The recent judgment of the High Court in London Trocadero (2015) LLP v Picturehouse Cinemas Limited  EWHC 3103 (Ch) provides an interesting insight into judicial treatment of defective Part 36 offers, the question of when Part 36 offers will be considered genuine offers to settle, and the other factors considered by the court in determining when it would be unjust to apply the full cost consequences prescribed by CPR r. 36.17.
London Trocadero v Picturehouse Cinemas – Defectively served Part 36 offer limits cost recovery
The dispute concerned whether the Claimants ("London Trocadero") could rely on a Part 36 offer, which had not been properly served, for the purpose of recovering costs from the Third Defendant ("Cineworld"), and if so whether it would be just in the circumstances for the Court to apply the full cost consequences of Part 36.
London Trocadero is the landlord of a cinema premises leased to the First Defendant, pursuant to two leases. The second Defendant was the original tenant under the first lease. Cineworld is the guarantor under both leases.
London Trocadero obtained summary judgment in relation to a claim made against the Defendants for unpaid rent and service charges, which had built up as a consequence of the Covid-19 pandemic. London Trocadero was awarded indemnity costs against the first and second defendants, based on its entitlement under the terms of the leases to recover its costs of enforcing the tenant's obligations. In respect of Cineworld, London Trocadero sought to rely on a Part 36 offer it had made on 15 December 2020, specifying a "relevant period" of 21 days, which expired on 5 January 2021.
There was no dispute as to whether London Trocadero had obtained a judgment that was at least as advantageous as the terms of the Part 36 offer. However, the Defendants argued that the defective service of the Part 36 offer rendered it invalid.
It was common ground that the Part 36 offer had not been properly served. It had been communicated exclusively by email, notwithstanding that London Trocadero had not verified that the Defendants' solicitors were willing to accept service by email, as required by Practice Direction 6A. However, the Claimants argued that this did not have the effect of rendering the offer invalid, because of the provisions of CPR r. 3.10, which provides that "[w]here there has been an error of procedure such as a failure to comply with a rule of practice direction – (a) the error does not invalidate any step taken in the proceedings unless the court so orders; and (b) the court may make an order to remedy the error".
The judge agreed that the effect of CPR r. 3.10 was that the Part 36 offer was not automatically invalidated as a result of the defective service. Indeed, the judge held that this was a case where the court had to decide whether to impose a sanction, under CPR r. 3.10(a), rather than whether to grant relief from an existing sanction. The judge concluded that, whilst a failure to comply with the rules of service under CPR r. 6 should not be taken lightly, there was no suggestion that the Defendants had not received the Part 36 offer, or that they had suffered any prejudice as a consequence of the defective service, and no complaint had been raised until shortly prior to the hearing, some months after the offer had expired. In those circumstances, the judge concluded that to invalidate the Part 36 offer would be a "triumph of form over substance".
The judge held that whilst it may not be necessary to do so, on the basis that CPR r. 3.10(a) provides that a procedural error will not invalidate a step taken in the proceedings absent an order from the court to that effect, he would make an order under CPR 3.10(b) that the Part 36 offer was to be treated as having been validly made.
The consequences of a claimant obtaining at outcome at least as advantageous as its Part 36 offer are set out in CPR r. 36.17(4). The claimant is entitled to (i) interest at up to 10% above base rate on the amount of money awarded (excluding interest) from the expiry of the "relevant period"; (ii) indemnity costs from the end of the "relevant period"; (iii) interest on those costs at a rate not exceeding 10% above base rate; and (iv) an additional amount, capped at £75,000, being 10% of the first £500,000 awarded, and, subject to the cap, 5% of any amount above that.
The court must make these orders in favour of the claimant unless the court considers it unjust to do so. In making this determination, the court is required to consider all the circumstances of the case, including the factors set out at CPR r. 36.17(5). These include "whether the offer was a genuine attempt to settle the proceedings".
Was the Part 36 offer a "genuine offer to settle"?
The Defendants argued that the Part 36 offer was not a genuine attempt at settlement. London Trocadero had offered to accept the full amount of rent owed, without any interest. This represented 99% of the total sum claimed. The Defendants argued that London Trocadero's offer to forego the minimal amount of interest that had accrued on the unpaid rent, approximately £8,000, was not a genuine concession. The Defendants also pointed to the fact that the offer was made the day before the third lockdown, which came into effect on 16 December 2020, and against a background where many landlords were agreeing to waive or defer unpaid rent.
Conversely, London Trocadero argued that the outcome was binary, with no dispute as to the amount; either the rent was due in full, or it was not. The Defendants had no realistic defence to the claim, as the successful application for summary judgment established. Accordingly, whilst the concession was small, London Trocadero had offered to give up something which it had a near certainty of obtaining, and that should be considered a genuine attempt to settle the proceedings.
The judge agreed with London Trocadero's submissions on this issue. The judge held that that London Trocadero had clearly considered that the Defendants had no realistic defence to the claim, and that the Defendants were able to pay the sum owed, but had chosen not to do so in order to preserve liquidity. The offer had included a concession, and it could not be said objectively that no defendant would have accepted it, having regard to the surrounding circumstances.
Would it be nevertheless unjust to apply the full cost consequences in CPR r. 36.17(4)?
However, the judge concluded that it would nevertheless be unjust to apply the full cost consequences set out in CPR r. 36.17(4). He awarded London Trocadero its costs on an indemnity basis from the expiry of the Part 36 offer, but declined to award the "additional amount" provided for by CPR r. 36.17(4)(d), or any lesser amount. Notably the judge expressed a "provisional view", on an obiter basis, that the court is not faced with a binary decision between awarding the additional amount prescribed in CPR r. 36.17(4)(d) or nothing at all, and that he would have been able to award a lesser amount had he so chosen. He noted that there was a divergence of views on this issue at first instance.
The judge also concluded it would be unjust to award the maximum permitted rate of interest of 10% above the base rate, and instead awarded London Trocadero interest on the costs it had incurred from the expiry of the "relevant period" at 5% above base rate (he awarded London Trocadero interest on the rental arrears, which had formed the subject of the Part 36 offer, at the judgment rate).
There were two principal factors that the judge relied on in reaching his decision as to the costs to be awarded.
First, the judge pointed to the proposed binding arbitration scheme announced by the Government relating to rent arrears that had accrued during the pandemic. The judge said that it was clear that a tenant whose business had been affected by the pandemic and who had rent arrears might expect to obtain some sort of concession under the scheme. He said that his decision on this point did not depend on whether the Defendants were in fact able ultimately to take advantage of the scheme, and that he was not impeded under CPR r. 36.17 from taking the scheme into account just because it post-dated the Part 36 offer.
Second, the judge held that whilst the defective service of the Part 36 offer did not merit the invalidation of the offer under CPR r. 3.10(a), it was a further reason why it would be unjust in his judgment to award London Trocadero the maximum amount available under CPR r. 36.17. This is a cautionary tale for practitioners, in that it affirms that defective service of a Part 36 offer may affect the quantum of costs awarded, even if it does not result in the offer being invalidated.