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Case 13

Thakkar and Another

v

Patel and Another

[2017] 2 Costs LR 233

Neutral Citation Number: [2017] EWCA Civ 117

Court of Appeal (Civil Division)

25 January 2017

Before:

Jackson and Briggs LJJ

Headnote

The court considered an appeal against a costs order made in circumstances where a purported Part 36 offer had been withdrawn after 21 days and there had been a failure to mediate.

The defendants had made an early Part 36 offer on 21 July 2011 in the sum of £30,000.00 plus costs which had been withdrawn on 12 August 2011. Although both parties had expressed a willingness to mediate, the claimants were proactive in making arrangements, but the defendants were slow to respond to letters and had raised various difficulties.

The claimants had made a Part 36 offer on 24 February 2014 in the sum of £40,000.00. The defendants had not accepted the offer. Following trial the claimants were awarded £44,933.52 on their claims, and the defendants awarded £16,750.00 on their counterclaim, resulting in a balance of £28,183.52 due from the defendants to the claimants.

The judge stated that there were real prospects of settlement if a mediation had taken place, and ordered the defendants to pay 75% of the claimants’ costs of the claim, with the claimants to pay the defendants’ costs of the counterclaim.

The defendants sought to appeal on the basis that the offer of £30,000.00 made on 21 July 2011 should have been accepted (the claimant having received a balance of only £28,183.52 following trial) and the court should therefore have ordered the claimants to pay the defendants’ costs in relation to the claim from 12 August 2011 onwards, not vice versa.

Held: Appeal dismissed. Since the claimants’ Part 36 offer had been withdrawn after 21 days, it had not taken effect as a Part 36 offer, as the CPR were in 2014. Nonetheless, the fact of the offer and its non-acceptance were factors which the court should take into account in the exercise of its discretion under CPR 44.3. Moreover, silence in the face of an offer to mediate was, as a general rule, unreasonable conduct meriting a costs sanction (PGF II SA v OMFS Company 1 Ltd [2013] 6 Costs LR 973). This was so even if an outright refusal to mediate might have been justified. In this matter, the prospects of a successful mediation had been good. Whilst the order made had been tough, it had been within the proper ambit of the judge’s discretion.

Cases Cited

Owners and/or Bareboat Charterers and/or Sub Bareboat Charterers of Samco Europe v Owners of MSC Prestige [2011] EWHC 1656 (Admlty)

PGF II SA v OMFS Company 1 Ltd [2013] 6 Costs LR 973; [2013] EWCA Civ 1288; [2014] 1 WLR 1386

Trustees of Stokes Pension Fund v Western Power Distribution (South West) plc [2006] 2 Costs LR 226; [2005] EWCA Civ 854; [2005] 1 WLR 3595

Judgment

1. JACKSON LJ: This judgment is in four parts, namely part 1, Introduction, part 2, The Facts, part 3, The Present Proceedings, part 4, The Appeal to the Court of Appeal.

Part 1: Introduction

2. This is an appeal against a costs order. The principal issues in this appeal are the effect of a purported Part 36 offer which is withdrawn after 21 days and the consequences of failure to mediate. The subject matter of this litigation is a property in Leicester which the claimants leased to the defendants for a total of 18 years. Both parties achieved a measure of success in the subsequent litigation. The defendant tenants are aggrieved by the final costs order. They are the appellants in this court.

3. In this judgment I shall refer to the Civil Procedure Rules as “CPR”. Part 36 of the CPR underwent substantial amendment on 6 April 2015. This appeal is concerned with the Rules as they stood in 2014. In 2014 Rule 36.14(2) set out the costs consequences where a claimant failed to beat the defendant’s Part 36 offer. That provision was qualified, however, by Rule 36.14(6) which stated:

“Paragraphs (2) and (3) of this rule do not apply to a Part 36 offer –

(a) that has been withdrawn; …

(Rule 44.2 requires the court to consider an offer to settle that does not have the costs consequences set out in this Part in deciding what order to make about costs)”

Rule 44.2 as it stood in 2014 provided as follows:

“(1) The court has discretion as to –

(a) whether costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

(2) If the court decides to make an order about costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b) the court may make a different order. …

(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including –

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and

(c) any admissible offer to settle made by a party which is drawn to the court’s attention and which is not an offer to which costs consequences under Part 36 apply.”

The rule then sets out further guidance in relation to conduct. For present purposes, I need not read out those provisions. After these introductory remarks I must now turn to the facts.

Part 2: The Facts

4. The claimants are the owners of a building at 194 London Road, Leicester, to which I shall refer as “the Property”. Between 1992 and 2010 the claimants demised the property to the defendants, who used it as a preparatory school. There were two leases; the first was dated 1992, the second lease was dated 2 February 1998.

5. In June 2009 thieves climbed on to the roof of the building and stole some of the lead. The defendants notified the claimant that the roof was no longer watertight. The claimants delayed for some months before repairing the roof. During that period of delay the school suffered water ingress and flooding. As a result, the defendants were unable to use the building as a school during the academic year 2009 to 2010.

6. The second lease came to an end in August 2010. The claimants took possession of the building. They intimated a claim for dilapidations. The defendants maintained that the claimants were liable to compensate them for the flood damage in 2009. The parties were unable to reach agreement on these matters. Accordingly, they embarked upon the present proceedings.

Part 3: The Present Proceedings

7. By a claim form issued in the Leicester District Registry of the Queen’s Bench Division on 23 March 2011, the claimants claimed damages for dilapidations. In their particulars of claim, they quantified the claim at approximately £210,000 plus interest. On 26 May 2011, the defendants served their defence and counterclaim. By their defence they disputed almost the entirety of the dilapidations claim. In their counterclaim, the defendants claimed £41,875 in respect of rent paid to the claimants during the period when the property was unfit for occupation due to flooding.

8. In their respective allocation questionnaires, both parties requested a stay for ADR. There seems to have been a desire to settle on both sides. On 21 July 2011 the defendants’ solicitors sent an offer of settlement of £30,000 plus costs on the basis that the defendants would drop their counterclaim. That offer was expressed to remain open for 21 days. The claimants did not accept that offer. Instead by their solicitor’s letter dated 12 August 2011, the claimants made a Part 36 offer to accept £86,400 inclusive of VAT in settlement of the claim and counterclaim.

9. The defendants did not accept the claimants’ offer or make any further offer. Instead, by letter dated 12 August 2011 the defendants’ solicitors stated that their previous settlement offer was withdrawn. On 7 October 2011 District Judge Merriman made an order allocating the case to the multi-track. Thereafter nothing else happened in the litigation for a year; there was a stay to facilitate alternative dispute resolution.

10. Both parties expressed a willingness to mediate. The claimants were proactive in making arrangements for a mediation and identifying possible mediators for consideration by the defendants. The defendants, by contrast, were slow to respond to letters and raised all sorts of difficulties. Eventually, in a letter dated 22 August 2012 the claimants set out the history of their attempts to set up a mediation and concluded as follows:

“Our clients have made all reasonable attempts to arrange a mediation but have been thwarted by your clients’ conduct. Since April 2012 countless weeks have been lost through having to chase for responses. When your client finally gave a clear window of availability we tried to fix a mediation within that period a variety of excuses have been given as to why that date could no longer go ahead.

Understandably, our clients no longer have any confidence that a mediation can be arranged given your clients’ conduct and do not feel that it is reasonable that they should continue to have to amend their travel plans and work commitments of both themselves, their surveyor, and the writer, when the likelihood is that further ‘circumstances’ will arise that will lead to the postponement of any future date.”

11. On 25 October 2012, District Judge Whybrow ordered the stay of proceedings to be lifted. He gave directions for exchange of witness statements, preparation of expert reports and related matters.

12. The trial of the action began in the Leicester County Court before His Honour Judge Rogers on 28 October 2013. After the hearing had continued for three days the evidence was still being called, but no further court time was available. The judge adjourned the case part-heard until March 2014.

13. By their solicitors’ letter dated 24 February 2014 the claimants made a Part 36 offer to accept £40,000 in settlement of the claim and counterclaim. The defendants did not accept that offer. The trial resumed on 10 March 2014. It continued for a further four days. On 10 June 2014 the judge gave judgment. He awarded £44,933.52 to the claimants on their claim and £16,750 to the defendants on their counterclaim. That resulted in a balance of £28,183.52 due from the defendants to the claimants. The judge left over all questions of interest and costs for future argument. There was a further hearing to deal with interest and costs on 14 November 2014. The judge awarded interest at the rate of 4.5%. After adding interest at that rate to both claim and counterclaim, the balance which the defendants owed to the claimants amounted to £32,083.18.

14. Turning to costs, the judge noted that the defendants’ offer of £30,000 was “well judged”, but it did not take effect under Part 36 because it had been withdrawn after three weeks. Nevertheless the judge accepted that the defendants’ offer was still relevant if it was one which the claimants ought to have accepted within 21 days. He noted the claimants’ argument that they were unable properly to assess the defendants’ offer at that stage of the proceedings.

15. The judge then examined the parties’ conduct in relation to mediation. He accepted the claimants’ solicitor’s letter of 22 August 2012 as an accurate summary of the events. The judge summarised the position as follows in para 26 of his judgment:

“Both parties initially and superficially were willing, so it is not a case of simple refusal or rejection or silence. But looking at the matter overall and in particular looking at the chronology set out in the letter to which I referred, the conclusion I reach is that the claimants were more proactive. The defendants or defendant, particularly, was to say the least apparently relatively unenthusiastic or lacking in preparedness to be flexible. It was, as has been pointed out, ultimately the claimants who closed matters down and decided to move forward. To some extent they can be criticised for closing down the process, rather than continuing to press for mediation and going the extra mile and I accept that point. But it must be tempered by the finding already made that the reality is that it was the defendants who were the less keen to participate.”

16. The judge stated that there were real prospects of settlement if a mediation had taken place. The defendants’ revised offer of £40,000 indicated a willingness to negotiate. After weighing up all the circumstances, the judge ordered the defendants to pay 75% of the claimants’ costs of the claim. He ordered the claimants to pay the defendants’ costs of the counterclaim.

17. Defendants were aggrieved by the judge’s decision on costs. Accordingly they appealed to the Court of Appeal.

Part 4: The Appeal to the Court of Appeal

18. By an appellant’s notice dated 5 December 2014 the defendants appealed to the Court of Appeal on the ground that the judge had erred in the exercise of his discretion concerning costs. The defendants’ offer of £30,000 made on 21 July 2011 should have been accepted. That offer was open for 21 days, namely until 11 August 2011. Therefore the judge should have ordered the claimants to pay the defendants’ costs in relation to the claim from 12 August 2011 onwards, not vice versa.

19. The appeal has come on for hearing today. Mr Stephen Taylor represents the appellant defendants, as he did in the court below. Mr Timothy Leader represents the respondent claimants, as he did in the court below. I am grateful to both counsel for their helpful skeleton arguments and their concise oral submissions.

20. Mr Taylor opened his appeal by taking us to the calculations in his skeleton argument. These show that if you add interest to the claim and counterclaim at the rate allowed by the judge, the sum owed by the defendants to the claimants on 11 August 2011 was £28,692.55. Accordingly, the result which the claimants achieved at the end of the trial in June 2014 was less advantageous than the defendants’ offer of £30,000 in July 2011. At this point, the court invited Mr Leader to intervene. Mr Leader did so. He accepted the accuracy of that calculation. This therefore is a case in which the claimants failed to beat the defendants’ offer.

21. Mr Taylor next submitted that the judge failed to appreciate that the defendants’ offer was more advantageous to the claimants than the final outcome of the case. This submission calls for careful scrutiny of the judge’s second judgment and counsel’s submissions, insofar as the judge accepted those submissions. Having read through Mr Taylor’s written submissions of November 2014 and paras 10 and 11 of the judge’s second judgment, I am satisfied that the judge did appreciate that from the claimants’ point of view the final outcome of the case was less advantageous than the defendants’ offer, so I reject the submission that the judge failed to take this relevant factor into account.

22. The next issue which arises concerns the effect of the claimants’ offer which the defendants failed to beat. Since that offer was withdrawn after 21 days, it does not take effect under Part 36. (See Rule 36.14(6) of the Civil Procedure Rules as they were in 2014. I have read that provision out in part 1 of this judgment.) Therefore the fact of the offer and its non-acceptance were matters which the court should take into account in the exercise of its discretion under CPR Rule 44.2. The judge asserted in his judgment that he did so.

23. In relation to this issue, Mr Taylor relies upon two authorities, namely Trustees of Stokes Pension Fund v Western Power Distribution (South West) plc [2005] EWCA Civ 854; [2005] 1 WLR 3595, and Owners and/or Bareboat Charterers and/or Sub Bareboat Charterers of Samco Europe v Owners of MSC Prestige [2011] EWHC 1656 (Admlty). The effect of these authorities is that where a purported Part 36 offer under the pre-April 2015 CPR is withdrawn, the crucial question is whether the offeree acted reasonably or unreasonably in failing to accept the offer while it was on the table. In both of those cases, the claimants acted unreasonably. Accordingly, the court made costs orders favourable to the defendants.

24. In the present case, Mr Taylor submits that the claimants acted unreasonably in failing to accept the defendants’ offer on or before 11 August 2011. Mr Leader resists that submission, essentially on the basis of the judge’s findings at paras 15 and 32 of the second judgment. In those paragraphs the judge noted that as at August 2011 there had been no disclosure or exchange of evidence. Accordingly, “It was not an offer … that it was easy for the claimants to accept”.

25. In August 2011 both parties knew what the evidence was concerning the claimants’ dilapidations claim. In relation to the counterclaim, however, the claimants only had the pleadings, whereas the defendants knew what their supporting evidence was. Therefore the defendants were in a better position than the claimants to make an overall assessment of the claim and counterclaim.

26. The judge has, at least implicitly, held that the claimants acted reasonably in not accepting the defendants’ offer during the 21-day period before it was withdrawn. The judge was immersed in the minutiae of this case, having presided over a seven-day trial. I see no reason why this court should disturb his assessment.

27. I turn now to the mediation issue. The claimants took proactive steps to set up a mediation during the period March to August 2012. The defendants, whilst not refusing outright to mediate, dragged their feet and delayed for so long that the claimants lost confidence in the process and closed it down. The judge held that this case was suitable for mediation. He held that if there had been a mediation there was a real chance of achieving a settlement. Those findings were plainly correct. I say that for five reasons:

i. The dispute between the parties was a commercial one. It was purely about money;

ii. The defendants were willing to pay £30,000. The claimants were, or became, willing to accept £40,000;

iii. The costs of the litigation were vastly greater than the sum in issue;

iv. Bilateral negotiations between the parties had been unsuccessful;

v. Any mediator would have had both parties in the room with him. He would have let them have their say. He would then have pointed out (a) the small gap between their respective positions, and (b) the huge future costs of the litigation. In those circumstances I would be astonished if a skilled mediator failed to bring the parties to a sensible settlement.

28. The total costs of both sides in this litigation are about £300,000. The position as at August 2012 was that pleadings had closed and there had been a lengthy stay for settlement negotiations and ADR. The litigation did not really move forward until the directions hearing in October 2012. It therefore follows that the vast majority of the litigation costs would have been saved if there had been a settlement in August 2012.

29. In PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288; [2014] 1 WLR 1386, the Court of Appeal held that silence in the face of an offer to mediate was as a general rule unreasonable conduct meriting a costs sanction. That was so even if an outright refusal to mediate might have been justified. The present case is different. The prospects of a successful mediation were good. The defendants did not refuse to mediate, but they dragged their feet and delayed until eventually the claimants lost confidence in the whole ADR process. The judge held that most but not all of the blame for the abortive mediation lay with the defendants.

30. Against that background, the judge ordered the defendants to pay to the claimants 75% of the costs of the claim whilst recovering their costs of the counterclaim. In my view that was a tough order, but it was within the proper ambit of the judge’s discretion. I would therefore dismiss this appeal.

31. The message which this court sent out in PGF II was that to remain silent in the face of an offer to mediate is, absent exceptional circumstances, unreasonable conduct meriting a costs sanction, even in cases where mediation is unlikely to succeed. The message which the court sends out in this case is that in a case where bilateral negotiations fail but mediation is obviously appropriate, it behoves both parties to get on with it. If one party frustrates the process by delaying and dragging its feet for no good reason, that will merit a costs sanction. In the present case, the costs sanction was severe, but not so severe that this court should intervene. If Lord Justice Briggs agrees, this appeal will be dismissed.

32. BRIGGS LJ: I do agree.

Stephen Taylor (instructed by RW Hemmings & Co) appeared on behalf of the claimants/respondents.

Timothy Leader (instructed by Spearing Waite) appeared on behalf of the defendants/appellants.

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