Neutral Citation Number: [2016] EWCA Civ 127
Case No: A2/2015/0383 and A2/2015/0508
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COUNTY COURT SITTING AT LONDON
HHJ Deborah Taylor
3CL20079
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 10/03/2016
Before :

LADY JUSTICE BLACK
LADY JUSTICE GLOSTER
and
LORD JUSTICE BRIGGS
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Between :

	LITTLESTONE AND ORS	Appellants	
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	MACLEISH	Respondent	

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Edward Pepperall QC and Alan Tunkel (instructed by Prettys) for the Appellants
Nicholas Bacon QC and Adam Walker (instructed by Edwards Duthie Solicitors) for the Respondent

Hearing dates : Tuesday 9th  February 2016
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Judgment

Lord Justice Briggs : 
Introduction
1.	This appeal and cross-appeal raise two short points arising from the decisions as to costs embodied in the Order of HHJ Deborah Taylor made in the County Court at Central London on 5 February 2015, following the trial of a claim by Terence Nicholas Macleish, as landlord, against his colleagues in a solicitors’ partnership, as tenants, following the termination of a lease of office premises in Snaresbrook, London E11.  The claim was for damages for breach of the defendants’ repairing obligations, originally quantified in the Claim Form in the sum of £74,820.93 plus interest.
2.	After a full trial, the judge awarded the claimant damages of £48,409.40 together with interest, and agreed service charges, with a small deduction for an agreed insurance premium rebate.  She ordered the defendants to pay the claimant’s costs of the proceedings, on the standard basis.
3.	Both sides have appealed the judge’s order.  The defendants (as appellants) say that the claimant failed to do better than the amount reflected in their  Part 36 offer made on 13 February 2013 within days of service of the Claim Form, so that they should have been awarded their costs from 13 or 15 March 2013.  The claimant seeks to uphold the judge’s award of costs in his favour, but cross-appeals on the ground that the judge should have made the award on the indemnity basis, so as to reflect his contractual entitlement to an indemnity for costs incurred in the recovery of sums due from the defendants as tenants, pursuant to clause 2.12.2 of the Lease.
4.	Save only that the claimant’s cross-appeal depends upon his successfully resisting the defendants’ appeal, the two issues thus raised are entirely independent from each other, and I propose to deal with them separately.
The Part 36 Issue
5.	The defendants vacated the premises when the Lease terminated at the end of March 2012.  After an inspection by his surveyor, Mr Dadd, the claimant served a Schedule of Dilapidations on the defendants in April 2012.  Remedial works were carried out by the claimant between August and December 2012. Thus the claimant was able to, and did, quantify his claim for damages for the defendants’ breach of repairing covenants in the Lease by reference to amounts invoiced to the claimant by his builders for the making good of each item alleged to have been in disrepair.
6.	The claimant therefore annexed to his Particulars of Claim, served with the Claim Form on 30 January 2013, a fully costed Schedule of Dilapidations containing some 83 items, supporting his overall claim for £74,820.93 damages plus interest.  This method of quantification of the claim followed the established principle that a landlord’s cost of repair is usually the best measure of his loss occasioned by breach of a tenant’s repairing covenant.
7.	On 13 February the defendants served their Part 36 offer by DX.  It was in standard form, and its relevant parts for present purposes, stated as follows:
“The Defendants offer to pay the Claimant the sum of £35,000 in full and final settlement of this claim.
Payment will be made in full within 28 days of the Defendants receiving written acceptance of this offer and an invoice from the Claimant.
This offer is intended to have the costs consequences set out in Part 36 of the Civil Procedure Rules.
The period within which the Defendants will be liable to pay the Claimant’s costs in accordance with Rule 36.10 if the offer is accepted, is 28 days from the date of service of this letter (“the relevant period”).”
Deemed service of the Part 36 offer occurred on 15 February, so that the relevant period was due to expire on 15 March.
8.	Meanwhile, on 1 March, the defendants served their Defence.  In paragraph 34 they admitted liability in the aggregate amount of £17,504, broken down by reference to the 17 subheadings in paragraph 25 of the Particulars of Claim, and further broken down by reference to an annexed copy of the Schedule of Dilapidations in which, item by item, the amounts admitted were specified.  Thus the aggregate amount admitted was made up both from items in the claim which were admitted in full, and items which were admitted in part.  The claim for Mr Dadd’s fee was admitted in part, by reference to the same formula (12.5% of the costed works) as claimed, but in a smaller amount because of the defendants’ limited admissions as to the works required.
9.	On 7 March the defendants wrote to the claimant in the following terms:
 “We have been instructed to arrange for payment of £17,504.00 to be remitted to you in this matter pursuant to the terms of the Defence. 
Please let us have your firm’s details in order that payment can be made electronically.”
The claimant replied on the same day, providing his banking details, and continuing:
“For the avoidance of any doubt we are instructed to point out that the payment you propose to make will be accepted by our client on account of his claim only, since of course the figure in your Defence is disputed and we shall be serving a Reply when we file the Claimant’s Allocation Questionnaire with the court.”
10.	On 12 March, without further correspondence, the defendants duly made payment of £17,504.00 to the claimant’s specified account.  The relevant period specified in the defendants’ Part 36 offer ended three days later.
11.	The issue with which the court is now concerned surfaced only in October 2013, when the claimant made a Part 36 offer to accept the sum of £54,000 inclusive of interest and VAT but less the £17,504 already paid on account.  The defendants responded, on 14 October, by suggesting that this offer was only £1,496 apart from their own Part 36 offer, it being implicit in their response that the £35,000 thereby offered had been available for acceptance in full, without the claimant having to give credit for the £17,504 already paid by the defendants pursuant to their admissions. The claimant challenged this approach as disingenuous and, in due course, the judge found that the defendants had not genuinely intended that their admitted payment could be aggregated with their Part 36 offer of £35,000, but rather had taken advantage of an ambiguity, following the claimant’s Part 36 offer in October.
12.	Thus identified, the issue continued to fester away, bedevilling attempts to settle, so that the proceedings went to a full 5-day trial in January 2014, by which time the parties had, as so often occurs in hard fought disputes about relatively modest amounts, incurred costs out of all proportion to the value of the underlying issues.  The judge’s detailed judgment on the issues amounted to a finding that the damages payable for the dilapidations found to have been proved amounted to £48,409.40.  She adjourned the questions of interest and costs for further argument which took place on 2 December 2014, following which she handed down a further judgment on 20 December (amended in January 2015), awarding interest of £3,091.90, so that the aggregate of damages and interest was £51,501.30.  She adjusted the judgment sum upwards to £55,463.11 by adding an agreed amount for service charges of £4,112 and deducting an agreed insurance premium rebate due from the claimant to the defendants in the sum of £150.19. 
13.	By this time, the defendants had, shortly after receipt of the judgment on the main issues, paid a further £36,314.52 to the claimant.  Paragraph 2 of the judge’s Order recited the claimant’s receipt of the two sums of £17,504 and £36,314.52 and directed the defendants to pay the claimant the balance of £1,644.59.
14.	The judge rejected the defendants’ argument that the Part 36 offer should be aggregated with the £17,504 payment following admissions for the purpose of deciding whether the claimant had obtained a judgment more advantageous than the Part 36 offer, and ordered the defendants to pay the claimant’s costs of the action, to be assessed on the standard basis.
15.	It was common ground in this court that, for the purpose of assessing the value of the judgment as at the relevant date (that is 15 March 2013), the addition of interest accrued until then upon the damages of £48,409.40 produces a gross value of £49,534.79.  Plainly, if the Part 36 offer is to be aggregated with the admissions payment (in the sum of £52,504) the claimant’s judgment was less advantageous than the defendants’ offer.  Conversely if as the judge held the Part 36 offer stood alone, the claimant’s judgment was substantially more advantageous, within the meaning of Part 36.14(1)(a).
Analysis
16.	The defendants have, at various times, put their case in relation to the Part 36 issue in three main ways.  In the forefront of his submissions on this appeal Mr Edward Pepperall QC, supported by Mr Alan Tunkel advanced this analysis:
The best way of addressing the Part 36 issue was to ask what payment would have been due to the claimant if he had accepted the Part 36 offer on or after 15 March, following the making of the admissions payment on 12 March.  
Part 36 is a statutory code, not to be subjected to contractual analysis, such as implied revocation, and takes effect strictly in accordance with its terms.  It does what it says on the tin.
Part 36.11(6) provides (so far as is relevant) that:
“Unless the parties agree otherwise in writing, where a Part 36 offer by a defendant that is or that includes an offer to pay a single sum of money is accepted, that sum must be paid to the offeree within 14 days of the date of -
(a) acceptance; or
..  …”
Therefore, there being no written agreement to the contrary, the plain meaning and effect of Part 36 is that, on acceptance, the defendants would have been obliged to pay a further £35,000 to the claimant, in addition to the admissions payment already made of £17,504.
Accordingly, the value of the Part 36 offer, for the purposes of addressing the question whether the claimant’s judgment was more advantageous, was £52,504 i.e. £2,969.21 more than the then value of the judgment. 
17.	The defendants’ second argument was that, in any event, a Part 36 offer which is followed by a payment on admissions has its value augmented by the amount of the admissions payment, pursuant to the analysis of this court in Gibbon v Manchester City Council; L G Blower Specialist Bricklayer Ltd  v Reeves and another [2010] 1WLR 2081, at paragraph 37.
18.	The defendants’ third submission, which may be no more than another way of making the same point, was to say that the effect of the admissions payment was to reduce, pro tanto, the amount of the claimant’s claim so that in reality (and notwithstanding the express words of the judge’s Order) the claimant obtained judgment only for the net amount derived from subtracting the admissions payment from the aggregate of the damages plus interest, i.e. only £33,997.30, and therefore less than the face value of the Part 36 offer.
19.	In my judgment the true analysis of the relationship between the Part 36 offer and the admissions payment is as follows.  First, the Part 36 offer was, from start to finish, an offer to settle the entirety of the claimant’s claim for £35,000, no more and no less.  Nothing in the correspondence about, or the making of, the admissions payment made any reference to the Part 36 offer.
20.	Secondly, the admissions payment was plainly made, and indeed accepted, on the basis that it was a payment on account following admissions, against the claimant’s entire claim.  It did not cease to be the same claim for damages for dilapidations and interest which had been originally pleaded, merely because part of it was admitted, and a payment made in accordance with those admissions.  Thus it would, plainly, fall to be taken into account as a part payment of any larger sum awarded by way of damages, as indeed it later was.
21.	Thirdly, the admissions payment was, for the same reason, liable to be taken into account as a part payment in advance of the £35,000 that would have been due and payable to the claimant if, thereafter, he accepted the Part 36 offer.  This does no violence to Rule 36.11(6) which is plainly not intended to deprive the defendant of the benefit of a part-payment made on account, after admissions, between the making of a Part 36 offer and its acceptance, at least if (as here) both the offer and the payment were made in respect of the same claim.  The result is that, had the claimant accepted the Part 36 offer on or after 15 March, the net sum payable would only have been £17,496.
22.	Fourthly, the judge was correct to award damages and interest in the full sum of £51,501.30 (ignoring the adjustments for service charges and insurance premium rebate), treating the admissions payment as something to be taken into account, rather than as reducing the quantification of the damages payable.  Plainly, therefore, the claimant obtained a judgment more advantageous than the value of the Part 36 offer, within the meaning of rule 36.14(1)(a) so that she was correct to award the claimant his costs of the proceedings.
23.	I consider that the critical flaw in the defendants’ primary case is that it fails to address the obvious reality that an admitted payment on account of a claim, following a Part 36 offer in a higher amount must, in the absence of any agreement to the contrary, be taken as being made as much on account of the Part 36 offer to settle the claim as it is made on account of the claim itself.  During argument I put to Mr Pepperall the example of a claim for £40,000 followed by a defendant’s Part 36 offer of £35,000, then followed by a defendant’s payment after admissions of £30,000.  Would the claimant, upon acceptance of the Part 36 offer, obtain a net £5,000, or £65,000, on account of the £40,000 claim?  Mr Pepperall boldly submitted that the defendant would be obliged to pay £65,000, after which he would no doubt sue his solicitors for placing him in that absurd predicament.  In my view, the absurdity derives from the submission that Part 36 produces that result on those facts.
24.	The absurdity is, in my view, by no means confined to a case where aggregating the Part 36 offer and the admissions payment would produce a sum larger than the claim.  It arises from the fact that the admissions payment is made on account.  By that I do not mean that it is an “interim payment on account” within the meaning of the Civil Procedure Rules, which is a payment which may be ordered, or made voluntarily, without prejudice to the payer’s case, rather than following an admission that the amount of the payment is due: see generally Part 25.1(k), 25.6, 25.8 and 25.9.  The admissions payment was not that kind of interim payment, but it was plainly a payment on account of the claimant’s claim.  This is the express basis upon which the claimant insisted, in his letter of 7 March, and the money was then paid by the defendants without demur, following receipt of that letter. I would have reached the same conclusion about the nature of the payment, even if no such letter had been written.
25.	It is not in my view merely a question of absurdity.  The general thrust of the CPR, and of Part 36 in particular, is both to encourage parties to make sensible offers to settle the claim and also to take sensible steps to limit the issues between them.  These are separate objectives.  Part 36 serves the first, while admissions serve the second.  Payment following admissions may stop interest running, and will avoid the cost of the claimant having to obtain interim judgment on the admissions.  
26.	There is nothing inconsistent in a defendant both wishing to encourage settlement by making an offer to settle the whole claim, then making one or more smaller payments outright pursuant to admissions, while leaving the Part 36 offer open for acceptance throughout.  The continuing offer encourages settlement while the admissions payment narrows the issues.  There is no reason why the admissions payment should be intended to improve the value of the offer to settle the whole claim.  It is made for a different purpose.  If Mr Pepperall’s analysis were correct the defendant would have to withdraw the Part 36 offer to prevent it being aggregated with the admissions payment.  As the Rules then stood, such a withdrawal could only be made within the relevant period with the permission of the court: see Part 36.3(5).  The present position is more complicated: see Part 36.10, but no more amenable to the making of an early admissions payment during the relevant period.
27.	I acknowledge that my analysis may at first sight appear to lie uneasily alongside that of Moore-Bick LJ in the Blower case.  That was a claim in debt, not for damages, based upon a builder’s invoice to its customers, Mr and Mrs Reeves, for £15,793.06.  Included within that amount was an item for plumbing works in the sum of £649.36 (“the plumbing item”).  Proceedings were issued in March 2007 and, on 15 May, Mr and Mrs Reeves made a Part 36 offer of £8,023.14, inclusive of interest (“the May offer”).  An earlier offer, before the issue of proceedings, had been made in February to pay the same amount.  Thereafter, in August 2007 Mr and Mrs Reeves paid the plumbing item in full.  
28.	At trial before the district judge in June 2009 the claimant builder obtained judgment for £8,375.94 together with interest.  I infer, from the passages which I quote below, that the judgment sum did not include anything in respect of the plumbing item, because it had by then been paid.  The relevant question (for present purposes) for the District Judge and later for this court was whether the judgment in favour of the builder was more advantageous than the May offer.  
29.	At paragraph 35 Moore-Bick LJ said this:
“In the course of his judgment the district judge commented on the offer made by Mr and Mrs Reeves on 9 February 2007 to pay £8,023.14 and observed that it was not quite as close to the eventual judgment as might appear because part of it related to the plumbing bill which they later accepted to be due.  He considered the true amount of the offer to be £7,373.78 and it seems clear that he viewed the May offer (which was in the same amount) in the same way.”
Later at paragraph 37, he continued:
“Since the plumbing bill was still outstanding when the May offer was made, the district judge was wrong to deduct it when considering the value of that offer.  The effect of paying the plumbing bill was to reduce the value of the claim against Mr and Mrs Reeves by £649.36 and to that extent it made the May offer, which they left open for acceptance, more attractive.  Nonetheless the fact remains that at the end of the day the claimant recovered £661.38 more than the enhanced May offer, which, allowing for one year’s interest at 4% (the plumbing bill having been paid in August 2007), represented a principal sum of only £7,714.56.”
30.	It is not surprising that Mr Pepperall sought to derive assistance from these passages, both for his second submission that the Part 36 offer and the admissions payment should be aggregated or the offer “enhanced” for the purposes of valuation and for his third alternative submission, namely that the effect of the admission payment in this case was to reduce the amount for which the claimant could obtain judgment.
31.	The first point to make about the Blower case is that these observations of Moore-Bick LJ were, as Mr Pepperall readily acknowledged, obiter dicta.  Whatever the true analysis of the relationship between the payment of the admitted plumbing item and the May offer, the latter still fell short of the value of the successful builder’s judgment.  The case is a leading authority for other aspects of the interpretation and effect of Part 36, including the holding that it is a self contained statutory code, and that it means what it says.  But it is no authority for a general principle as to the relationship between Part 36 offers and subsequent payments following admissions.  It is I think clear from paragraph 33 that although Moore-Bick LJ’s analysis followed and accepted a submission to that effect by counsel for Mr and Mrs Reeves, his opponent’s response was not to argue the point, but to submit (as Moore-Bick LJ also held) that, regardless of the effect of the payment of the plumbing item, the May offer still fell short of the value of the judgment.  The issue which arises in this case was, therefore, not the subject of adversarial argument.
32.	The second point about the Blower case is that it was a claim in debt, rather than for damages, and that the plumbing item was paid not as a payment on account of the whole claim, but simply a payment of that item in full.  It may be that this explains why the district judge deducted it in determining the amount for which to give judgment.  By contrast, the present case is a claim for damages, and the admissions payment was a payment on account of that claim.  True it is, as Mr Pepperall emphasised, that the calculation of the amount of the pleaded admission which preceded the payment was made by reference to detailed elements in the Schedule of Dilapidations, some of which were accepted in full, but others only in part.  But this did not take those items out of the claim in any way, even though they very sensibly reduced the ambit of the dispute between the parties.  
33.	That this is the correct analysis is borne out by the fact that, following the admissions and payment, the claimant later increased the amount claimed in respect of some of the admitted items, the defendants challenged whether some of those items were recoverable at all, on the ground that the part of the building to which they were related fell outside the demise, and the claimant later sought to meet that challenge by a claim for rectification of the Lease which in due course failed.  Thus, even though the admissions payment had been calculated by reference to specific items in the Schedule of Dilapidations, the defendants eventually succeeded in resisting any liability in respect of some of those items, on account of their “outside the demise” case.  In short, some of those items continued to give rise to live issues in the proceedings.
34.	I do not find it entirely satisfactory simply to dismiss Moore-Bick LJ’s analysis in the Blower case on the ground that it is distinguishable for the reasons given above, or just a case on its own specific facts.  It may be that there are further distinguishing factors not apparent from the report of that case because, in particular, there is no precise description of the circumstances in which the plumbing item was paid, or of any correspondence in relation to that payment.  It may be that there was good reason for not treating it as, in any sense, a payment on account of the same claim in respect of which the May Part 36 offer had previously been made.  Although there is no particular fact-sensitivity about the Part 36 offers in either case, which were in simple terms and mean what they say, there may well be fact-sensitivity about the circumstances in which a later payment is made following admissions.  Nothing in Part 36 prohibits a common-sense analysis of the nature and effect of payments following admissions, which are not regulated by any statutory code similar to Part 36.
35.	Nonetheless, were it necessary to do so, I would respectfully differ from Moore-Bick LJ’s analysis which, being contained in obiter dicta, is not binding on this court.  For my part, I cannot see what was wrong with the district judge’s approach. The plumbing item formed part of the claim which Mr and Mrs Reeves offered to settle by their May offer.  If the claimant builder had accepted that offer after payment of the plumbing item, he would in my view have been obliged, and Mr and Mrs Reeves entitled, to take the payment of the plumbing amount into account.  Since the district judge deducted the plumbing amount from the amount for which he would otherwise have given judgment, I find it difficult to fault his view that the value of the Part 36 offer should have been similarly discounted, when comparing it with the value of the judgment.  In the present case the judge did not deduct the admissions payment from the damages for which she gave judgment.  She therefore had no need to deduct it from the amount of the Part 36 offer when comparing like with like, but nor, by the same token, was there any need for her to add it to the Part 36 offer for the purpose of comparison, by enhancement or otherwise.  Her analysis was, in my view, straightforward, simple and correct.  
36.	The judge went on to conclude that, even if she had adopted the Blower analysis, she would still have given the claimant his costs, for discretionary reasons which she, perhaps unfortunately, mis-described as arising under Part 44.  In reality they arise under Part 36.14 (2) and (4).  The parties to this appeal devoted substantial effort in submissions about this alternative approach of the judge but, having regard to my view that she was correct in her primary analysis, I consider it unnecessary to express any view about them.
37.	I would therefore dismiss the appeal.

The Indemnity Basis Issue
38.	I can deal with this issue, which arises on the claimant’s cross appeal, very shortly.  It is well settled that when exercising discretion as to the basis of assessment of costs under the CPR, the court should normally do so in a way which corresponds with any contractual entitlement agreed between the parties: see Gomba Holdings (UK) Ltd and Others v Minories Finance Ltd and Others (No 2) [1993] Ch.171 at 190-1 and 194-5.  In that case, the relevant contractual basis was set out in a mortgage deed between the parties, and was better reflected in an indemnity rather than standard basis of assessment.  But the contractual basis may equally appear from a lease between the parties, as in the present case.
39.	The judge was alert to this general principle.  At paragraph 45 of her judgment on interest and costs, she said:
“Further, that there is a contractual right to costs incurred in the recovery or attempted recovery of sums due from the Lessee.  Under clause 2.12 of the lease, and in principle the discretion should be exercised to reflect the contractual right.”
She then referred to the Gomba Holdings case as authority.  But in awarding costs on the standard basis, the judge appears not to have taken on board the need to consider whether the relevant contractual entitlement would best be reflected in standard or indemnity costs.
40.	 Clause 2.12 of the Lease provides, so far as is relevant, the following covenant by the defendants as Lessees:
“To pay to the Lessor all costs and expenses (including legal costs and fees payable to a surveyor) which may be incurred by the Lessor
2.12.1 in or in contemplation of any proceedings under Sections 146 and 147 of the Law of Property Act 1925 notwithstanding forfeiture is avoided otherwise than by relief granted by the Court or
2.12.2 the recovery or attempted recovery of arrears of rent or other sums due from the Lessee or
…”
41.	In my judgment, although that phraseology does not refer expressly to an indemnity, it corresponds more closely with assessment upon the indemnity basis than upon the standard basis. This is because of the obligation on the lessee to pay “all costs and expenses …. which may be incurred”. The principal difference between the standard basis and the indemnity basis is that, on the standard basis, costs are recoverable only if proportionately incurred and proportionate in amount, whereas the indemnity basis is not concerned with proportionality and nor is the contract.
42.	The contract is silent as to the reasonableness of the costs and expenses which are to be paid but I do not think this adds to or detracts from this analysis. By virtue of CPR 44.3(1), costs will not be allowed if they were unreasonably incurred or unreasonable in amount, whether the court is assessing them on the standard or the indemnity basis. Where the court assesses costs which are payable by the paying party to the receiving party under the terms of a contract, CPR 44.5(1) provides, subject to certain exceptions, that the costs payable under those terms are, unless the contract expressly provides otherwise, to be presumed to be costs which have been reasonably incurred, and which are reasonable in amount.
43.	Mr Pepperall could offer no cogent reason for upholding the judge’s standard basis of assessment in the circumstances and, in my view, the judge should therefore have chosen an indemnity rather than standard basis for assessment.  

44.	I would therefore allow the cross appeal.
Lady Justice Gloster
45.	I agree.
Lady Justice Black
46.	I also agree.