that case, (b) an order that he pay the other party's costs attributable to proving that dishonesty, and (c) the imposition of an additional penalty which, while it must be proportionate to the gravity of the misconduct, may in an appropriate case extend to a disallowance of the whole of the successful party's costs, or an order that he pay all or part of the unsuccessful party's costs.

In framing an appropriate response to such misconduct, the trial judge must constantly bear in mind the effect of his order upon the process of detailed assessment which will follow, in the absence of agreement, in particular to avoid unintended double jeopardy.

“[T]ake a case where dishonesty has been found as in the instant case. Would the fact that the paying party had not sought an order from the judge reflecting that misconduct deprive that party of referring on the assessment to the holding of the judge that a forgery had been committed when considering whether the costs incurred by the dishonest party were reasonable? I cannot think that it should. What then is the position if a paying party has a finding of dishonesty of the winning party in his favour, and raises that factor as a ground for a reduction of the costs at the end of the trial? Clearly there is no problem if the judge's order makes “no order as to costs”, but if the judge orders a reduction by say 20% without more, what would be the natural construction of that order? My view is that the natural construction of such an order, unless the contrary is expressly stated, is that the party guilty of dishonesty should not be entitled to say on assessment, ‘my costs incurred in seeking to make a dishonest case can be taken as reasonably incurred because the judge has made a reduction’. If the dishonest party was entitled to succeed on such an argument, he will hardly suffer any penalty at all.

It seems to me that consideration of a party's conduct should normally take place both at the stage when the judge is considering what order for costs he should make, and then during assessment. But the court will want to ensure that dishonesty is penalised but that the party is not placed in double jeopardy. Ultimately, the question is one of the proper construction of the order made by the judge. Thus it will be important for the judge, who is asked to take dishonesty into account at the end of a trial when considering the order as to costs, to consider what is likely to occur on assessment. Where dishonest conduct is being reflected in an order made by the trial judge, it must be wise for the future for judges to make clear whether they are making the order on the basis that, on the assessment, the paying party will still be entitled to raise the dishonesty in arguing that costs incurred in supporting the particular dishonesty were unreasonably incurred. Judges may also want to consider whether to make an order under [what is now rule 44.11] and it would be wise to do that before considering precisely what order to make in relation to the costs of a trial generally.”

First, is it open to the Judge to reflect the costs incurred by the successful but dishonest party in a percentage reduction in the costs awarded, or must they be assessed to avoid any risk of recovery? There have been a number of cases signalling a pragmatic preference for orders of the former kind when an “issue-based” cost order is made: e.g. Burchell v Bullard [2005] EWCA Civ 358, [29]-[30] and Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Limited [2008] EWHC 2280(TCC), [72(iv)-(v)] and there is a “steer” in this direction in CPR 44.2(7). Provided that the proportion which the Judge deducts is intended, in a broad-brush way, to capture the costs incurred in advancing the dishonest case, I can see no objection to the issue being dealt with exclusively at the stage of the judge’s costs order, such that there would be no ability to raise the issue again on assessment.

Second, whether any principle that costs in support of a dishonest case are necessarily unreasonably incurred means that the court must refuse to apply CPR 36.17(4)(b) to the extent of any such costs, even though CPR 36.17(3) contemplates that the court has a discretion? In Morgan v UPS [2008] EWCA Civ 1476, [21], Longmore LJ upheld the judge’s order that a claimant who had dishonestly exaggerated personal injuries he had suffered, but had nonetheless “beaten” a payment into court was entitled to his costs. In Fox v Foundation Piling [2011] EWCA Civ 790, [48], the Court noted that “the fact that the claimant has deliberately exaggerated his claim may in certain instances not be a good reason for depriving him of part of his costs:”.

Third, there have also been a number of clear signals that costs awards do not simply reflect the costs incurred by reference to the success or failure of a party on each issue fought, but also, to a significant extent, who is the overall successful party in the litigation (e.g. Fox v Foundation Piling [2011] EWCA Civ 790, [62] referring to “a growing and unwelcome tendency by first instance courts … to depart from the starting point set out in rule 44.3(2)(a) too far and too often”). However, the decision in Ultraframe suggests that “winner’s premium” in any costs orders will not extend to the recovery of any costs incurred in advancing a dishonest case, which the court should seek to exclude from any costs recovery.

There were still factual issues on both the VTB Commodities and Petraco sides as to (i) the extent of VTB Commodities’ contractual entitlements from time-to-time; and (ii) whether Petraco acquired title to the Disputed Parcel and the Other Cargoes which would have required some disclosure, witness evidence and cross-examination.

There would still have been expert evidence on the quantum aspects of the claim.

The “fixed” costs of the trial would still have been incurred, together with the costs of determining the disputed issues of Russian law, quantum and relating to the exercise of the court’s discretion to enforce the Undertaking.

In arriving at the 40% figure, I have sought to address all of the costs incurred by Petraco in relation to the Petraco Knowledge case, such that it will not be open to VTB Commodities to seek a further reduction on assessment.

100% of its costs on a standard basis up to 6 November 2019.

100% of its costs on a standard basis for the period from 7 November 2019 to 9 July 2021; and

40% of its costs on an indemnity basis for the period from 10 July 2021.

The specified rate of 10% was not a starting point but the maximum possible enhancement ([31]).

The purpose of the provision was not entirely compensatory ([33]).

The court has a discretion to include a non-compensatory element in the award but the level of interest awarded must be proportionate to the circumstances of the case which may include (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 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.

I will award an uplift over US Prime of 3% on the interest payable on the damages I have awarded, subject to a maximum overall interest rate of 10% (the court usually assuming in the absence of contrary evidence that a party bringing a US dollar claim is sufficiently compensated by an award of interest at US Prime).

I will award an uplift over the Bank of England base rate of 4% on the interest payable on costs subject to a maximum overall interest rate of 10% (the court usually assuming in the absence of contrary evidence that a party bringing a sterling claim will borrow at base rate plus 1%).

“It is clear that the question, at any rate now, is what is a “reasonable sum on account of costs”. It may be that in any given case the only amount that it is reasonable to award is the irreducible minimum. I do not, however, accept that that means that “irreducible minimum” is the test. That would be to introduce a criterion (a) for which the rules do not provide’ (b) which is not the same as the criterion for which they do provide; and (c) which has potential drawbacks of its own, not least because it begs the question whether it means those costs which could not realistically be challenged as to item or amount or some more generous test. On one approach it admits of every objection to costs, which cannot be treated as fanciful.

What is a reasonable amount will depend on the circumstances, the chief of which is that there will, by definition, have been no detailed assessment and thus an element of uncertainty, the extent of which may differ widely from case to case as to what will be allowed on detailed assessment. Any sum will have to be an estimate. A reasonable sum would often be one that was an estimate of the likely level of recovery subject, as the costs claimants accept, to an appropriate margin to allow for error in the estimation. This can be done by taking the lowest figure in a likely range or making a deduction from a single estimated figure or perhaps from the lowest figure in the range if the range itself is not very broad.”

Petraco is likely to recover at least 60% of the £818,037.47 incurred prior to 6 November 2019 on a standard basis: which I round to £500,000.

I am unable to apportion costs incurred after 6 November 2019 as between those incurred up to 9 July 2021 and those incurred afterwards, but I would assume that by far the greater proportion of these costs fall within the latter period. 40% of the total costs for that period is about £2m. As I have ordered assessment on an indemnity basis, I am satisfied that at least £1.4m will be recovered on assessment.

As a result, I order an interim payment of £1.9m to be paid within 14 days.

On 17 May 2019, Sir William Blair made an order for sale of the Disputed Parcel and required VTB Commodities to pay US$30m or its Euro or Sterling equivalent into court, to be held to the order of the court.

On 28 May 2019, Mr Justice Robin Knowles varied that order by consent, to allow the US$30m or equivalent to be paid into the client account of VTB Commodities’ then solicitors to be held to the order of the court, as an alternative to payment into court. This was not intended to affect the substantive position – in each case the sum was held to the order of the court.

On 28 September 2020, Mr Justice Jacobs varied that order by consent, to allow the US$30m or equivalent to be paid into the client account of VTB Commodities’ new solicitors, PCB, as an alternative to payment into court. Once again, this was not intended to affect the substantive position – in each case the sum was held to the order of the court.

“I consider that the use of this phrase is intended to create a situation which is equivalent to that where the money has been paid into court. The difference is simply a ministerial difference for the convenience and benefit of the parties.”

While the money was held to the order of the court, it could not be treated as an asset available to VTB Commodities’ creditors in the event of insolvency (Peak Hotels and Resorts Ltd v Tarek Investments Ltd [2015] EWHC 386 (Ch), [41]-[43] and WA Sherratt Ltd v John Bromley Ltd [1985] QB 1038).

VTB Commodities would retain an equity of redemption over the funds which might, if the court so ordered, be paid out (Crumpler v Candey Ltd [2018] EWCA Civ 2256, [87]).

However, Sir William Blair’s order provided that the trial would determine “the rights and obligations” of VTB Commodities and Petraco in respect of the Secured Sum including VTB Commodities’ right to seek repayment of those amounts. I have held that VTB Commodities had no rights or interests in the Secured Sum.

The effect of that determination was to extinguish any right of redemption VTB Commodities may have had, and the order I made on 18 March 2024 for payment of the Secured Sum to Petraco would also have had that effect, to the extent any equity of redemption had not already been extinguished.