Van Oord UK Ltd & Anor v Allseas UK Ltd

INTRODUCTION

At a hearing on 12 November 2015, I handed down the substantive Judgment in this case ([2015] EWHC 3074 (TCC)). The net effect of that Judgment was that the claimant (OSR) was liable to repay to the defendant (AUK) the sum of £2,768,405.17. The outcome of the litigation therefore represented a significant loss for OSR.

Thereafter, I was asked to decide a variety of issues concerned with interest and costs. At the hearing, I gave brief reasons for the following rulings:

It was agreed that, due to time constraints, I would provide detailed reasons in writing for my conclusions under sub-paragraphs (a), (d), and (e) above. This short Judgment sets out those reasons.

THE PART 36 OFFER

Rules 36.2, 36.5 and 36.6 of the CPR make plain that offers can be made by both a claimant and a defendant, whether or not the defendant is making a counterclaim. Rule 36.2(3) states that offers can be made in respect of claims and counterclaims and provides a ‘signpost’ to Rules 20.2 and 20.3 (which provide that “counterclaims and other additional claims are treated as claims and that references to a claimant and a defendant include a party bringing or defending an additional claim”.) Rule 36.5(1) sets out the form and content required of a Part 36 offer. One stipulation is that the offer must state whether it takes into account any counterclaim (r. 36.5(1)(e)).

If a Part 36 offer is ‘beaten’, in the sense that the party making the offer does better in the litigation than it would have done if the terms of the offer had been accepted by the other side, then different consequences follow, depending on whether or not the offer was a claimant’s offer or a defendant’s offer. A successful claimant is entitled to a raft of enhancements set out at r. 36.17(4) as follows:

Subject to paragraph (7), where paragraph (1)(b) applies, the court must, unless it considers it unjust to do so, order that the claimant is entitled to—

(a)

interest on the whole or part of any sum of money (excluding interest) awarded, at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired;

(b)

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

(c)

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

(d)

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

(i)

the sum awarded to the claimant by the court; or

(ii)

where there is no monetary award, the sum awarded to the claimant by the court in respect of costs—

Amount awarded by the court	Prescribed percentage
Up to £500,000	10% of the amount awarded
Above £500,000	10% of the first £500,000 and (subject to the limit of £75,000) 5% of any amount above that figure.

On the other hand, a defendant who has beaten its Part 36 offer has a more limited entitlement, set out in r.36.17(3) as follows:

“(3)

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

(a)

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

(b)

and interest on those costs.”

The position can be more complicated if the defendant has a counterclaim, particularly if the Part 36 offer takes into account a counterclaim not yet formulated. In such circumstances, if a Part 36 offer is made by a defendant, it will be a question of construction as to whether it is to be treated as a claimant’s offer or a defendant’s offer under Part 36.

This approach can be found in the Court of Appeal decision in AF v BG [2010] 2 Costs LR 164. In that case, there was an argument as to whether the offer letter made by the respondent was a Part 36 offer at all and, even if it was, whether it was to be construed as a claimant’s offer under Part 36. The offer letter in that case, set out at paragraph 6 of the judgment of Lloyd LJ, referred to the existence of the respondent’s counterclaim which had not yet been pleaded, but which was asserted in a specific sum in the offer letter. The offer expressly took into account both the claim and the counterclaim, and resulted in the respondent offering to accept a smaller sum than the amount of its counterclaim in settlement of the case. The letter went on to say:

“This letter is intended to have the consequences of a claimant's offer to settle in accordance with Part 36 of the Civil Procedure Rules…

We should point out that you will face potentially adverse costs consequences in the event that you choose not to accept the proposal set out in this letter and any judgment subsequently awarded is at least as advantageous to our client as the offer set out in this letter. In these circumstances our client will seek:

(1)

his costs on the indemnity basis with interest at 10% above base rate on those costs; and

(2)

interest on his damages at 10% above base rate,

from the date on which the Relevant Period expired.”

Lloyd LJ ruled that the offer was a valid Part 36 offer. The next question was whether it was a valid claimant’s Part 36 offer, a finding which would bring with it the possibility of the r.36.17(4) enhancements referred to in paragraph 5 above, or whether it was a defendant’s offer, which brought the more limited r.36.17(3) benefits referred to in paragraph 6 above. The Court of Appeal concluded that the offer letter was a claimant’s Part 36 offer letter. This allowed the respondent to argue for the enhancements although, as Lloyd LJ said at paragraph 23 of his judgment, the question of whether the court would think it just to allow indemnity costs and enhanced interest under the relevant rule “is quite another matter.”

In the present case, the parties are agreed that an offer made by AUK to OSR dated 13 January 2014 was a Part 36 offer. The issue of substance, therefore, was whether it was similar to the offer made in AF v BG or whether it was a defendant’s Part 36 offer. I deal first with the background, and then set out the letter and my conclusions as to its proper construction.

OSR had made what was called the Consolidated Claim in December 2012. AUK had responded to it some months later. Later in 2013, OSR sent a detailed letter of claim in accordance with the TCC pre-action protocol. AUK had responded to that too. In their response, AUK denied the claims and noted that, because large sums had already been paid to OSR on an interim basis, in respect of these very claims, OSR had in fact been overpaid. It does not appear that a separate, stand-alone counterclaim was asserted by AUK at any stage prior to the commencement of proceedings in April 2014.

At the end of 2013, AUK reached a global settlement with TEP in respect of all of the onshore works, which therefore included the works which AUK had subcontracted to OSR. The settlement involved a payment by TEP to AUK. It therefore appears more likely than not that the AUK offer letter of 13 January 2014 was written following that settlement, in order to try and resolve the remaining claim in respect of the onshore works. The letter was written some three months before these proceedings commenced.

It is appropriate to set out the letter in full:

“Without prejudice save as to costs

THE MEMBERS OF A JOINT VENTURE BETWEEN VAN OORD UK LTD. AND SICIM ROADBRIDGE LTD. (OSR) V ALLSEAS UK LTD. (AUK) Offer to settle under part 36

We refer to Contract no. 400970/AUK/LFL/001 for the Laggan Tormore Development and the Claims relating to WP10 Onshore Works East made under the LETTER OF CLAIM reference OSR/LPU/248 dated 29^th August 2013.

Although OSR’s claim has serious deficiencies, AUK is mindful that under the Civil Procedure Rules (CPR(s)) litigants are expected to try to resolve their disputes whenever possible. AUK therefore makes the following offer to settle under Part 36 (the “Offer”).

This Offer is intended to have the consequences set out in Part 36 of the CPRs. In particular, if the Offer is accepted, AUK will be liable for OSR’s costs up to the date of notice of acceptance in accordance with CPR 36.10 for a maximum period of 21 days (“the relevant period”).

Terms of the Offer

AUK is willing to settle the whole of the Claims referred to above, which for the avoidance of doubt is all matters described in OSR’s Letter of Claim reference OSR/LPU/248 dated 29 August 2013 including OSR’s Consolidated Claim dated 5 December 2012 and including all subsequent Addenda numbered 1 to 4 issued in January 2013 and February 2013 and all other submissions relating to OSR Change Order Requests referenced 058 (Parts 1 and 2), 066 (withdrawn by OSR), 068, 103 and 104 on the following terms:

AUK to pay OSR within 14 days of acceptance of the Offer, the sum of £3,800,000.00 gross including interest (“the settlement sum”) less amounts already paid on account for these Claims. The settlement sum will be in full and final settlement of all claims which OSR has or may have against AUK in this matter. For the avoidance of any doubt the amounts that have already been paid on account are:-

Gross Amount Certified and Paid (in GBP)
COR 058 Part 1 (was original COR 058)	2,850,000.00
COR 058 Part 2 (was original COR 066)	558,839.00
COR 068	132,000.00
TOTAL	3,540,839.00

The amount that will be paid within 14 days of acceptance of the Offer, which is the balance between the settlement sum and amounts already paid is £259,161.00.

This Offer takes account of any counterclaim AUK may have in relation to matters addressed in the Claims.

The settlement sum does not include costs and, as mentioned above, if the Offer is accepted, AUK will be liable for OSR’s costs up to the date of notice of acceptance in accordance with CPR 36.10 for a maximum period of 21 days (“the relevant period”).

Failure to accept this offer

If OSR does not accept the Offer, and subsequently commences proceedings in relation to this matter, and fails to do better than the Offer at trial, AUK intends to rely on CPR 36.14. This means for the avoidance of any doubt, that AUK will be seeking an order that OSR pays AUK its costs from the date when the relevant period expires and interest on those costs. In the event that OSR chooses to accept this offer prior to the commencement of proceedings, this offer is made on the basis that costs provisions of Part 36 and Part 44 shall apply.

Although AUK have not been formally notified that Mr Stimpson of Keating Chambers has been instructed for the purpose of proceedings, it was indicated during the meeting that this would occur and therefore this Offer is also copied to Mr Stimpson.

AUK understands that you are in possession of all necessary information and documents to be able to consider this Offer. If that is not correct, or if you think that this Offer is in any way non-compliant with the requirements of Part 36 of the CPRs, please notify us by return.”

There can be no doubt that the result of this litigation constituted a better outcome for AUK than was set out in their Part 36 offer. They will not be a net payer, but a net payee. They will not be liable for any part of OSR’s costs, and will instead have their costs paid by OSR, subject to a detailed assessment if not agreed. The remaining debate was, therefore, about the nature and degree of AUK’s entitlement under Part 36.

I should start with a threshold issue. There was a suggestion in Mr Lofthouse QC’s submissions that, because the letter of 13 January 2014 was a valid Part 36 offer, it simply did not matter whether, as a matter of construction, it was a claimant’s or a defendant’s offer, particularly given the wording of r.36.2(3), set out at paragraph 4 above. I do not accept that suggestion for four reasons.

First, the CPR expressly differentiates between the consequences of not accepting a claimant’s Part 36 offer on the one hand, and the consequences of not accepting a defendant’s Part 36 offer on the other. So it plainly matters which type of offer is under consideration.

Secondly, as a matter of commonsense, it is important that the recipient of a Part 36 letter knows what sort of offer it is. Because there is such a significant difference in the consequences of non-acceptance, depending on the proper construction of the letter, it is vital that a party making a Part 36 offer spells out, in terms which are unequivocal and free from ambiguity, the nature of the offer being made and the consequences which it says will flow from its non-acceptance by the recipient. The recipient needs to be in no doubt as to what may happen if the offer is turned down.

Thirdly, the Court of Appeal in AF v BG plainly thought that it mattered what kind of offer had been made. Lloyd LJ identified this as the issue, saying whether the Part 36 offer “is properly regarded as a claimant’s offer depends on a construction of the offer as a whole”. He carefully considered the letter in that case, before concluding that it was a claimant’s Part 36 offer. Amongst their reasons was the fact that the offer expressly said that it was a claimant’s offer (even though it was made by a respondent with a counterclaim), and because it spelt out the claimant’s r.36.17(4) enhancements as the consequence of non-acceptance.

Fourthly, the fact that a defendant with a counterclaim is treated as a claimant in accordance with r.36.2(3) does not mean that its offer is automatically to be regarded as a claimant’s offer: that must always depend on its terms. Otherwise it would have been unnecessary for the Court of Appeal to construe the whole of the offer, as they did in AF v BG.

So I turn to the substantive issue. As a matter of construction, I am entirely satisfied that the offer letter in this case was not a claimant’s Part 36 offer. Unlike the offer letter in AF v BG, it did not say expressly that it was a claimant’s offer. Unlike the offer letter in AF v BG, it did not offer to accept an amount of money in settlement of claim and counterclaim: instead, it offered to pay an amount to the claimant, OSR. Unlike the letter in AF v BG, it offered to pay the other side’s costs. And unlike the letter in AF v BG¸ it did not spell out the enhanced consequences of non-acceptance (indemnity costs and penal interest up to 10%) that are set out in r.36.17(4).

Instead, the letter in this case has all the hallmarks of a defendant’s Part 36 offer. It offered to pay a sum in settlement of the litigation (taking into account the counterclaim). That offer accepted that OSR could retain the sums already paid. It offered to pay OSR’s costs up to the date of acceptance, for a maximum period of 21 days after the date of the offer. And I agree with Ms O’Farrell QC that, when the letter said that “for the avoidance of any doubt”, AUK would seek an order that OSR pay AUK’s costs from the date of the expiry of the offer if OSR failed to do better than the offer at trial, that was classically in accordance with a defendant’s Part 36 offer. It reflected the terms of r.36.17(3). It did not reflect the terms of r.36.17(4)

Moreover, it is difficult to see how or why OSR, on receipt of the letter, could have reached any other conclusion. No separate, stand-alone counterclaim had been asserted by AUK at the time of the letter, and no sum was set out in the offer letter (unlike in AF v BG) as representing the liquidated amount of any such counterclaim. The most that could be said was that, in the correspondence, AUK were saying that, far from OSR being entitled to further sums, they had actually been overpaid. But the offer was in different terms, because it was expressly accepted that OSR could retain all that they had been paid.

For all these reasons, I consider that, as a matter of construction, the offer was and/or should be treated as a defendant’s Part 36 offer. OSR’s failure to beat it triggers the consequences in r.36.17(3), but not the consequences in r.36.17(4).

For the avoidance of doubt, I should make clear that, save for one element of costs, I have awarded AUK their costs on an indemnity basis. That is on an application of general principles, explained in Section 3 below. I have also awarded interest, on both the judgment sum and AUK’s costs, at a rate of 2.5%. That achieves a result which is close to that which would have been achieved by r.36.17(4), save in respect of the possibility of interest rates higher than 2.5%.

In all the circumstances of this case, I have concluded that, even if this had been a claimant’s offer under Part 36, it would have been unjust to penalise OSR still further by imposing a rate of interest higher than 2.5%. I consider that OSR have already been heavily penalised for pursuing a hopeless claim to trial and judgment, and I do not think that it is just to visit upon them the potentially draconian interest rates noted in r.36.17(4), particularly in circumstances where i) AUK themselves wholly failed to warn OSR of this possible consequence if their offer was not accepted; and ii) AUK had, during the contract, freely paid over to OSR the monies that were later the subject of the successful counterclaim.

I draw some general support for my decision not to award interest at a rate higher than 2.5% in this case from the judgment of Leggatt J in Thai International Public Company Ltd v KL Holdings Co Ltd [2015] 3 Costs LR 545, where he said, in considering the 10% ceiling, that it was “relevant to take account of the fact that interest rates are currently at what is historically a very low level so that awarding the maximum uplift would result in a significantly higher percentage uplift from an ordinary commercial rate than would at other times have been the case”.

BASIS OF ASSESSMENT

AUK sought an assessment of their costs on an indemnity basis on ordinary principles. The application was disputed by OSR. Both parties referred to my summary of the applicable principles in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] 4 Costs LR 612:

“16…

(a)

Indemnity costs are appropriate only where the conduct of a paying party is unreasonable "to a high degree. 'Unreasonable' in this context does not mean merely wrong or misguided in hindsight": see Simon Brown LJ (as he then was) in Kiam v MGN Ltd [2002] 1 WLR 2810.

(b)

The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it out of the norm in a way which justifies an order for indemnity costs: see Waller LJ in Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson [2002] EWCA (Civ) 879.

(c)

The pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, provided that the claim was at least arguable. But the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may well lead to such an order: see, for example, Wates Construction Ltd v HGP Greentree Alchurch Evans Ltd [2006] BLR 45.

(d)

If a claimant casts its claim disproportionately wide, and requires the defendant to meet such a claim, there was no injustice in denying the claimant the benefit of an assessment on a proportionate basis given that, in such circumstances, the claimant had forfeited its rights to the benefit of the doubt on reasonableness: see Digicel (St Lucia) Ltd v Cable and Wireless PLC [2010] EWHC 888 (Ch).

17.

These principles have recently been restated in the judgment of Gloster J (as she then was) in Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EWHC 749 (Comm.).”

The issue was whether OSR’s conduct overall had taken this case away from the norm. Mr Lofthouse QC said it was “difficult to think of a case to which that description more appropriately applies”. He made criticisms of Mr Lester, OSR’s expert (who Ms O’Farrell QC accepted in her closing submissions did not meet the standards that are expected of an independent expert giving evidence in court and whose conduct was the subject of significant criticisms in my principal Judgment); he said that the major weaknesses in the claim had been pointed out both before and after the proceedings were issued; and he reminded me that I concluded that the OSR claims were supported by witnesses who had little regard to truth or accuracy. In response, Ms O’Farrell QC accepted that nothing could point to OSR’s unreasonableness save bringing the claim at all, but said that, beyond that, there was no reprehensible conduct. The difficulty, she summarised, was not with conduct as such, but with the quality of OSR’s evidence.

I accept that there was no separate reprehensible conduct on the part of OSR, beyond the pursuit of the litigation itself, which is relevant to this issue. Further, although Mr Lester was a disastrous expert, I would be reluctant to visit the consequences of indemnity costs on OSR solely because of his performance. But even allowing for both of these points, the reality is that this was a hopeless claim, which OSR should have known was hopeless from the outset. The unforeseen ground conditions claim failed at every possible hurdle, and was, in any event, fatally tainted by the fact that, as OSR accepted, the same claim based on an alleged contractual term had had to be abandoned. In similar vein, the claims based on an absence of temporary crossings had all the hallmarks of an unreal argument, seized upon by claims consultants months or years after the event, which had been raised at the time, but had then petered out in the contemporaneous correspondence because it was so unimportant.

In addition, I was critical of OSR’s witnesses in the main Judgment because of the disjunct between what they were alleging now, and the contemporaneous documentation, which almost always said something different. I also noted that significant elements of the claim were not addressed at all, let alone supported as a matter of fact, in the OSR evidence.

In all those circumstances, I have concluded that this was a widely-drawn but hopeless claim which should not have been pursued. What is more, the deficiencies were or should have been apparent to OSR. The factors at paragraphs 16(c) and (d) of the judgment in Elvanite are both directly applicable here. Thus I have concluded that this is a case where an order for indemnity costs is appropriate.

DISPROPORTIONATE COSTS

Ms O’Farrell QC recognised that an order for indemnity costs was a very real possibility. In the event that such an order was made, she identified three areas of costs which she said should be excluded from any general order as to indemnity costs. They were:

The Costs of Knowles Ltd

In the outline bill of costs provided by AUK’s solicitors, the costs attributable to the claims consultants, Knowles Ltd, are put at £1.3 million. Ms O’Farrell QC said that this was an astonishing sum, given that AUK had their own expert (Mr Kitt) for the purposes of the trial, and that the witnesses of fact called from Knowles Ltd added very little, and took up little time at the hearing. I agree with that submission.

Mr Lofthouse QC sought to justify the figure on the basis that Knowles Ltd had undertaken a good deal of work which might otherwise have been done by the solicitors. In particular, I was told that Knowles Ltd had essentially undertaken the disclosure exercise, and the inspection of the OSR documents to see what was irrelevant. Mr Lofthouse QC said that, by reference to the decision of Edwards-Stuart J in NAP Anglia Ltd v Sun-Landed Development Co Ltd (No. 2) [2012] EWHC 51 (TCC), the involvement of claims consultants in such tasks was appropriate and permissible.

I do not consider that NAP Anglia is of any assistance on the issue raised by Ms O’Farrell QC. That was an adjudication enforcement dispute. Often in such cases, a claims consultant may have handled the entirety of the underlying adjudication and, where that has happened, the TCC has been reluctant to require the party for whom they acted to engage an entirely new set of advisors simply to deal with enforcement. As Edwards-Stuart J put it:

“I regard it as fairly self-evident that it would be more economical, in terms of both time and money, for NAP’s solicitors to take advantage of HCC's already acquired knowledge of the documents and the issues in the adjudication, rather than read themselves into the documents from scratch. HCC will (or should) have had the facts at their fingertips and been familiar with the documentation produced in the adjudication, as well as being broadly aware of what other documents might be in the possession of NAP.”

In my view, a very different situation arises here. There was no adjudication. Knowles Ltd have never acted for AUK in any set of formal proceedings. Their involvement in the disclosure exercise therefore appears, on the face of it, to be somewhat surprising. I can see that there may be issues as to the recoverability of some or all of those costs.

In all those circumstances, I consider that the order that I have made in respect of indemnity costs should exclude the £1.3 million paid to Knowles Ltd. On the detailed assessment, the parties can argue about the proportionality and reasonableness in respect of those fees. The issue of whether it was appropriate and permissible for the disclosure exercise to be ‘sub-contracted’ to them can also be argued on the detailed assessment.

The Bundling

The bundles for trial were far too voluminous and the majority of their contents were irrelevant. Sadly, that is all too common in cases of this sort.

However, I am not in a position to ascribe blame for that situation as between the parties. In addition, it seems to me that Ms O’Farrell QC can raise at least some of her arguments about the bundling on any detailed assessment, regardless of the order for indemnity costs. It would not be appropriate to carve out these costs from the order.

Proportionality Generally

Ms O’Farrell QC argued that, at £3.48 million, AUK’s costs were disproportionate and that, unless I made an alternative order, the indemnity costs order would not allow her to argue those general points.

There were no costs management orders in this case, which would have dealt with questions of proportionality at an early stage. However no criticism can attach to the parties for that, since the claim was for over £10 million and neither side sought the assistance of the court. I hope, following my judgment in CIP Properties (AIPT) Ltd v Galliford Try Infrastructures Ltd [2014] EWHC 3546 (TCC), parties will take advantage of the costs management regime, even in claims worth over £10 million. It would have avoided some of the disputes and uncertainties that now arise.

I have concluded that no further ‘carve-out’ from the scope of the indemnity costs order is justified on the grounds of proportionality. First, I do not think that the £3.48 million is the relevant figure to take. I have said that the Knowles Ltd costs should be stripped out of the indemnity costs order, so that the relevant figure for these purposes is £2.18 million. Even if an additional allowance is added back for a proportion of the Knowles Ltd costs, that would plainly produce a proportionate figure overall, given that the claim here was originally put at over £10 million. Indeed, it may well be that, given the size of the claim and the detailed points that arose at trial, even the £3.48 million cannot be said to be disproportionate.

For present purposes, I do not consider that aside from the Knowles Ltd costs, there is any other element of the AUK costs that should be carved out of the indemnity costs order that I have made.

INTERIM PAYMENT ON ACCOUNT OF COSTS

I ordered an interim payment on account of costs in the amount of £1.3 million. This was just less than the 66% of £2.12 million contended for by Mr Lofthouse QC, and more than the 50% advanced by Ms O’Farrell QC.

In arriving at the figure of £1.3 million I followed the approach of Jacob J in Mars UK Ltd v TeKnowledge [1999] EWHC 226 (Pat); [1999] 2 Costs LR 44 (when he referred to the “payment of some lesser amount which you will almost certainly collect” as being “a closer approximation to justice”); and the approach of Clarke LJ in Excalibur Ventures LLC v Texas Keystone Inc and others [2015] EWHC 566 (Comm.), in which he said that the test was not to find “the irreducible minimum” (which had been the test applied by Birss J in Hospira UK Ltd v Genentech Inc [2014] EWHC 1688 (Pat)), but instead to identify a reasonable sum in all the circumstances, being an estimate of the likely level of recovery, subject “to an appropriate margin to allow for error in the estimation”.

I consider that the figure of £1.3 million, as against the overall figure of £2.12 million meets that test. That is therefore the amount of the interim payment to be made by OSR on account of AUK’s costs.