Eiles v London Borough of Southwark

In this action I gave Judgment in favour of the Claimant on a claim involving damage caused by tree roots to the Claimant’s house. The judgment sum was £76,005.84 excluding interest.

After handing down judgment I heard submissions on costs from the Defendant who sought an order that, in respect of two elements of costs, I should order those costs in the Defendant’s favour and disallow those elements from the Claimant’s costs. Having heard arguments I rejected those submissions. As a result, I held that the Claimant was entitled to the costs of the action.

At that stage I was shown some “without prejudice save as to costs” correspondence which had been exchanged on behalf of the parties and which culminated in a letter from the Claimant which was expressed to be a Part 36 Offer.

The letter was dated 20 February 2006 and written by the Claimant’s Solicitors, Plexus Law, to the Defendant’s Solicitors, Barlow Lyde & Gilbert. It reads as follows:

“We refer to our previous correspondence and discussions in connection with a possible settlement of the above claim.

We have received instructions from our client and confirm that the Claimant is prepared to accept £60,000 by way of damages (inclusive of interest), together with 90% of the Claimant’s costs on the standard basis, such costs to be the subject of detailed assessment, if they cannot be agreed.

As this a Part 36 Offer, it is open for acceptance for 21 days, after which time it will only be accepted if we agree liability for costs, or if the Court gives permission.”

In the event, that offer was not accepted and, as I have found that the Claimant is entitled to £76,005.84 (excluding interest) and 100% of its costs, it follows that the Defendant has been held liable for more and the judgment against the Defendant is more advantageous to the Claimant than the proposals contained in the Claimant’s offer.

I therefore have to consider the effect of the Claimant’s offer of 20 February 2006 (“the Offer”). In this context CPR rule 36.21 provides for “costs and other consequences where Claimant does better than he proposed in his Part 36 Offer”.

Rule 36.21(1) provides that:

“This rule applies where at trial –

(a)

A defendant is held liable for more; or

(b)

the judgment against a defendant is more advantageous to the claimant,

than the proposals contained in a claimant’s Part 36 offer (including a Part 36 offer made under rule 36.2A)”.

In summary the consequences in such a case are that the Court may Order

The Defendant accepts that the Claimant has done better than the offer but submits that Rule 36.21 does not apply because:

The Claimant submits that the Offer is a valid Part 36 Offer, alternatively the Court should make an order that it has the same consequences.

The Offer is expressed by the Claimant to include an offer to accept 90% of the Claimant’s costs. It is therefore an offer which makes an offer in respect of costs.

In Mitchell v. James [2004] 1 WLR 158 the Court of Appeal considered the validity of an offer by claimants which included an offer for each party to bear its own costs. In giving the judgment with which the other members of the Court of Appeal agreed, Peter Gibson, L.J. said at para.28 at 166:

“…the offer, if accepted as, with hindsight, it should have been, would have included a not insignificant concession by the claimant. It might well be said that the encouragement of claimants to make such an offer by the prospect of obtaining the advantages set out in rule 36.21(2) and (3) was within the policy of Part 36.”

Despite that, he came to the conclusion that the draftsman of Part 36 did not intend terms as to costs to be included in a Part 36 offer. He gave four reasons for that conclusion at page166:

Then Peter Gibson L.J. concluded at para.34 at page 167:

“ I therefore conclude that a term as to costs is not within the scope of a Part 36 offer. That does not of course mean that a claimant cannot make an offer which includes a term as to costs; the court will have regard to that in exercising its usual discretion in relation to inter partes costs at the end of the case. As rule 36.1(2) states, nothing in Part 36 prevents a party making an offer to settle in whatever way he chooses. However, nothing in rule 36.1(1)(2) permits a party to include a term as to costs as part of a Part 36 offer for the purpose of obtaining an order for costs on an indemnity basis.”

Mr. Reeve, on behalf of the Council, therefore relies on Mitchell v. James as being of general application and submits that the offer made by the Claimant in this case is not a valid Part 36 Offer because it includes a provision as to costs.

Mr. Crowley, on behalf of the Claimant, sought to distinguish Mitchell v. James. He pointed out that in that case the Judge at first instance had stated that he was not satisfied that the outcome of the case would mean that the claimants had beaten the offer. On appeal it was accepted by the claimants that, in the absence of the costs offer, they had not achieved a more advantageous result than the offer. It was therefore submitted by Mr Crowley that in Mitchell v. James it was only the costs offer that made the judgment more advantageous to the claimants than the offer.

In this case Mr. Crowley pointed out that the judgment sum itself was more advantageous than the offer (£76,005.84 excluding interest compared to £60,000.00 including interest). In addition, so was the costs order (100% of the costs compared to 90%).

On this basis Mr Crowley submitted that each of the four reasons given by Peter Gibson L.J. in Mitchell v. James were not applicable on the facts of this case.

In relation to the first reason (inconsistency with rule 36.14), he submitted that the automatic costs consequences under rule 36.14 would not cause a problem in this case.

Rule 36.14 provides:

“Where a claimant’s part 36 offer is accepted without needing the permission of the Court the claimant will be entitled to his costs of the proceedings up to the date upon which the defendant serves notice of acceptance.”

The offer of 90% of the costs is therefore inconsistent with rule 36.14. However Mr Crowley submitted that the claimants would be “estopped” by the terms of the offer from obtaining 100% of the costs under rule 36.14 and so, if the offer had been accepted by the Defendant, the Claimant would have received £60,000.00 and 90% of its costs.

In relation to the second reason (rule 36.21 not applying to liability or judgments for costs), Mr Crowley submitted that there was no problem with the words “held liable” or “the judgment” in this case as the Defendant was held liable for more than £60,000 and the judgment sum of £76,005.84 was itself more advantageous to the Claimant. Thus the position was not like that in Mitchell v. James where the judgment sum was better than the offer.

In relation to the third reason (uncertainty), Mr Crowley submitted that there was no difficulty in the phrasing of the offer in this case because the judge at the end of the trial would give judgment for a sum and make an order for costs, both of which could immediately be compared with the offer. The assessment of success against the offer did not depend on the assessment of costs.

In relation to the fourth reason (abuse), Mr Crowley submitted that there was no risk of abuse from offers made in the way in which the Claimant’s offer had been made.

Mr Reeve, however, submitted that it was wrong to look at the particular terms of this offer; the conclusions in Mitchell v. James were of general application and a Part 36 offer which included a term of costs was not a valid offer.

I have come to the conclusion that Mr. Reeve is correct. While the terms of the judgment in this case might provide good grounds for upholding the validity of the offer made by the claimants, the validity of a Part 36 offer is something to be decided, in principle, at the date the offer is made. In this case, if I had given judgment for £55,000 and 100% of the costs, then before it could have been said that the claimant had done better than the offer, it would have been necessary to consider whether the additional 10% of the costs awarded over the 90% offered was more than the £5,000 reduction below the offer of £60,000. Equally, if I had given judgement for £65,000 and 80% of the costs, similar questions would have arisen. This shows that at the time of the offer was made there were potential problems which could have arisen under both the second and third reasons given by Peter Gibson L.J. for his conclusion that an offer in relation to costs affected the validity of the Part 36 offer.

Equally, in relation to his first reason there is a clear conflict between Part 36.14 and an offer which itself deals with costs consequences upon acceptance. Only by disapplying rule 36.14, which is expressed to apply without limitation to Part 36 offers, can the Offer be validly accepted.

I have therefore come to the conclusion that the Offer was not a valid Part 36 Offer because it included an offer in respect of costs. That, however, is not the end of the matter as there is an alternative argument based on rule 36.1(2)

The alternative argument depends on whether the offer, despite not being a valid Part 36 offer, should be ordered to have the same consequences as a Part 36 offer under the provisions of Rule 36.1(2)

Rule 36.1(2) provides

“(2)

Nothing in this Part prevents a party making an offer to settle in whichever way he chooses, but if that offer is not made in accordance with this Part, it will only have the consequences specified in this Part if the court so orders.”

On its face that gives the Court a wide discretion to order that an offer should have Part 36 consequences.

In Trustees of Stokes Pension Fund v. Western Power Distribution (South West) plc [2005] 1 WLR 3595 the Court of Appeal had to consider whether a “without prejudice save as to costs” offer by a defendant should have the same consequences as a Part 36 payment. In reviewing the discretion under rule 36.1(2) Dyson L.J. observed that it was unfortunate that the rules gave no guidance as to how the discretion should be exercised. The question whether an offer should be treated as a Part 36 Payment was however not uncharted territory and Dyson LJ, with whom Auld L.J. agreed, gave guidance as to the exercise of the discretion.

Dyson L.J. emphasised that it is a matter for the discretion of the court but stated that an offer should usually be treated as a Part 36 Payment if certain conditions were met. Those were that the offer must be expressed in clear terms so that there is no doubt as to what is being offered; that the offer should be open for acceptance for at least 21 days and otherwise accord with the substance of a Calderbank offer; that the offer should be genuine and not a “sham or non-serious in some way” and that the defendant should clearly have been good for the money when the offer was made. If any of those conditions were not met, Dyson L.J. stated that the offer should be given less weight than a payment into court and when none were satisfied it was likely to afford no costs protection. However, when the conditions were satisfied, he could see no reason in principle why the effect of an offer should differ from that of a Part 36 Offer.

Mr Crowley relies on his submissions by which he attempted to distinguish the decision in Mitchell v. James and submits that they are equally applicable to arguments why, on the facts of this case, the Court should now order that the Offer should have the costs consequences in Part 36 and, in particular, under rule 36.21.

Mr Reeve however submits that Mitchell v. James deals with this aspect and precludes reliance on rule 36.1(2). He refers to paragraph 34 of the judgment which I have set out above and, in particular the last sentence where Peter Gibson L.J. said: “However, nothing in rule 36.1(1)(2) permits a party to include a term as to costs as part of a Part 36 offer for the purpose of obtaining an order for costs on an indemnity basis.”

The reference to rule 36.1(1) (2) must, it seems, be a reference to rule 36.1(2). Mr Reeve submits that this reference means that rule 36.1(2) does not permit a court to order that an offer which includes a term as to costs should have the consequences specified in rule 36.21. I do not consider that this is the effect of that passage in the judgment of Peter Gibson L.J. In my judgment there was no intention to circumscribe the discretion which would otherwise apply under rule 36.1(2). Rather, in that passage the Court of Appeal was pointing out that an order under rule 36.1(2) that the consequences of rule 36.21 should apply to an offer did not thereby change the threshold test for rule 36.21.

The threshold test for applying rule 36.21 is that “A defendant is held liable for more; or the judgment against a defendant is more advantageous to the claimant” than the offer. In paragraph 31 Peter Gibson L.J. held that the words “held liable” and “the judgment” in rule 36.21 both connoted what the trial judge holds or decides on the substantive issues in the case as distinct from the ancillary issue of costs to be determined after the substantive issues were decided.

As a result, an offer as to costs cannot be used to overcome the threshold test for rule 36.21. Thus, if as in Mitchell v. James, the decision on the substantive issues was insufficient in itself to exceed the offer, the ancillary issue of costs could not be used to determine whether the defendant was held liable for more or the judgment against a defendant was more advantageous to the claimant than the offer.

In this case, though, the claimant has, independently of the offer as to costs, satisfied the conditions in rule 36.21 and does not need to rely on the success on costs to succeed in relation to the threshold test for rule 36.21. It is therefore not relying on the terms as to costs included as part of the Offer for the purposes of obtaining an order for costs on an indemnity basis. In those circumstances, I do not consider that there is any impediment to the exercise of the discretion under rule 36.21 to order that the Offer should have the consequences specified in Part 36.

My attention has been drawn to one other case where an invalid claimant’s Part 36 Offer was ordered to have the consequences in Part 36. In Hertsmere Primary Care Trust v The Estate of Balsubramanium Ranindra-Anandh [2005] EWHC 320 (Ch), Lightman J. had to deal with a case where a letter expressed as a Part 36 Offer failed to comply with the requirements of rule 36.21(6) which provides that the offer must provide that, after 21 days, it may only be accepted if the parties agree liability for costs or the court gives permission. Master Bowman held that the offer should be ordered to have the cost consequences of Part 36 and this was upheld on appeal by Lightman J. In giving reasons, it was pointed out that the defendant was not misled or prejudiced by the offer and it was said that the error was a pure technicality and that recourse to the technicality should not preclude the claimant’s entitlement to the benefit of rule 36.21. In addition, the defendant had been aware of the error but had not drawn it to the attention of the claimant, although the fact of it being invalid was mentioned. This conduct was held not to be acceptable under the CPR.

Whilst the facts of that case are different, it illustrates the fact that a claimant’s offer is an invalid Part 36 Offer does not preclude it being treated as having the relevant consequences in Part 36.

In this case, in deciding whether to exercise my discretion to make that order, I have regard to the observations of Dyson L.J. in Trustees of Stoke Pension Fund and also, of course, to the overriding objective under rule 1.1 and the requirement to deal with cases justly and in particular, save expense and deal with the case in ways which are proportionate to the amount of money involved.

In relation to the Offer, the defendant does not contend that there is anything unclear or uncertain about the terms of the Offer and it was expressed to be open for acceptance for 21 days and satisfied the requirements of rule 36.21(6). This is not a case where the defendant was misled or prejudiced by the terms of the Offer. It was a serious offer and being a claimant’s offer was not one which raised a requirement for the claimant to be good for the money. There is nothing in the considerations raised in Mitchell v. James to prevent the exercise of the discretion under rule 36.21 but rather those considerations favour the exercise of that discretion.

The considerations which apply to the exercise of the discretion under rule 36.1(2) in the case of a defendant’s offer as in Mitchell v. James are, I consider, different to those which apply in the case of a claimant’s offer. “Reverse” without prejudice offers made by a claimant are a comparatively new feature and, as Lord Woolf pointed out in Petrotrade Inc v. Texaco Ltd (Note) [2002] 1 WLR 947 at para. 59, the provisions of rule 36.21(2) and (3) are important because without them claimant’s Part 36 offers would be of no value to a claimant. It is those rules which create the incentive for a claimant to make a Part 36 offer. Otherwise, if a claimant offered to accept less than it was awarded then it is generally unlikely to have any effect on costs or otherwise. The discretion to award costs on an indemnity basis would not be engaged without Part 36 and neither would enhanced interest be available. Thus, the provisions of Part 36 are of considerable importance in the context of the beneficial effect of claimant’s offers.

The purpose of giving an incentive to a claimant’s Part 36 offer is to encourage settlements and obviously this meets the overriding objective. When therefore, independently of the costs consequences, the sum which a claimant offers to accept is less than the judgment sum, I can see no reason in principle, why the court should not exercise its discretion under rule 36.1(2) to order that the claimant’s offer should have the costs consequences under rule 36.21.

In addition, as Mr. Crowley points out, if the consequences of Part 36 did not apply to the Offer, the claimant would be in a worse position than if it had made a higher offer, that is for £60,000 and 100% of its costs. The encouragement of compromise would hardly be assisted if Part 36 applied to the offer if it had included the automatic 100% of costs under rule 36.14 but not if it included 90% of costs. I do not consider that there is anything which favours such an outcome.

It seems to me therefore that all the arguments relied upon by Mr Crowley in relation to the facts of this case are apt arguments for why, in this case, the Court should now order that the offer made by the Claimant should have the costs consequences in Part 36 and, in particular, under Rules 36.21.

As a result, I consider that the claimant’s offer should have those consequences because the defendant has been held liable for more than £60,000 and, on this basis, the judgment against the defendant is more advantageous to the claimant than the proposals contained in the claimant’s offer, quite independently of whether the further advantage of the costs offer is taken into account.

Under Rule 36.21 the first matter which I have to consider is whether I should make orders for enhanced interest, indemnity costs and enhanced interest on those costs. Rule 36.21(4) states that where rule 36.21 applies, the court will make orders under rules 36.21(2) and (3) unless it considers it unjust to do so. In considering whether it would be unjust, rule 36.21(4) states that the court will take into account all the circumstances of the case including the terms of the offer; 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 or refusing to give information for the purposes of enabling the offer to be made or evaluated.

The defendant submits that I should not make orders under rule 36.21(2) and (3) for a number of reasons. First, it submits that in the light of the ruling in Mitchell v. James, the defendant was entitled to treat the Offer as invalid under Part 36.1(2) or, at the very least, had grounds to doubt the effect of the Offer and there was cause for uncertainty. There is no suggestion that this was the position of the defendant and the defendant did not write to express any concerns at the time. Indeed the defendant made a Part 36 Offer which also included a non-standard provision as to costs. The Offer was in clear terms and I do not accept that there is anything unjust in making the relevant orders.

It seems to me that if a party wishes to take a point on the invalidity of a Part 36 Offer, it should notify the other party as soon as possible and not wait until the hearing on costs to raise it for the first time. Under the CPR and the overriding objectives, I consider that parties must co-operate in this way.

The defendant submits that, at the heart of the case was a difficult question of causation on which different expert opinions could be legitimately held. There was evidently a central question of causation with a degree of complexity which I had to resolve but I do not consider that this affects the position. Indeed, it is in just such cases where costs are high and the sums in dispute are small that the parties should be encouraged to settle.

The defendant also submits that the offer represented a small discount relative to the litigation risk. Again I do not consider that this affects the position. The Offer followed a claimant’s Part 36 Offer on 31 October 2005 and a defendant’s Part 36 Offer on 8 December 2005. The claimant’s previous offer was higher than I awarded and the defendant’s offer lower than the sum awarded. This shows that the parties were assessing the litigation risk and, in the Offer, the claimant more accurately assessed the risk.

This is not a case where there was a lack of information in the hands of the defendant. The exchange of offers shows that each party had sufficient information to make and evaluate offers and there is no conduct with regard to the giving or refusing to give information which affects the position. The Offer itself was made on 20 February 2006 and therefore allowed a sufficient period before the trial commencing on 27 March 2006 for the defendant to consider it. It followed a “without prejudice save as to costs” offer of 15 February 2006 in similar terms but not expressed as a Part 36 Offer.

In addition, the defendant refers to the fact that this litigation is between two rival sets of insurers. I cannot see that this makes an order unjust. Indeed the opposite could be argued.

The defendant makes further submissions on each of the orders for enhanced interest, indemnity costs and enhanced interest on indemnity costs which I deal with below. However, there is nothing in the general submissions which leads me to the conclusion that those orders would be unjust. As I have said these enhancement provisions provide the only incentive for a defendant to accept the offer and therefore, as reinforced by rule 36.21, in the absence of some reason why it would be unjust to make the order, the claimant who meets the threshold test should be awarded enhanced interest, indemnity costs and enhanced interest on costs. In this case, the balance is clearly in favour of the claimant who made the Offer and should be entitled to the benefit of the provision.

I now turn to consider the appropriate orders under rules 36.21(2) and (3). In a number of authorities cited to me reference is made to passages in the judgment of Lord Woolf MR (with whom the other members of the Court agreed) in Petrotrade Inc v. Texaco Ltd (Note) [2002] 1 WLR 947 where at para. 59 to 64 he said:

In considering the particular submissions on the application of rules 36.21(2) and (3), I bear those observations in mind.

In relation to enhanced interest under rule 36.21(2), the claimant seeks interest at 10% above base rate (that is 14.5%) from 14 March 2006. The defendant contests that rate. So far as the rate of interest is concerned, there is obviously a broad discretion. In Earl v. Cantor Fitzgerald Moore-Bick J, as he then was, awarded enhanced interest at 5% above base. In coming to that conclusion, he was not persuaded that the court should start from the assumption that it should award the maximum amount of 10% unless there was some reason not to do so. He considered that in arriving at the rate of interest the court, among other things, should take into account the conduct of the defendant in pursuing the matter to trial. He also considered that it was necessary to stand back and consider whether, viewed in the round, any given award would provide a disproportionate benefit to the claimant or impose a disproportionate burden on the defendant.

This claim was made as a subrogated claim by insurers against the defendant who is also insured. I do not consider that there is anything disproportionate to either party by an award of substantially enhanced interest. There is nothing in particular in this case in terms of conduct which I consider should be reflected in the rate. As Lord Woolf said in Petrotrade at para. 63 the award of interest is, in part, to compensate a claimant for having to come to court to bring proceedings.

In such circumstances, I consider that the maximum rate should be reserved for cases where there is some particular reason in terms of conduct, for instance, for that maximum rate of 10% above base rate to be applied. It seems to me that I should also bear in mind that a commercial rate of interest might be, say, 2% above base. In all the circumstances, I consider that 8% above base is the appropriate rate and I award this from 14 March 2006.

In relation to indemnity costs under rule 36.21(3)(a), the claimant seeks indemnity costs from 14 March 2006. The defendant submits that a proportion of, say, 50% of indemnity costs should be awarded. The order for indemnity costs under rule 36.21(3) is distinct from the general discretion to award indemnity costs which arises when there is unreasonable conduct. It is an order which the court makes to give an incentive for the claimant to make and the defendant to accept reasonable offers.

I can see no basis for a partial award of indemnity costs. Rather, I consider that the claimant should have the benefit of indemnity costs from 14 March 2006.

Finally, I consider the position in relation to interest on costs. The claimant seeks an order that the defendant should pay the claimant interest on the claimant’s costs incurred between 14 March 2006 and 22 June 2006 at 14.5%. The defendant submits that because there is a CFA in this case the order sought by the claimant for enhanced interest on costs incurred is not appropriate as such costs are only incurred on judgment. Otherwise, the defendant submits that interest should not be recoverable until the claimant has paid the relevant costs.

The discretion to award interest on costs has been considered in two Court of Appeal decisions: McPhilemy v. Times Newspapers (Costs) [2002] 1 WLR 934 and KR v. Bryn Alyn Community (Holdings) Ltd (In Liquidation) [2003] PIQR P562.

At para. 23 of McPhilemy, Chadwick L.J. stated that the purpose of enhanced interest on costs under rule 36.21(3)(b) was to redress the perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment: Hunt v. R M Douglas (Roofing) Ltd [1990] 1 AC 398 at 415F. Dealing with the position of a successful claimant, he added:

“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 rule 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 L.J. (as he then was) referred to the importance in libel actions of making an order for indemnity costs when rule 36.21 applied “irrespective of whether or not the claimant is represented under a conditional fee arrangement”.

In KR v. Bryn Alyn Waller L.J. said this about an order for enhanced interest on costs:

“There may be cases where the evidence will demonstrate actual dates when clients had to put up funds and from which interest will run. Without such evidence the court can do no more than Chadwick L.J. did and make interest run from the date when the work done or liability for disbursements was incurred. The rate of interest, following the lead of Chadwick L.J., would have been assessed at 4 per cent over base being “(albeit generously) the cost of money”. If it were questioned why there should be a difference between the rate of interest on costs and the rate of interest on damages, the answer would be that the rate on damages compensates also for the general impact of proceedings (see para. [63] of the judgment of Lord Woolf in Petrotrade Inc v. Texaco Ltd . There must not be double compensation for the impact and the provisions of Pt 36.21 are not intended to be penal (see para. [62] of the judgment of Lord Woolf in the Petrotrade case).”

In this case, there is a conditional fee agreement and I have no evidence of the actual dates when clients had to put up any funds. In principle, I can see no reason why the provisions of rule 36.21(3) should not apply to a case where there is a conditional fee agreement as much as any other case and this was evidently the view of Simon Brown L.J. in McPhilemy. The claimant says that interest should apply to costs from 14 March 2006 and that such costs will include base costs plus the relevant success fee (which is to be assessed or agreed). I accept that and see no reason why the relevant costs should not include the success fee.

Whilst the absence of evidence of the actual dates when clients had to put up funds would preclude a specific date being set,the solution in McPhilemy and KR v. Bryn Alyn that interest should run from the date when the work done or liability for disbursements was incurred would again need evidence to establish the relevant dates. The absence of evidence on specific dates does not therefore seem to be determinative of the date from which the court, in its discretion, may order interest to run under rule 36.21(3)(b). In this case, Mr Crowley submits that the defendant should pay the claimant interest on the costs incurred between 14 March 2006 and 22 June 2006. Mr Reeve submits that interest should not be recoverable until the claimant has paid the relevant costs.

In McPhilemy Chadwick L.J. said that the purpose of interest under rule 36.21(b) was to redress “the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment” and to compensate a claimant “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.”

That perceived unfairness derives from the decision in Hunt v. R M Douglas (Roofing) Ltd [1990] 1 AC 398. In that case Lord Ackner stated that the balance of justice favoured the “incipitur rule” which provided that interest was to be awarded on costs from the date of judgment, rather than the later date of the costs certificate, the “allocatur rule”. He gave these reasons:

“1.

It is the unsuccessful party to the litigation who, ex hypothesi, has caused the costs unnecessarily to be incurred. Hence the order made against him. Since interest is not awarded on costs incurred and paid by the successful party before judgment, why should he suffer the added loss of interest on costs incurred and paid after judgment but before the taxing master gives his certificate? 2. Since, as the Court of Appeal rightly said in the Erven Warnink case [1982] 3 All E.R. 312 payments of costs are likely nowadays to be made to lawyers prior to taxation, then the application of the allocatur rule would generally speaking do greater injustice than the operation of the incipitur rule. Moreover, the incipitur rule provides a further necessary stimulus for payments to be made on account of costs and disbursements prior to taxation, for costs to be more readily agreed, and for taxation, when necessary, to be expedited, all of which are desirable developments. Barristers, solicitors and expert witnesses should not be expected to finance their clients' litigation until it is completed and the taxing master's certificate obtained. If interest is not payable on costs between judgment and the completion of taxation, then there is an incentive to delay payment, delay disbursements and taxation. 3. It is common ground between the parties that the unsatisfactory situation illustrated in K. v. K. can be simply dealt with by an express agreement between the solicitor and his client that any interest recovered on costs and disbursements after judgment is pronounced but before the taxing master's certificate is obtained, which costs and disbursements have not in fact been paid prior to taxation shall as to the interest on the costs belong to the solicitor, and as to the interest on disbursements be held by him for and on behalf of the person or persons to whom the disbursements are ultimately paid.”

Mr Reeve submits that McPhilemy and Hunt both indicate that payment of costs is generally the determining factor in considering whether interest should be paid to a litigant.

However, Mr Crowley refers me to what Moore-Bick J. said in Earl at p. 5 of the transcript: “an award of enhanced interest on costs is intended to act as a spur to defendants to accept reasonable offers of compromise.” On the facts of that case he held that the Legal Services Commission was entitled to that interest as much as a private litigant. Mr Crowley also relies on the solution adopted in both McPhilemy and KR v. Bryn Alyn.

In general, costs (or disbursements) are incurred by a solicitor, counsel, an expert or others when they carry out their work or provide their services. The question of the date on which they are paid for their work or services by the litigant will depend on the terms of payment, how much leeway is given on payment and whether interest is charged. It seems to me that, particularly in cases where there are conditional fee agreements, the formulation of an order which depends on payment would be more akin to applying the indemnity principle for costs recovery to a situation where interest under rule 36.21(3)(b) is a broader discretion. In some cases it might be appropriate for interest to run from the date of payment by the litigant. However, in this case the fact that a success fee may be payable only on later assessment or agreement would point to the proper order in this case being the solution adopted in McPhilemy and KR v. Bryn Alyn that interest should run from the date on which the work was done or liability for disbursements was incurred.

I therefore adopt that formulation which is a “costs incurred” rather than a “costs paid” approach.

So far as the rate of interest is concerned, as Waller L.J. pointed out in KR v. Bryn Alyn, the purpose of enhanced interest under rule 36.21(2) is different from rule 36.21(3). As set out by Lord Woolf in Petrotrade the rate of interest on damages under rule 36.21(2) compensates also for the general impact of proceedings, whilst the rate under rule 36.21(3) does not have that purpose. The rate of interest on costs should therefore reflect (albeit generously) the cost of money. InMcPhilemy and KR v. Bryn Alyn the Court of Appeal adopted a rate of 4% over base and that seems to me to be the appropriate rate in this case.

I therefore decide that the Offer of 20 February 2006 was not a valid Part 36 Offer because it included a provision as to costs. However, given the terms of the Offer, the outcome of the case and other circumstances, this is a case where I should exercise my discretion and order under rule 36.1(2) that the Offer should have the consequences specified in Part 36. On that basis, I consider that the appropriate order is that:

Otherwise, as previously ordered:

On this basis I trust that the parties can agree the calculations for interest. Subject to any further submissions, I would propose that the defendant should pay the claimant’s costs of dealing with the issues in relation to the Offer and, consistent with the findings set out above, they should also be assessed on an indemnity basis, if not agreed.