The power of Part 36 and the Court’s discretion - Telefonica UK Ltd v The Office of Communications

Published: 12/1/2021

In our first blog of the New Year, we take a look at an interesting Court of Appeal decision from the latter half of 2020 that caught our eye and one that dispute resolution practitioners might keep in mind when considering settlement options and strategy.

In a decision handed down by the Court of Appeal on 29 October 2020 in case of Telefonica UK Ltd v The Office of Communications, the Court of Appeal re-asserted the power of Part 36 offers to settle by clarifying the bounds of the court’s discretion when it comes to ordering the additional cost consequences pursuant to CPR 36.17(4). This case will no doubt provide litigants looking to settle their claims with reassurance that the consequences of failing to accept a Part 36 offer (and then not bettering it at trial) are very real indeed.

The decision at first instance

Telefónica brought a claim against Ofcom for the return of annual licence fees paid to Ofcom between 2015 and 2017 pursuant to a licencing regulation (The Wireless Telegraphy (Licence Charges for the 900 MHz frequency band and the 1800 MHz frequency band) (Amendment and Further Provisions) Regulations 2015) that was introduced in 2015 but was subsequently quashed by the Court of Appeal in judicial review proceedings. Following a short trial, the High Court awarded Telefonica the full amount of its claim - c.£55m.

The substance of the appeal: costs

The £55m was approximately 8% and 9% more than two respective Part 36 offers made by Telefonica before the trial. It therefore fell to the judge to order additional cost consequences pursuant to CPR 36.17(4). However, in doing so, the trial judge adopted what the Court of Appeal found to be an erroneous interpretation of the court’s discretion (as codified in CPR 36.17(4)). The trial judge awarded Telefonica its costs on the indemnity basis (CPR 36.17(4)(b)) as well as an additional sum of £75,000 (calculated by reference to the table at CPR 36.17 (4)(c)) but refused to make an award of enhanced interest on neither the sum awarded (CPR 36.17(4)(c)) or the costs (CPR 36.17 (d)). He did so on the basis, in particular, that the offers made by Telefonica were very close to the full amount claimed and the extra interest (which the trial judge said would have amounted to £3.2m) would have been disproportionate in the circumstances. The trial judge also considered that having awarded two of the costs consequences under CPR 36.17(4) he was content that it would be unjust to award any others. It was the discretion exercised by the judge that formed the substance of the appeal.

The result of the appeal

The Court of Appeal allowed the appeal disagreeing with the judge’s approach. In Lord Justice Phillips’ judgment, he found that:

  1. First, the trial judge was wrong to adopt a different positions with respect to (i) enhanced interest and (ii) indemnity costs order and the additional sum. In his judgment, the judge concluded that the same decision as to whether it was just or not to award cost consequences should apply to all four costs consequences collectively. In the circumstances, the trial judge had accepted the offers were genuine offers to settle and that the "normal Part 36 approach" ought therefore to be adopted.
  2. Second, the basis on which he independently decided that it would be unjust to award enhanced interest on the sum awarded was also flawed:
    1. The margin of difference between the Claimant’s offer and the sum awarded was not a factor available to the judge. The key consideration was whether the Defendant could have avoided the proceedings by accepting the offer and been in as good a position as (or better than) the position it found itself in after trial. The Court of Appeal did remark that such a consideration might be valid in evaluating whether the judge considered the offers to be genuine offers to settle but this was not the case here – the judge had explicitly said otherwise.
    2. Proportionality may be considered when assessing the rate of interest to be awarded (0-10%) but not in the context of deciding whether or not to award the interest at all.
    3. Unsurprisingly, Phillips LJ also found that it was not available to the trial judge to factor into his thinking that by awarding two of the cost consequences it would be unjust to award the third. Importantly, he pointed out that in this case the enhanced interest was the key cost consequence in the context of a £55m judgment without which the overall consequences for not having accepted the Part 36 were ultimately trivial.
    4. Finally, as to interest on costs (CPR 36.17(4)(c)), the Court of Appeal again rejected the trial judge’s approach and instead reasserted the point raised at (ii) above albeit with a different emphasis – the Court of Appeal held that the trial judge was not entitled to take the Claimant’s conduct into account when assessing whether or not it was just to award enhanced interest on the Claimant’s costs. The court’s discretion lies within the level of interest to be awarded.

Comment

This case is a clear message that the courts are strong advocates of the use of Part 36 as a means of encouraging parties to settle and the effect of the court’s discretion in awarding costs consequences, a tool to be used in confined circumstances, should not be to dilute the very purpose of Part 36. A key take home, from our perspective, is that in most situations where a Claimant makes a genuine offer to settle under Part 36 and beats the offer at trial all four cost consequences (CPR 36.17(4)(a)-(d)) should be awarded.

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