McPhilemy v Times Newspapers Ltd (No 2)

Where a claimant beats a compliant Part 36 offer, an order for indemnity costs is the ordinary consequence unless it would be unjust. It is not punitive and carries no implication that the defendant or its lawyers behaved improperly.

The discretion must be exercised by reference to all the circumstances. A late offer, or settlement terms requiring an apology, will not by itself establish injustice where the defendant had a proper opportunity to evaluate or clarify the offer.

Under Civil Procedure Rules 1998, enhanced interest should not duplicate compensation already reflected in a jury’s libel award. Indemnity costs and pre-judgment interest on those costs may nevertheless be awarded to remedy the shortfall inherent in standard costs and the absence of interest on costs paid before judgment.

The claimant succeeded at trial in a defamation action and received £145,000 general damages. Before trial he had made an unaccepted Part 36 offer which included £50,000 general damages, financial losses to be assessed, and non-monetary terms including an apology.

Eady J made an order on 31 March 2000 but refused the claimant relief under CPR 36.21. He considered it unjust to award interest on the jury’s damages or indemnity costs, partly because he regarded indemnity costs as punitive and stigmatic.

The defendants’ principal appeal had already been dismissed. The claimant cross-appealed against the refusal of CPR 36.21 relief. The central issue was whether the circumstances made the ordinary Part 36 consequences unjust and, if not, what interest and costs orders could properly be made.

1. The principal appeal was dismissed and the cross-appeal was allowed in part. Chadwick LJ gave the principal reasons on the cross-appeal. Simon Brown LJ and Longmore LJ agreed.

2. The judge below erred by treating an indemnity-costs order under CPR 36.21 as punitive, stigmatic, or as an implied condemnation of the defendant’s conduct. Where the rule applies, indemnity costs from the relevant acceptance date are the normal consequence unless the court considers the order unjust. The Court followed the explanation in Petrotrade Incorporated v Texaco Limited (unreported, 23 May 2000) that the provision promotes fair settlement incentives rather than punishment.

3. The stated grounds of injustice did not justify withholding indemnity costs. The offer was made sufficiently before trial to allow consideration and clarification. The defendants’ preparation of trial bundles did not create relevant unfairness. The apology and retraction terms had not been explored because the defendants did not respond. Nor was the private defamation action an appropriate vehicle for resolving the wider alleged conspiracy issue in the public interest.

4. It would, however, be unjust to award CPR 36.21 interest on the jury’s damages for any period before judgment. A libel jury’s award is assumed to reflect delay, trial-related anxiety and distress up to the verdict. Further interest for that period would risk double compensation and cross the boundary from compensation into punishment.

5. Indemnity costs did not create that risk. They addressed the ordinary shortfall between standard costs and the successful claimant’s actual costs. Interest on those costs was also appropriate before judgment, at 4% above base rate from the date work was done or a disbursement liability was incurred. The Court held that CPR 36.21 did not permit variation of the statutory judgment-debt rate after judgment; thereafter interest on damages and costs ran in the ordinary way under the Judgments Act 1838.

6. Simon Brown LJ further held, with the agreement of the Court, that the defendants should pay the costs of their unsuccessful principal appeal on the indemnity basis. Their perversity argument made that order appropriate.

• Court of Appeal (Civil Division) — dismissed the defendants’ principal appeal and allowed the claimant’s cross-appeal in part. It varied the costs order to award indemnity costs from 12 January 2000 and pre-judgment interest on those costs at 4% above base rate.
• Queen’s Bench Division — Eady J’s order of 31 March 2000 refused relief under CPR 36.21 on the ground that it would be unjust to award interest on damages or indemnity costs. That refusal was varied on the cross-appeal.