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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Codent Ltd v Lyson Ltd [2005] EWCA Civ 1835 (08 December 2005) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2005/1835.html Cite as: [2005] EWCA Civ 1835, [2006] CP Rep 33, [2007] 2 Costs LR 185

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONTRUCTION COURT
SALFORD DISTRICT REGISTRY

		Royal Courts of Justice Strand London, WC2
		8th December 2005

1. LORD JUSTICE MAY: The defendants appeal by leave of Waller LJ against a costs order made at the close of long-drawn-out proceedings by HHJ Raynor QC, sitting in the Technology and Construction Court in the Salford District Registry.

2. The claimants, Codent Limited, manufacture coding and marketing equipment for cartridges of computer printers. The defendants, Lyson Limited, produced the fluids or ink for some such cartridges. It was around October 1999 that the claimants purchased from the defendants a quantity of black ink. The claimants' case in these proceedings was that the ink that the defendants supplied was neither of satisfactory quality nor reasonably fit for the purpose for which it was required. For whatever precise reason, the ink, wholly or partially, blocked the print-heads of the machines into which it was introduced, thereby rendering these print-heads inoperable.

3. The defendants denied liability. They made a counterclaim for the cost of the materials that it had supplied and it sought, if necessary, to set off the sum claimed on the counterclaim against any sum due to the claimants. Eventually judgment was entered by the judge for the claimants on their claim in what, in the circumstances, was a rather modest sum, and judgment was entered on the defendants on their counterclaim. Indeed, the counterclaim was set off against the successful part of the claimants' claim.

4. The procedural history of the proceedings is of relevance to the costs appeal. The claim form was issued on 22nd February 2001. It was served with the Particulars of Claim in April 2001. It claimed £50,000, or thereabouts, of expenditure incurred by the claimants. There were quantified sums claimed by four of the claimants' distributors and particular sums were claimed for those claims. In addition, an indemnity was claimed against claims by others, including those four distributors.

5. The allegation of defect in the ink, as it first came to trial, was based upon the expert opinion of a Dr West. He, in short, was of the opinion that the ink was unstable because it was not a true solution. In November 2001, directions were given for liability to be tried before quantum. Shortly after that, on 29th November 2001, the claimants told the defendants that they had sustained, and would wish to claim, business interruption losses of the order of £2 million, but that they did not intend to pursue this claim until after the liability trial. Accordingly, there was an unpleaded, as yet, claim for a very large sum of money, far in excess of the particular sums claimed in the original Particulars of Claim.

6. In May 2002, the liability trial was fixed to start on 29th October 2002. On 7th October 2002, the claimants wrote a letter expressed to be without prejudice, save as to costs. Their solicitors stated in that letter that they had been instructed by their client to make a Part 36 offer to settle the matter without resorting to a court hearing. On that basis they said that their client was willing to accept 90 per cent of any damages awarded to it, plus costs in full. It was said that in accordance with Part 36 the claimants reserved the right to draw the letter to the attention of the court when the question of costs fell to be considered.

7. It is accepted on all sides by Mr Jeremy Stuart-Smith QC, in particular, on behalf of the claimants, that that was not a full-blooded Part 36 offer; rather, however, it was in the nature of what has become known as a Calderbank offer. The defendants did not accept that offer. They, for their part, wrote a Calderbank letter, dated 17th October 2002, also expressed to be without prejudice, save as to costs. They said in that letter, or their solicitors did:

   "As part of the ongoing preparation of this matter for Trial, we have attended upon our client and considered whether commercially an offer ought to be made to try to settle the matter prior to delivery of Briefs. On that basis, we are instructed to make the following offer:-

   1. our clients will pay to your client the sum of £100,000.00 in full and final settlement of all outstanding issues, within 14 days of agreement being reached;

   2. in the spirit of compromise, our client will waive its claim for the sum of £81,486.99 plus interest in respect of the invoices payable by your client;

   3. Our client will pay your client's costs of the action to be subject to detailed assessment in default of agreement."

   The offer was stated to remain open for acceptance until 4 o'clock in the afternoon, Tuesday, 22nd October. That is five days from the date of the letter, a weekend intervening.

8. That too was a Calderbank letter and not a full-going Part 36 offer. It was not a Part 36 offer, in particular, because it was not made 21 days, or more, before the start of the hearing on liability, nor was it stipulated to be open for acceptance for 21 days.

9. The counterclaim was worth £81,486-odd and accordingly the value of that offer was £181,486.99. The claimants did not accept that offer, nor, so far as I am aware, did they make any material response to it. Certainly it is not suggested that they embarked on any kind of negotiation with a view to settling the action at or around that time.

10. The trial duly started on 29th October 2002. Dr West gave evidence for more than three days. Defence counsel, as the judge put it, comprehensively destroyed his evidence, in particular of the assertion that the ink was not a true solution. The trial had not finished after the five-day period then allocated to it and so it was adjourned until 17th February 2003.

11. Shortly before the resumption of the liability hearing, on 24th January 2003, the defendants made a second offer to settle, again expressed to be without prejudice save as to costs. That offer was in the same terms as the offer which they had made on 17th October 2002, except that it was stated that the defendants would pay the claimants' costs incurred up to 4pm on 22nd October 2002, being the date of expiry of the previous without prejudice offer. This January 2003 offer was stated to remain open for acceptance until 4pm on Friday, 31st January 2003.

12. The claimants' solicitors acknowledged that letter, on 29th January 2003, simply saying that the defendants' offer appeared to be no more than a repeat of the offer it made just before the trial started. The offer was not acceptable to the claimants then and it remains so now. It was rejected.

13. The trial resumed on 17th February 2003. The claimants made a successful application, on 18th February 2003, to amend the statement of case to include a new allegation that:

    "over time, and for whatever reason,... the ink developed excessive particular material which caused the print-heads to be blocked."

14. This amendment, in substance, meant that the claimants were abandoning the theory of Dr West that had occupied much of the time of the trial in October and early November 2002.

15. The trial of liability proceeded. It was again adjourned until October 2003 to allow the defendants to meet the new case. There were suggested mediation proceedings in the spring of 2003. In August 2003, the claimants made an application to amend the Particulars of Claim to include the business interruption claim. That application was unsuccessful for want of adequate particularity, although later on a renewed successful application was made to add £1.7 million worth of business interruption claim.

16. At this point the defendants, who were insured against this claim, got into difficulties with their insurers in the sense that in August 2003 the insurers, as they were entitled to under the policy, paid out to the defendants the balance of their indemnity policy, being a sum just short of £350,000. As a result of that the insurers were under no further liability in respect of costs, damages, expenses or disbursements, and the subsequent costs of defending the proceedings lay upon the defendants themselves.

17. The trial on liability resumed on 13th October 2003. Judgment on liability was given in the claimants' favour on 24th November 2003. On 22nd December 2003, the defendants obtained judgment on its counterclaim. The quantum trial was fixed to start in October 2004.

18. On 22nd January 2004, the defendants made a Part 36 payment by paying £178,513 into court. It also offered to waive its counterclaim. The total value of the offer that the claimants accordingly effected was in the order of £260,000. The defendants also wrote offering to pay the claimants' reasonable costs, but excluding those referable to the evidence given by Dr West.

19. On 23rd March 2004, the claimants were given permission to amend their Particulars of Claim to include the claim for loss of profit. The quantum trial duly began on 11th October 2004. After five days it was adjourned part-heard until 29th November 2004. There were matters concerning offers and disclosure, and so forth, in the intervening period. One such letter was a letter from the defendants, dated 17th December 2004, when the matter of the claimants' indemnity claim was, among other things, addressed. The letter dealt with that indemnity claim in a way in which I understand counsel for the claimants, at the costs hearing before the judge, accepted provided a valid and satisfactory offer to deal with the matter of indemnity.

20. The Particulars of Claim were re-re-re-reamended about 23rd December 2004 and eventually, in this long drawn-out saga, on 2nd February 2005 the judge gave judgment for the claimants at the end of the quantum trial in the sum of £144,89.72. The defendants were awarded the full £81,486.99 in the counterclaim and accordingly, excluding interest, there was a balance payment due to the claimant of £62,602.73.

21. As the judge said, the end result was that the claimants obtained a very modest judgment in relation to the huge costs expenditure of each side in the region of £500,000 per side. So it was that the judge, on 6th May 2005, came to deal with the costs of all that. The order, which the judge made, was that the defendants should pay 70 per cent of the claimants' costs of the action up to, and including, 22nd December 2003 on a standard basis. Between 23rd December 2003 and 13th February 2004 there would be no order for costs and that the claimants should pay the defendants' costs of the action from 14th February 2004.

22. The thinking behind that series of orders included the following: the claimants were to pay the defendants' costs of the action from 14th February 2004, because the judge held that the payment into court of 22nd January 2004 was effective and should take the normal effect. There is no suggestion on this appeal that the judge was wrong about that. The judge ordered the defendants to pay 70 per cent only of the claimants' costs up to 22nd December 2003 because 22nd December 2003 was the date upon which liability, in the claim and counterclaim, had been finally determined. The reduction of 70 per cent was on account of the waste of time that had taken place with Dr West's evidence. No objection is taken by either side, as such, to the reduction of 30 per cent upon account of Dr West's evidence. The short interim period, between 22nd December 2003 and 13th February 2004, when there was no order as to costs, was, as it were, a low period during which nothing very much was happening.

23. The essential ground of appeal against this order is that the judge failed to give any, or any adequate, weight in exercising his discretion as to costs to the defendants' two Calderbank offers, to which I have referred: the one of 17th October 2002 and the other of 23rd January 2003. It will be recalled that, for practical purposes, these were in the same terms. It is necessary to have a look at the reasoning of the judge in reaching the conclusion which he did, that the defendants should get no benefit from those two offers. The judge was directed to the relevant parts of the Civil Procedure Rules, in particular, the relevant parts of Part 36 and Part 44, to which I shall refer in slightly greater detail a little later in this judgment.

24. The judge referred to a number of decisions of this court, in particular, what was then the latest case on the subject of Calderbank offers and how they should be dealt with in Crouch v King's Health Care NHS Trust [2005] 1 WLR 2015. He did not have the benefit of the later decision of this court in The Trustees of Stokes Pension Fund v Western Power Distribution (South West) Plc [2005] EWCA Civ 854. It will be necessary to refer to Stokes a little later in this judgment. The judge quoted, as had Waller LJ in Crouch, from Simon Brown LJ's judgment in Amber v Stacey [2001] 1 WLR 1225. In that context there is also consideration of the problem in another decision of this court called The Maersk Colombo [2001] Lloyd's Rep 275.

25. The judge summarised his understanding of his task, having considered those authorities, in these words, paragraph 14 of his judgment on page 242 of the bundle:

    "What I therefore have to do is to look at all the circumstances and say whether or not the offers that have been made should have the consequences contended for by Mr Bartley-Jones and should protect the Defendant in costs from the date the offers were made.

    In my judgment, having considered all the circumstances, I am of the clear view that the offers should not have the consequences contended for. In my judgment it would not be just that the offers should protect Lyson in respect of costs in circumstances where they could, and in my view should, have made a valid Part 36 offer payment in at an appropriate time (ie prior to the trial on liability)- and in any event long before they did. I base myself on the following reasoning:

    (1) There has been no justification advanced as to why Lyson did not pay in at the proper time, so as to give itself the protection of Part 36. Indeed Lyson could have paid in after October 2002. They did not have to make a non-Part 36 compliant offer in January 2003. They could then have paid in, as in the event they did, when they made what I am going to hold was an effective payment in in January of the following year.

    (2) It seems to me, as stated by Lord Justice Simon Brown, that there are compelling reasons why payments in should be made in a money claim in the normal way. That is not to say that I have applied a rule of thumb or some presumption. It seems to me that the reasons which Lord Justice Simon Brown spoke of as valid and compelling reasons are indeed compelling reasons.

    (3) It seems to me that Codent, had it accepted the offer, had no guarantee that payment would be made in accordance with its terms. Codent was not privy to Lyson's insurance position. Money had not been paid in and no excuse had been given as to why a payment in had not been made. Codent, having compromised the action, might have been left having to pursue a claim for payment. It is said that Codent could have made inquiries as to Lyson's ability to pay, but it is next to be borne in mind that not only was the offer made only 12 days before trial, but there was also in my judgment an unreasonably short time for consideration of the offer. To obtain the full protection of Part 36, an offerer should allow 21 days. This gave five days and then it was to be withdrawn. Mr Bartley-Jones says with force that it may well be that even if more time had been given, the offer would have been rejected, as we know the offer made in January 2003 was. But it does seem to me, in any event, that to make an offer so late in the day and then say it will be withdrawn if not accepted within that short period, is itself an unreasonable proviso. It was always open to Lyson to volunteer information as to how payment was to be funded just as it was always open to Lyson actually to obtain the money. And, as I have said, it was always open to Lyson to pay in and Lyson did not do so.

    In my judgment, for all the above reasons, it would not be just to hold that these letters should have the protection on costs that Lyson now contends for. I do not ignore the fact that Lyson itself did not sit back on its laurels as regards these offers. It did pay in later. It should have paid in earlier. It would then have been protected and it is not."

26. I have read that passage in full."

27. In my judgment, as I read it, it seems that there were three reasons advanced by the judge why Lyson should not get any benefit from the Calderbank offer in particular, that they had made on 17th October 2002. The first essential reason was because they could have made a Part 36 payment. They did not. They had provided no convincing reason why they did not. The second reason was that Codent had no guarantee that payment would be made in accordance with the terms of the offer. The third reason was that an unreasonably short period of time was given for acceptance of the offer. Indeed, the full 21 days before trial was not afforded. The full 21 days, of course, was that referred to in Part 36 of the Civil Procedure Rules. It is also, in my judgment, abundantly plain that the judge regarded this as an all or nothing question. Either Lyson were to get full protection going back to the date they had stipulated, of 22nd October 2002, as being the date for acceptance of their offer, or they should get no protection. As the judge himself subsequently held, they covered themselves with the payment into court that they made a good deal later.

28. It is, of course, correct, and Mr Bartley-Jones accepts that his submission was put in an all or nothing way in the sense that what he was arguing for was full protection from 22nd October 2002. But it is not uncommon for counsel to pitch their argument at the highest they feel they reasonably can and not to offer, in the alternative, the possibility of an intermediate position.

29. Before I go to look at Stokes, it is, I think, helpful just to abstract two points from the judgment of this court in Butcher v Wolfe and Wolfe [1999] 1 F.L.R. 334. The two points are these: first, from the judgment of Mummery LJ, at the top of page 342, where he said, in relation to a Calderbank offer:

    "So the critical question for the determination of the issue of costs is: why did Mrs Butcher reject the offer, pursue the proceedings, and run up legal costs for the defendants as well as for herself? To put it another way: why was this case fought? Was it fought because she did not want to settle all her claims relating to the land?"

30. That seems to me to be an important point that encourages the court, in the exercise of its discretion, to look at the reality, so far as it can, of what was going on. Not necessarily to dwell unduly on precise particulars of the way in which letters, for instance, may have been expressed. The second point to be derived from the case of Butcher is that there is an obligation to negotiate, placed upon the parties, which, as that case held, was not limited purely to family proceedings. A party who was refused a Calderbank offer point-blank and failed to negotiate might be penalised in costs if such refusal was unreasonable.

31. Against that background, I turn to the case of Stokes. This is a comprehensive judgment on the subject of the court's proper approach to the effect of Calderbank offers, the only substantive judgment being given by Dyson LJ. Dyson LJ sets out, in paragraph 6 of his judgment, all the relevant provisions of the Civil Procedure Rules. I shall not repeat them in this judgment. I simply refer to the highlight provisions. Rule 36.1(2) which provides that:.

    "Nothing in this Part prevents a party making an offer to settle in whatever way he chooses, but if that offer is not made in accordance with this Part, it will only have the consequences specified in this Part if the court so orders."

    Rule 36.3(1) provides that subject to irrelevant rules for present purposes:

    "An offer by a defendant to settle a money claim will not have the consequences set out in this Part unless it is made by way of a Part 36 payment."

    Rule 36.20 provides for what is to happen if at trial a claimant:

    "fails to better a Part 36 payment,"

    and rule 36.20(2) provides that:

    "Unless it considers it unjust to do so, the court will order the claimant to pay any costs incurred by the defendant after the latest date on which the payment or offer could have been accepted without needing the permission of the court."

    Rule 44.3(1) provides that:

    "The court has discretion as to:

    (a) whether costs are payable by one party to another

    (b) the amount of those costs..."

    Rule 44.3(4) provides that:

    "In deciding what order (if any) to make about costs, the court must [one emphasises that word] have regard to all the circumstances, including-

    (a) the conduct of all the parties;

    (b)...

    (c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention (whether or not made in accordance with Part 36)"

32. Accordingly, the court has a discretion. The authorities show that the discretion may be derived variously or cumulatively from rule 44.3 or rule 36.1(2). In exercising that discretion the court must have regard to the conduct of the parties and any admissible offer to settle, whether made in accordance with Part 36 or not. It is not suggested that the offers in question in this case were not admissible offers to settle in the sense of admissible before the court on this question.

33. Dyson LJ considered the background and previous authority and in doing so referred to all the relevant cases, including Amber and Stacey, The Maersk Colombo and Crouch. I do not propose to rehearse in this judgment the bits of those cases to which Dyson LJ referred. They can be found in paragraphs 12 to 22 of his judgment. He introduces his examination of authority in paragraph 12 with these words:

    "There is no doubt that an offer by a defendant to settle a money claim will not automatically have the cost consequences set out in CPR 36.20(2) unless it is made by way of a Part 36 payment. This is expressly provided by CPR 36.3(1). Neither CPR 36.5(5) nor CPR 36.23 (the two exceptions in CPR 36.3(1), has any application in the present case. But the court can exercise its discretion to order that an offer which is not made in accordance with Part 36 (including ,therefore, an offer made before the commencement of proceedings which is not followed by a payment into court pursuant to CPR 36.10(3)(a) within 14 days of the service of the claim form) shall have the costs consequences specified in CPR 36.20(2): that is expressly provided by CPR 36.1(2) and CPR 44.3(4)(c).

    These provisions enabling the court to order that an offer should have the costs consequences specified in CPR 36.20(2) had the effect of reversing the pre-CPR practice which was most clearly articulated by this court in Cutts v Head [1984] Ch 290."

34. With that introduction Dyson LJ proceeded to consider the more recent cases. Having done so he came, in paragraph 23 of his judgment, to give guidance as to the exercise of the discretion. He said this:

    "How should the discretion accorded by CPR 36.1(2) and 44.3(4) (c) be exercised in relation to an offer made to settle a money claim where the claimant recovers less than the amount of the offer? In the absence of any guidance in the rules, it falls to the courts to provide it. I emphasise that it is a matter for the discretion of the court. It is clear from CPR 36.3(1) that the offer cannot automatically have the costs consequences specified in Part 36. The question, therefore, is what weight should be given to an offer made to settle a money claim.

    24. In my judgment, an offer should usually be treated as having the same effect as a payment into court if the following conditions are satisfied (I consider the effect of a withdrawal at paras 36 to 42 below). First, the offer must be expressed in clear terms so that there is no doubt as to what is being offered. It should state whether it relates to the whole of the claim or to part of it or to an issue that arises in it, and if so to which part or issue; whether it takes into account any counterclaim; and if it is expressed not to be inclusive of interest, giving details relating to interest equivalent to those set out in CPR 36.22(2). This condition does no more that reflect the requirements specified in CPR 36.5(2) in relation to payments into court. Secondly, the offer should be open for acceptance for at least 21 days and otherwise accord with the substance of a Calderbank offer. Thirdly, the offer should be genuine and, not to use the words of Waller LJ 'sham or non-serious in some way'. Fourthly, the defendant should clearly have been good for the money at the time when the offer was made."

    I pause to interrupt from reading from this judgment simply to say that those matters are, and clearly are intended to be, a synthesis of material derived from previous cases. Going on paragraph 25:

    "25.To the extent that any of these conditions is not satisfied, the offer should be given less weight than a payment into court for the purposes of a decision, as to the incidence of costs. Where none of the conditions is satisfied, it is likely that the court will hold that offer affords the defendant no costs protection at all.

    26. But if all of the conditions to which I have referred are met, then I can see no reason in principle why the effect of an offer should differ from that of a payment into court. Simon Brown LJ mentioned the need to promote clarity and certainty, I agree. That is why an offer which is unclear and uncertain will usually not carry the same weight as a payment made into court. But an offer which satisfies the four conditions should by definition be no less clear or certain than a payment into court. It is important to emphasise that the purpose of a payment into court is not to provide the claimant with security for his judgment if he succeeds at trial. It is to encourage settlement."

    Leaving out the rest of that paragraph and the first part of paragraph 27, just preceding the middle part of paragraph 27:

    "In reality, it would be difficult for a claimant who refused an offer to contend after a trial that the offer was not genuine or that the defendant was not good for the money, unless he said that this was why he was refusing the offer at the time. In the absence of such a statement at that time, the court would be likely to infer that the reason for the refusal of the offer was simply that the claimant considered it to be too low. The best way for a claimant to test the genuineness of an offer and the defendant's ability to pay is to accept the offer (or at least to do so conditionally on payment being forthcoming) and see what happens. If this does not occur, it will be a rare case where a claimant will have any prospects of showing that the offer was not genuine or would not have been honoured."

35. That, of course, harks back to the second of the two points, to which I referred, deriving from the case of Butcher, that is to say that a claimant in receipt of a Calderbank offer, who failed to negotiate about it, might be penalised in costs if such refusal was unreasonable.

36. The judge in the present case did not have the benefit of the decision in Stokes Pension Fund. He did, as I have indicated, appear to base his decision upon an underlying premise that it was all or nothing: either the offer of 17th October 2002 was to have the full effect contended for by the defendants, or it was to have no effect at all.

37. In my judgment, albeit this comes out most clearly from the subsequent case, he proceeded upon a wrong principle in so far as he did that. He did not consider whether an intermediate position might have been possible, nor did he consider whether the result, which he produced, was in the round a just result. I emphasise this because Mr Jeremy Stuart-Smith QC, making submissions on behalf of the claimants and in opposition to this appeal, makes a strong submission that this is a case where the judge, in essence, correctly directed himself as to the principles to be applied. Having done so the judge exercised his discretion in a way in which this court should not intervene.

38. Mr Stuart-Smith submits that unless it can be shown that the judge made an error of principle and that the result is manifestly unjust, this court cannot intervene. Mr Stuart- Smith relies, if mutedly, on the fact that Codent themselves have made an antecedent offer without prejudice, except as to costs, on 7th October 2002, offering to compromise the liability issue at 90 per cent. He also makes a muted submission in relation to the fact that the defendants' offer took no account of the claim for an indemnity against sub-suppliers' possible claims. However, in my judgment the judge correctly dealt with and dismissed that particular argument, in particular pointing to the fact that it raised no real issue and that when it was raised in December 2004 it was readily dealt with by the defendants.

39. I would only add to that, in the matter of the indemnity, that if that was all or among the things that was troubling the claimants, then it was up to them to bring that to the attention of the defendants and negotiate about it. Had there been a negotiation there is no doubt that subsequent events demonstrated that a satisfactory conclusion would have been arrived at.

40. Mr Stuart-Smith submits that the factors to be taken into consideration by the judge were all taken into consideration by him. Codent had won on liability. Yes, Dr West's evidence had been destroyed, but that was catered for by the reduction of 30 per cent in the costs that the judge awarded the claimants. The defendants' expert also was wrong, or at least not accepted as being right, and the judge's judgment on liability proceeded on the basis that the ink was just not fit for its purpose. Codent, as I have indicated, offered to compromise at 90 per cent. If that offer had been accepted, none of the costs of the liability trial would have been incurred and it would have reduced the defendants' exposure to quantum.

41. Mr Stuart-Smith accepts that the Codent offer of 7th October 2002 was not a true Part 36 offer. As to the defendants' offers, the first one of them was made very shortly before trial. It stipulated an unduly short time for acceptance. There was no explanation of why they had not made a Part 36 payment and there was no assurance that they were indeed good for the money. Mr Stuart-Smith submits that in his discretion the judge took all these matters into account. He addressed the submissions that had been made and he held that taking all these matters into account the offers should not have the effect that the defendant contended for. It was, he submits, well within the judge's discretion. The judge had the correct principles in mind.

42. In my judgment, the judge did make an error of principle in that he assumed wrongly, as Stokes now indicates, that the answer to the question had to be all or nothing. Either the letter had its full effect from 22nd October 2002, or it had no effect at all. I also take up Mr Stuart-Smith's challenge and express the clear view that the result of the judge's costs order was manifestly unjust to the defendants. The plain fact was that the defendants had made a clear, unequivocal offer to settle the entirety of these dreadful proceedings, on 17th October 2002, in a sum which substantially exceeded that which the claimants eventually recovered, yet the judge's decision gave it no benefit from that fact at all. I think that the right thing to do, in the circumstances, is for this court to re-evaluate the matter and to exercise again the discretion which the judge, as I think, exercised in a wrong manner.

43. The fact that the claimants made an offer on 7th October 2002 to accept 90 per cent of whatever should turn out to be their claim, is not an irrelevant matter. It needs to be taken into account. It is not, in my judgment, particularly persuasive. The main reason, in my judgment, why it is not particularly persuasive is because, in truth, and as things turned out, the defendants' offer of 17th October 2002 was a better offer, from the claimants' point of view, than the offer which they themselves had made ten days earlier.

44. Another factor which I think bears upon the exercise of discretion is the fact that, at the time the 17th October 2002 offer was made, the claimants' pleaded case was not viable. At that stage they were relying on Dr West. Dr West's opinion was subsequently demolished and it was only following an amendment in February of the following year that the claimants got a viable case of liability on to its feet. That case, of course, eventually succeeded.

45. Reverting to Dyson LJ's four points, it seems to me that the first of those was entirely fulfilled. The offer was expressed in clear terms. The second of Dyson LJ's points was not fulfilled. That is to say that the offer should be open for acceptance for at least 21 days, and I shall return to what I consider to be the appropriate effect of that in a few moments. Thirdly, the third point is that the offer should be genuine. There is no question but that the offer in this case was genuine. Fourthly, the defendants should clearly have been good for the money at the time when the offer was made.

46. In the present case the defendants were good for the money at the time when the offer was made because they were backed by adequate insurers. The claimants, so I understand, knew that they were backed by insurance. They did not know the terms of the insurance, nor could they know for certain that the insurance was indeed adequate to cover, and to cover quickly, the £100,000 plus costs, which was offered in the letter of 17th October 2002. However, they only had to ask. As Dyson LJ says in paragraph 27 of Stokes, it would be difficult for a claimant who refused an offer to contend, after a trial, that the defendant was not good for the money, unless he said that this was why he was refusing the offer at the time.

47. In the absence of such a statement at the time the court would be likely to infer that the reason for the refusal of the offer was simply that the claimants considered it to be too low. I would so infer in this case and I refer back to Butcher for what can be referred to as the risk upon claimants who refuse to negotiate in the face of a Calderbank offer, which would otherwise be acceptable to him.

48. The one point of Dyson LJ's quartet, which was not satisfied and significantly not satisfied, was the time for acceptance that the letter stipulated and indeed the time at which it was made. It was not made 21 days before the hearing. It was made 12 days before the hearing. It did not stipulate 21 days for acceptance, but stipulated five days for acceptance of which two days were the weekend.

49. It seems to me that that is a matter which the court should take into consideration and should bear in mind, that to the extent that any of the conditions referred to by Dyson LJ are not satisfied (as I am satisfied in this respect this was not) the offer should be given less weight than a payment into court for the purposes of the decision as to the incidents of costs. That, to my mind, quite plainly means finding a sensible and just intermediate position. It seems to me that an offer stipulating effectively three days for acceptance made 12 days before the trial, admittedly expressed to be made in order to settle the matter before delivery of briefs, nevertheless has left the claimants with inadequate time to consider it and, indeed, if so advised, to negotiate about it before the trial came on.

50. However, it seems to me that two important considerations are to be brought to bear. The first is to return to Mummery LJ in Butcher and ask the critical question: why did the claimants not accept the offer? There is, it seems to me, no reason in evidence, nor any obviously inferable reason, why they did not accept it other than they did not regard the amount offered as being anything like enough. There is, in my judgment, considerable, if somewhat flamboyant, force in Mr Bartley-Jones' submission that the true reason why they did not accept the offer was because they had in the background a £2 million claim for loss of profits which they wished to advance, against which they regarded an offer of £100,000 as being entirely inadequate.

51. Mr Stuart-Smith has submitted that the court cannot, for certain, tell what the claimants would have done if there had been a full-blown 21 days, Part 36 payment into court in this case. I grant that the court cannot for certain know what the claimants would have done because that eventuality did not happen. I am quite confident upon the evidence, and upon what this court has been told, that the shortness of time stipulated for acceptance by the defendants in this case was not, in truth, a material reason why the claimants did not accept the offer. That does not, in my judgment, however, mean that no effect should be given to the shortness of time. Effect should be given to the shortness of time for the very simple reason that that is, in substance, what Dyson LJ is saying in paragraph 25 of his judgment in Stokes Pension Fund. The obvious reason why he is saying this is because those who make full-blown Part 36 payments in accordance with the provisions of Part 36 do, other things being equal and unusual questions of justice apart, have the benefit of the provisions of rule 36.20. Those who do not follow those procedures, who instead do not put money into court and do not obtain the procedural benefits that Simon Brown LJ referred to in Amber, are at risk of not getting the full benefit of the payment into court, in my judgment, rightly so, where the stipulated time period fell well short of the 21 days that appears in the rules.

52. Looking at what I regard as the reality of the present case, it seems to me that a fair hypothetical approach would be to say that, if the claimants had seriously thought that the offer was worth thinking about, and if they had come into the open and started a sensible and proportionate negotiation (proportionate, I say, in the light of subsequent events), then a settlement would have been achieved. It seems to me that the time period within which that settlement would, and probably should, have been achieved would have been at the start of the liability hearing. It would not, in all the circumstances (I am talking hypothetically) seem to me to have been unreasonable for the claimants to have taken a bit of time to think about this offer and to have satisfied themselves that the defendants were good for the money; maybe to have tied up some details in relation to the indemnity. This would have taken a bit of time and we would have reached the first day of the trial.

53. In those circumstances, taking account of the matters that I have referred to and for the reasons that I have given, I think that the right order for costs, in the light of the offer of 17th October 2002, would have been that the claimants should have 70 per cent of their costs of the action up to, and including, the first day of the liability hearing, that is to say 29th October 2002, and that the defendants should have their costs thereafter. That would include setting aside the judge's order not only in relation to the liability hearing up until 22nd December 2003, but also encompassing so that the defendants get their costs of the dead period between then and the date in early 2004, when the full court payment into court was made. For these reasons, and to that extent, I would allow this appeal.

54. LADY JUSTICE ARDEN: I agree with my Lord that the judge made an error of principle for the reasons that my Lord has explained. The judge limited his consideration to the submission made to him of whether the offer made by the appellants should protect them in costs from -- and here I quote from the judgment--:"the date on which they were made." In fact, Mr Bartley Jones' submission to the judge (as I read his closing submissions) was that the date from which costs should run should be, in the case of the first offer, the date on which it lapsed, and in the case of the second offer, the date on which it was rejected.

55. Be that as it may, the learned judge did not consider whether, if he rejected that submission, the offers should be taken into account in some other way. As Clarke LJ said in The Maersk Columbo, the courts should encourage settlement. One way of doing so is to make effective orders for costs where the claimants could have settled for more than they were ultimately held to be entitled.

56. I would add that the court should also encourage parties to keep assessing the amount at stake in the litigation because the financial discipline which an offer makes will make it more likely that the costs they incur will be proportionate to the amount at stake. There is clearly a substantial public policy interest in a party incurring only costs that are proportionate to the amount at stake.

57. I also agree with my Lord that in the event of an error of principle it falls to this court to re-exercise the discretion as to costs which the judge had. I further agree with my Lord that the date from which the appellants become entitled to costs under that order, as varied by this court, is not one of the specific dates sought by the appellants in its appellants' notice. It will not enable the appellants to recover brief fees paid to their own counsel on or before the first date of the trial. The order proposed to be made by this court in addition also varies a period for which the judge held there should be no order. Mr Bartley Jones informed this court that in that period the appellants incurred few, if any, costs.

58. I add one further substantive observation of my own. Mr Bartley Jones submits that logically a Calderbank offer could confer protection superior to that of a Part 36 offer, but that the court would be reluctant to see superior protection unless the circumstances were unusual. It is unnecessary to express a final view on that submission because the offer of 17th October 2002 was a beneficial offer, which, properly evaluated, the respondents they should have considered very seriously.

59. The appellants, for their part, were faced with a trial on liability and the possibility of a claim for loss of profits of £2 million, a claim first intimated by a letter dated 29th November 2001. In those circumstances it is reasonable to infer that they would have been prepared to negotiate an extension of their offer.

60. In my judgment, if an offer had been made on 17th October pursuant to Part 36, the offer would have been open for acceptance on the first day of the trial, and pursuant to CPR 36.11(2)(b)(ii) the court would have given the respondent permission to accept the offer on the first day of the trial. Moreover, it would have been reasonable not to accept that offer until then as the respondents had had only 12 days to consider it. In addition, in my judgment, the court would have made an offer for costs in the terms that my Lord proposes.

61. The weight given to the offer by this court's order will therefore be no different from that which an offer, pursuant to Part 36, would have had. The passages which my Lord, May LJ, referred to in the Stokes Pension Fund case, assumed that the weight to be given by the court to an offer, which is not made pursuant to Part 36, will be no greater than an offer made pursuant to CPR 36. Accordingly, while it is unnecessary to express a final view on this point, I find it difficult to accept that there could be cases in which an offer not made pursuant to Part 36 could protect the offer or in costs to an extent greater than a Part 36 offer, which he could have made, would have done.

62. For those additional reasons I also agree that this appeal should be allowed on the terms that my Lord proposes.

63. SIR PETER GIBSON: There is much in the full, careful and lucid judgment of the judge with which I am in respectful and admiring agreement. But like my Lord, May LJ, I too am satisfied that, with all respect to the judge, he did err in principle and produced a result which was unjust in giving two Calderbank offers little or no effect on the protection of costs. The principal reason for the judge's conclusion was the fact that there was no payment in and no explanation for that failure.

64. As Dyson LJ explained in paragraph 26 of the Stokes case, the purpose of a payment into court is not to provide the claimant with security for his judgment if he succeeds at trial, but it is to encourage settlement. If a claimant has no less assurance as to the substance of an offer than where a payment into court has been made, there is no reason to treat the offer as providing any less encouragement to settle, or to treat it differently from a payment into court.

65. As for the failure to provide an explanation, Dyson LJ, in paragraph 29 of his judgment, pertinently said this:

    "There may be circumstances where the existence of a good practical reason for not making a payment into court would be considered to be a sufficient reason for holding that an offer should have the same costs consequences as a payment into court. But the existence of such a reason is certainly not a necessary condition for treating an offer as having such consequences. In my judgment, however, the substance and effect of the offer are more important than the reasons why the defendant did not make a payment into court."

66. For these, as well as the reasons given by my Lord, with which I am in entire agreement, I too would allow this appeal and make the order which he suggests.

    Order: Appeal allowed; judge's order varied so claimant's get 70 per cent of costs, up to and including first day of trial, 29th October 2002; defendants shall have costs thereafter; Christmas and New Year 2003/2004 become defendant's costs; appellant to have costs of appeal assessed at £27,000; order for interim payment of £200,000 payable within 28 days by claimant to defendants in relation to costs liability resulting from appeal.