Telefonica UK Ltd v The Office of Communications  EWCA Civ 1374
In the fast developing and nuanced legal landscape surrounding Part 36, this case, in which DWF represented Telefónica together with Benjamin Williams QC of 4 New Square, demonstrates the potential value to claimants of making early Part 36 offers and explores the limited circumstances in which a trial judge can withhold the prescribed benefits of a successful offer. Here, by making an early Part 36 offer which the defendant did not better, Telefónica ultimately received additional compensation, costs and interest thereby increasing its overall recovery in the proceedings.
History of the litigation
Telefónica’s claim was one of four claims brought by mobile network operators ("MNOs") for restitution of annual licence fees paid to Ofcom for spectrum holdings between 2015 and 2017. The spectrum licence fees had been paid under regulations which were quashed in 2017 by the Court of Appeal ( 1 WLR 1868) thereby leaving earlier lawful regulations setting the fees at a much lower level.
On the basis of the principle in Woolwich Building Society v IRC  AC 70, Telefónica (together with the other MNOs) claimed restitution of the difference between the fees it had paid under the invalid regulations and the fees that were lawfully due pursuant to the earlier valid regulations. The four claims were ordered to be heard together, each turning on the same question of law regarding the appropriate measure of restitution. The MNOs were successful at first instance and awarded the full principal sums claimed together with simple interest:  EWHC 1234 (Comm). Ofcom subsequently appealed against this judgment, but the Court of Appeal dismissed the appeal:  EWCA Civ 183.
Telefonica's Part 36 offers
Telefónica made two Part 36 offers. The first offer was made prior to the commencement of the proceedings and was in the same sum for principal and interest as Telefónica had demanded in a Letter of Claim of the same date. Following the decision of the Supreme Court in Prudential Assurance Co Ltd v Revenue and Customer Commissioners  UKSC 39, deciding that compound interest is not available in unjust enrichment claims for restitution of money payments, Telefónica made a second Part 36 offer, this time on the basis of payment of the principal sum claimed without any interest.
On 18 February 2019, ten weeks before trial, Telefónica increased the value of its claim by £1.56m, but left its earlier Part 36 offers in place. This increased the relative value of those Part 36 offers, as they would have allowed Ofcom to settle the claim without meeting the additional claim of £1.56 million (in general, and perhaps anomalously, there is no penalty for a defendant which accepts a claimant’s Part 36 offer late – see Hislop v Perde  EWCA Civ 1726 which rejected a claim for a routine award of indemnity basis costs or other benefits in such circumstances).
The MNOs were successful at trial and Telefónica was awarded the full amount of its revised principal claim together with interest thereby beating its first Part 36 offer by circa 8% and its second Part 36 offer by circa 9%.
The Approach of the Trial Judge
Although Telefónica's initial offer was in the same amount as was demanded in the letter of claim, Ofcom did not assert that it was not a genuine attempt to settle the proceedings (one of the bases on which a trial judge may withhold the Part 36 benefits – see CPR 36.17(5)(e)). Ofcom therefore conceded that it should pay the ‘additional amount’ which is prescribed by CPR 36.17 in the event of a successful offer, which here, given the size of the principal claims, was the statutory maximum sum of £75,000. However, it objected to paying indemnity basis costs or enhanced interest, relying on the fact that the offers were high relative to the overall value of the claim, and the fact that Ofcom reasonably defended what was a ‘binary’ claim (i.e. a claim where the claimant would either recover its full claim or nothing at all, with no scope for a judge to carve through the middle).
The trial judge also treated both offers as genuine attempts to settle, although he too commented on their high level relative to the value of the claim. He awarded Telefónica indemnity basis costs, but declined to allow the enhanced interest prescribed by CPR 36.17(4). He considered the award of such interest as unjust because, given the stipulated maximum award of interest at up to 10% above base rate, that would lead to Ofcom receiving disproportionate benefits, given that the agreed commercial rate of interest was only 2% above base rate.
Telefónica appealed the judge’s refusal to award increased interest. It said that, its offers having been accepted as genuine, there was no basis on which the judge could properly allow it some of the Part 36 benefits and not others. Moreover, in saying that the award of enhanced interest would be disproportionate, the judge had made an obvious error. CPR 36.17 gave him a discretion as to the amount of enhanced interest, and any concern about the rate of interest was met by adjusting the rate of interest to ensure that the overall enhancement to Telefónica’s compensation was reasonable. The enhancement allowed by the judge, however, was not reasonable. Given the overall value of the claim, the additional award of £75,000 and indemnity basis costs would lead to a trivial increase on Telefónica’s overall recovery – far less than 1%.
The appeal was allowed. The court stated that once an offer was accepted as genuine, it would be unusual for a claimant to be awarded some of the prescribed Part 36 benefits and not others. It agreed with Telefónica that the benefits it had been awarded by the judge verged on the trivial in the context of a £54 million claim. The court held that once the judge accepted that the offers were genuine, it was wrong for him to place emphasis on the offers being pitched at a high level compared to the total value of the claim – that was to reinstate the ‘near miss’ approach to Part 36 offers which had been taken in Carver v BAA  1 WLR 113 but which had subsequently been disapproved. Once a Part 36 offer was bettered, by however small an amount, it had to be given effect unless that was unjust – that hurdle being the ‘formidable obstacle’ described by Briggs J in Smith v Trafford Housing Trust  EWHC 3320. Here, the Court of Appeal found that there was no injustice in awarding Telefónica all the Part 36 benefits, as it had made an offer which, if accepted, would have led to Ofcom settling the case on better terms than it achieved at trial. The court emphasised that issues of proportionality, and of Ofcom having acted reasonably, could be reflected in the rate of interest, but could not be reasons for the court withholding interest altogether.
Overall, the court held that the fact Ofcom had not litigated unreasonably and the overall proportionality of the award of enhancements could be marked by an award of enhanced interest at the lower end of the scale. It therefore awarded interest at 3.5% over base rate rather than at the maximum rate of 10% over base rate (Telefónica having conceded in any event that this was not a case for an award at the highest end of the scale).
The Financial Impact of the Part 36 Offer
Telefónica’s early Part 36 offer ultimately led to an additional award of interest on both damages and costs of almost £860,000. Allowing also for the ‘additional amount’ of £75,000 and the increased costs which would be payable under the indemnity basis costs order, the overall value to Telefónica of making its Part 36 offer will have been at least £950,000. That increased Telefónica’s overall recovery from Ofcom by around 18%.
This case shows the extent of the benefits that can flow from an early Part 36 offer. The figures stated above speak for themselves. The amount of enhanced interest awarded was modest in percentage terms – 3.5% above base is at the lower end of the scale for commercial cases, given that the usual rate of interest is already 2% above base. However, that simply reflects the need for an outcome which is proportionate overall – it still benefited Telefónica to the extent of £860,000 because the principal sum to which the interest was applied was so high. In Petrotrade v Texaco, one of the first cases on Part 36, Lord Woolf MR, the architect of the rule, suggested that the award of interest would need to be higher in small cases, to make sure that the claimant obtained a reasonable award that acted as a genuine inducement to settle. The lower rate allowed in the present case doubtless represents the same principle in reverse: a low interest rate still gave Telefónica a valuable reward for making a reasonable offer of settlement at an early stage. In ‘big money’ cases such as this, awards of interest at the very top of the scale are therefore likely to be rare – perhaps reserved for cases of misconduct such as OMV v Petrom v Glencore International  1 WLR 3465 where, as Vos C there said, there was a need to wield both carrot and stick.
Notwithstanding this helpful decision for claimants, future claimants should be aware that there is some litigation risk in making offers at a very high level and, as so often with costs issues, the facts may be at least as important as the legal principles in play.
For further information please contact Simon Murray.
Benjamin Williams QC, 4 New Square
Lyndsey Crowder-Barton, Senior Associate, DWF
Sam Ponzini, Solicitor, DWF
Simon Murray, Partner and Head of Costs, DWF