Lehman administrators awarded enhanced costs

Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor [2022] EWHC 3366 (Ch)What is the test for awarding costs on an indemnity basis following an offer to settle under CPR Part 36?

Overview

This case considers three primary issues: (1) what constitutes a compliant offer to settle under Part 36 of the Civil Procedure Rules (“CPR“); (2) how to determine whether an offer to settle is at least as advantageous to the offeror as the outcome ultimately reached in the case; and (3) the test for awarding consequential orders enhancing recovery as set out in CPR 36.17(4).

Background

In October, we wrote about a landmark High Court decision in the Lehman Brothers administration. The Court ruled that Firth Rixson is contractually obligated to pay more than £8 million (on account of the “Sterling Swap”) and US$53 million (on account of the “Dollar Swap”) owing to Lehman Brothers under certain interest rate swap agreements. These amounts are payable on the discharge of the Administrators and the publication of a notice that Lehman Brothers has surplus assets over liabilities and is able to pay its debts as they become due. Our summary of the decision can be found here.

Following the decision, the parties largely agreed on a draft form of order, but two issues remained for determination:

1. whether an offer to settle made by the Administrators was a compliant Part 36 offer and, if so: (a) whether the Administrators obtained a judgment which is at least as advantageous to Lehman Brothers as the offer to settle and, if it is, (b) whether consequential orders should be made enhancing their recovery under CPR 36.17; and

2. whether Firth Rixson should be given permission to appeal.

Offer to Settle

The Administrators’ offer, which was made in April 2020 and expired on 8 May 2020, provided that the Administrators were willing to settle provided Firth Rixson paid: (1) £7,334,117 on account of the Sterling Swap; and (2) US$53,535,379 on account of the the Dollar Swap. The Administrators’ offer provided for a small discount to the principal owing under each swap and a complete write-off of accrued interest on the Dollar Swap.

Was the offer a compliant offer to settle under CPR 36?

On the threshold issue of whether the offer was a compliant Part 36 offer, Firth Rixson argued that the offer to settle did not “relate to” the claim because the offer required immediate payment (within 14 days), irrespective of whether the “relevant steps” (the discharge of the Administrators and the publication of a notice that Lehman Brothers has surplus assets over liabilities and is able to pay its debts as they become due) were taken.

The Court disagreed, and found that the Administrators’ offer did “relate to” the claim. CPR 36.5 is less exacting and does not require the exact correlation suggested by Firth Rixson: it simply means that the offer must be made by reference to identified claims and make proposals in respect of them. The Court acknowledged it is difficult to weigh and translate into an acceptable discount the more innominate or uncertain advantages that Firth Rixson may legitimately have perceived the continuation of a period of suspension might afford (including, for example, cash flow, exchange rate concerns or investment plans amongst others, as well as the possibility of some supervening new event of default). However, this was not enough to take the claim out of the purview of CPR 36.5.

Was the judgment at least as advantageous as the offer to settle?

With respect to the second issue – whether the Administrators obtained a judgment which is at least as advantageous to Lehman Brothers as the offer to settle – the Court found that the mathematics are that the Administrators will obtain under the Court’s decision more in money terms than they would have obtained under their offer, even allowing for the fact that they would have received earlier payment under the latter. Accordingly, this part of the test was made out.

Should consequential orders be made enhancing recovery under CPR 36.17?

Finally, on the issue of consequential orders, CPR 36.17(4) provides that the Court must order the enhanced recovery provided under CPR 36.17(4) “unless it considers it unjust to do so”. In answering this question, the Court must take into account all of the circumstances of the case, including the factors set out in CPR 36.17(5):

1. the terms of the offer;

2. the stage in the proceedings when the offer was made, including in particular how long before the trial started the offer was made;

3. the information available to the parties at the time when the offer was made;

4. the conduct of the parties with regard to the giving of or refusal to give information for the purposes of enabling the offer to be evaluated; and

5. whether the offer was a genuine attempt to settle the proceedings.

The question is not whether it was reasonable for the defendant to refuse the offer. Rather, the question is whether, having regard to all the circumstances and looking at the matter as it affects both parties, an order that the defendant should pay the costs would be unjust. The burden to show injustice is a formidable obstacle to the obtaining of a different costs order.

Here, the Court found that:

1. the terms of the Administrators’ offer were clear;

2. the offer was made before the issue of the proceedings but after an iterative discussion of the essential matters in dispute and the provision of a copy of the draft intended witness statement in support of the intended application which clearly delineated the points in issue;

3. adequate information was thereby provided;

4. that information was plainly adequate to enable the offer to be evaluated; and

5. the offer was a genuine attempt to settle the proceedings.

The Court acknowledged that the point of interpretation raised by the proceedings was arguable and the amount at stake was considerable. Further, and perhaps most importantly, despite the result, Firth Rixson retained the advantage of not having to pay until the conclusion of the administration.

Against that, the Court took into account that Firth Rixson was pressing for a somewhat counter-intuitive result (that it should never have to pay a large sum of money which it owes its counterparty, even when that counterparty is fully solvent and is no longer subject to any insolvency proceedings). Considering all of the circumstances, the Court concluded that imposing certain enhanced recovery would be appropriate, but that it would be unjust to impose relief which is quasi-penal in nature.

In the result, the Court ordered Firth Rixson to pay costs on the indemnity basis from the date on which the offer expired, plus enhanced interest on those costs at a rate of 4.5% above the base rate, as well as an additional amount of £75,000.

Permission to Appeal

On the issue of permission to appeal, the Court found that (a) the points in issue are of some complexity and it is not unrealistic to suppose that another court might reach a different conclusion (b) the amounts at stake are considerable and (c) the issues are plainly of some general commercial interest. Accordingly, the Court granted permission to appeal.

Judge: Mr Justice Hildyard

Counsel: Mr Daniel Bayfield KC and Mr Ryan Perkins of South Square (instructed by Linklaters LLP) for the Applicant Joint Administrators (PwC); Mr Stephen Auld KC of One Essex Court and Mr Henry Phillips of South Square (instructed by Cleary Gottlieb Steen & Hamilton LLP) for the Respondents