Published November 25th 2019

Cost consequences associated with Part 36 offer: Defendant pays additional £65,000 after refusing to settle case over a difference of less than £5,000

The recent judgement in Hochtief (UK) Construction Ltd & Anor v Atkins Ltd illustrates the consequences of a claimant beating its own Part 36 offer, resulting in the defendant being ordered to pay an additional sum of £65,000 together with enhanced interest on the claimant’s costs. Because Part 36 offers can be made by either party before formal proceedings commence, anyone involved in a dispute should take note.

Background

The dispute arose from a £62.5m contract involving the construction of two new dual carriageway roads, the A256 and A299, to improve transport links in East Kent (“the Main Contract”).

In August 2009, the claimants, Hochtief (UK) Construction Limited and Volker Fitzpatrick Limited, acting in joint venture (“the JV”), were engaged by Kent County Council (“KCC”) to act as principal contractor for the Main Contract.

The JV sub-contracted with the defendant, Atkins Limited (“Atkins”) for Atkins to carry out the civil and structural design elements of the Main Contract. The design was for:

i) the Cottington Road Bridge (“the Bridge”), a two-span bridge carrying the A256 dual carriageway road over the Canterbury to Ramsgate railway line and Cottington Road;
and
ii) the Cliffsend Underpass (“the Underpass”), a 120-metre-long tunnel under the railway line to accommodate the A299 dual carriageway.

Shortly after completion of the Bridge in 2011, surface settlement of the carriageways was discovered, forming localised depressions. Between 2012 and 2014 remedial works were carried out.

Defects were also discovered following completion of the Underpass in March 2012. Signs of leakage including rust staining, icicles above the carriageway and fine cracking to the concrete was observed in April 2012. In 2013, remedial works were carried out.

On 12 June 2017, the JV issued a claim against Atkins alleging breach of contract and/or negligence in carrying out the design of the structures. The JV alleged that Atkins failed to design any adequate system of drainage of sub-surface water in the earthworks around the Bridge and that Atkins had failed to design an adequate waterproofing system for the Underpass.

The JV claimed damages in the sum of £802,475.35 in respect of remedial works to the Bridge and £122,559.82 in respect of remedial works to the Underpass.

Prior to issuing its claim against Atkins, the JV made a Part 36 offer to settle both the Bridge and the Underpass claims in the combined sum of £875,000 including interest (‘the Offer’). Atkins neither accepted nor rejected the Offer within 21 days of it being made (‘the relevant period’ stipulated in the Civil Procedure Rules – ‘CPR’), or at all.

The attractions of Part 36

Part 36 offers confer tactical and psychological advantages on whoever makes them, because if they ‘beat’ their own offer at trial, advantages follow. A defendant who is ordered to pay more damages than a claimant’s Part 36 offer, as in this case, is liable under CPR 36.17(4) to be ordered to also pay:

a) enhanced interest on the damages awarded at a rate not exceeding 10% above base rate;

b) costs on the indemnity basis from the date on which the relevant period expired;

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

d) an additional sum not exceeding £75,000, calculated by applying the prescribed percentage to the sum awarded as damages by the court (10% of the first £500,000 awarded and 5% of the amount above that figure).

Conversely, a claimant who recovers less than a defendant’s Part 36 offer has to pay the defendant’s costs from the end of the relevant period to the end of the trial, and interest on them (CPR 36.17(3)).

In the context of the CPR, the phrase ‘beat’ means to obtain a judgment which is “at least advantageous” as the offer, and CPR 36.17(2) elaborates:

“[…] in relation to any money claim or money element of a claim, ‘more advantageous’ means better in money terms by any amount, however small, and ‘at least as advantageous’ shall be construed accordingly.”

A successful party’s legal costs are normally assessed after trial on the standard basis, resulting in reimbursement of about 70% of them. However, assessment on the indemnity basis is more generous and would usually result in reimbursement of about 90% of legal costs.

TCC judgment on the claims

On 31 July 2019 the Court handed down judgment for the JV against Atkins. The Court found that the JV had established its claim in respect of the Bridge, entitling it to damages and interest in the sum of £802,475.35, but dismissed its claim in respect of the Underpass.

TCC judgment on the costs and the application of Part 36

Prior to the costs hearing on 11 November 2019, the JV and Atkins agreed the figure for interest due on the damages awarded, at a rate of 2% above the base rate, up to the expiry of the relevant period applicable to the Offer, 9 June 2017, in the sum of £77,372.41.

The TCC’s award of damages (£802,475.35), coupled with the above agreed interest resulted in the JV being entitled to £879,847.76, thereby beating its Part 36 offer by a small amount (£4,847) and Atkins was left facing a significant costs penalty.

The phrase “however small” in CPR 36.17(2) is amply demonstrated in this case. In the context the JV’s claim, £4,847 may seem a nominal amount. Nevertheless, the damages awarded, coupled with the interest on those damages, resulted in the JV beating its Part 36 Offer. In principle, the sum in excess of the Offer could have been to the tune of just £1, because that is still more advantageous.

Accordingly, pursuant to CPR 36.17(4) (see above), and in the absence of factors which would make it unjust to do so, the court ordered Atkins to pay the following to the JV:

Enhanced interest on damages at a rate of 6% above the base rate was deemed appropriate as this was the mid-point between the 2% agreed by the parties on the damages and the 10% maximum for the enhanced rate, totalling £112,812.20.
Costs on the indemnity basis from the date on which the relevant period expired. The fact that the JV had been unsuccessful on its Underpass claim did not affect the applicability of the Offer, and the court ordered that 85% of the JV’s overall costs were payable, assessed on the standard basis up to and including 9 June 2017 (the end of the relevant period) and assessed on the indemnity basis from 10 June 2017 until judgment. The detailed assessment of the costs will follow if the parties cannot agree the sums payable on each basis.
Enhanced interest on those costs at a rate of 6% above the base rate.
An additional sum, calculated by applying the prescribed percentage to the sum awarded as damages of £802,475.35. This was calculated to be £65,123.77 after following the above formula from 36.17(4)(d).

An interim costs award of £500,000 was also made.

Implications

The case serves as a reminder of the cost implications of Part 36. A claimant need only beat its Part 36 offer by a nominal amount to engage 36.17(4) and its tough sanctions.

The costs risks associated with Part 36 mean parties should consider carefully offers made pursuant to this rule, particularly a defendant who receives one because, generally, if beaten, a claimant’s offer will result in them paying much more than the value of the claim stated in the claim form and costs assessed on the standard basis. Defendants have to carefully consider the offers they make too; an offer which is too high is likely to be snapped up by a claimant who recognizes its value, whereas one which is too low is unlikely to have the desired effect of adding pressure.

Part 36 offers are a useful tactic and can place parties under considerable pressure to accept if pitched at the right level; that requires the full merits of a case to have been assessed before making one.