Costs should not be taken into account when deciding whether a part 36 offer has been beaten, the High Court has ruled, but they are relevant when deciding whether to apply the consequences of beating an offer.
In Transocean Drilling UK Ltd v Providence Resources Plc  EWHC 2611 (Comm) – which followed a claim after the claimant provided a drilling rig to the defendant – the part 36 offer was described as “too ambitious”.
Though the claimant won, Mr Justice Popplewell said the defendant succeeded on issues which consumed around 75% of the costs of the action. In all the circumstances of the case, including the claimant’s conduct, he decided that there be no order as to costs.
The part 36 offer, made more than four months before judgment, was to accept $13m and no interest. Some $13.8m was awarded, plus interest to the date of the offer of $800,000. Transocean applied for the part 36 consequences to apply from the date of the expiry of the offer.
The defendant first argued that, when the costs that would have been paid had the offer been accepted were taken into account, the claimant did not beat the offer.
Popplewell J rejected this, starting from the point that “the word ‘judgment’ naturally connotes what the trial judge holds or decides on the substantive issues in the case, as distinct from the ancillary question of costs which falls for consideration after the substantive issues have been decided”.
Further, rule 36.14(1)(b) – which sets out when part 36 is engaged – only applied “on judgment being entered”, which the judge said could not include a decision on costs.
He said the approach put forward by the defendant would require the judge to make provisional costs decisions as to the level of costs at the end and at the time of the part 36 offer. This would both “undermine the purpose of the rule, which is one of simple application”, and also make it difficult for parties to decide where to pitch a part 36 offer and whether to accept it.
The defendant’s second argument was that it would be unjust to apply the part 36 consequences
Popplewell J said that, notwithstanding his first finding, the exceptional feature of the case was that he had easily been able to decide what costs order the court would have made in the absence of consideration of the part 36 offer, both at the conclusion of the trial and at the time of the offer – that was, no order as to costs.
“Am I bound to ignore that costs position when deciding whether it is unjust that the part 36 consequences should apply? I do not consider that I am. It is well known that in heavy commercial litigation of this kind, costs can be substantial and the costs outcome can be an important consideration for the parties. The claims and counterclaims in this case were about money.
“What ultimately matters to the parties is the bottom line of how much is paid by one party to the other. That payment has to take account not only of principal and interest but also of costs…
“Transocean would have had costs well in mind when making the part 36 offer and so would Providence when considering whether to accept it. I see no reason in principle why the court must ignore commercial reality and leave out of its consideration something which is of real significance to the parties.”
His conclusion was that the part 36 offer was, “in commercial terms, and taking account of its costs consequences, too ambitious”. The judge continued: “Had it been accepted, Providence would have paid, and Transocean would have received, more than would have been the case had the court given judgment on liability and costs at the date of the expiry of the offer. In that sense, Transocean’s offer was too high.
“There should, moreover, be some disapplication of the part 36 consequences in any event to reflect the criticisms I have made of Transocean’s conduct, which was not merely unreasonable but dishonest.
“On the other hand, Providence could have avoided the windfall problem by making a counter-offer which protected its costs position; and in any event, when taking into account the subsequent adverse consequences for the parties and the court which would have been avoided by accepting the offer, Providence should have accepted it.”
As a result, he ordered the defendant to pay Transocean’s costs expiry of the offer, on the standard basis, but without any of the other part 36 consequences.