Part 36 penalties aimed at conduct, not just compensation, says appeal court

Vos: parties are obliged to conduct litigation collaboratively

Awards of enhanced interest after beating a part 36 offer are not intended only to compensate the successful party, but can also include a non-compensatory element as part of the “carrot and stick” approach to litigation post-Jackson, the Court of Appeal has ruled.

Sir Geoffrey Vos, Chancellor of the High Court, warned that “parties are no longer entitled to litigate forever simply because they can afford to do so. The rights of other court users must be taken into account”.

He continued: “The parties are obliged to make reasonable efforts to settle, and to respond properly to part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court’s powers can be expected to be used to their disadvantage.

“The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process.”

Mr Justice Flaux decided that the award of enhanced interest was entirely compensatory, but giving the judgment of the Court of Appeal in In OMV Petrom SA v Glencore International AG [2017] EWCA Civ 195, Vos LJ said he was wrong. Rule-makers could have made that clear in part 36 but did chose not to, he observed.

Vos LJ continued that “the whole thrust of the CPR after Jackson LJ’s reforms is to use both the carrot and the stick”, as shown by the appeal court’s rulings in Denton and PGF II SA

“If it were right to say that the provision for additional interest were entirely compensatory, the 10% cap would only rarely be engaged (as the judge’s order demonstrates), and then probably only in unusual cases where, for example, the period of the enhanced interest award was very short.

“First instance courts would be required to engage in a complex and unnecessary exercise aimed at identifying what the prolongation of the litigation has cost the successful party in terms of wasted management time and other on-costs. This would be the kind of undesirable satellite litigation, perhaps involving detailed evidence, of which the court spoke in Denton.

“Moreover, the range of possible additional costs that might be caused by the litigation would be boundless.”

Vos LJ added that the use of the word ‘penal’ to describe the award of enhanced interest was “probably unhelpful”.

“The court undoubtedly has a discretion to include a non-compensatory element to the award… but the level of interest awarded must be proportionate to the circumstances of the case.”

Here, the defendant had refused to engage in settlement discussions or to respond to the part 36 offer, the eventual award was very significantly greater than the part 36 offer, and “perhaps most of all”, its conduct of the litigation had been heavily criticised. Flaux J said Glencore “fought this case to the bitter end in an entirely unreasonable manner”.

Vos J said it was “by no means automatic that the 10% uplift will be appropriate”, but here “it is hard to imagine a case in which there would be greater justification for the award of a 10% enhanced interest rate”.

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