Neutral Citation Number: [2007] EWHC 1039 (TCC)
Case No: HT-04-368
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 04/05/2007

Before :

HIS HONOUR JUDGE DAVID WILCOX
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Between :

	MAERSK OIL UK LTD
FORMERLY KNOWN AS KERR-MCGEE OIL	Claimant
	
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DRESSER-RAND (UK) LIMITED
	
Defendant	

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Peter McMaster and Thomas Braithwaite (instructed by Russell Ridley & Co.) for the Claimant
Gaynor Chambers (instructed by Faegre & Benson LLP) for the Defendant

Hearing date: 19 April 2007
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Judgment
His Honour Judge Wilcox : 
1.	KMG has proved an entitlement to damages in the sum of £1,760,555.  It is accepted by DR that with interest, KMG will be entitled to judgment in a sum not less than £2,100,000.
2.	The claim was for damages for breach of contract in respect of a compressor package designed and fabricated by DR and warranted fit for purpose for operation in the North Sea Janice oil field.  In many significant respects affecting its safety and reliability it was not fit for purpose.
3.	The compressor package was part of the process plant on the floating oil platform and was a highly complex part of the process equipment.  For ease of presentation equipment and design failures were identified under a number of heads;  vibration issues;  liquid processing issues;  welding defects;  control issues and electric motor failures.  There was a miscellaneous head – that of additional costs relating to monies paid to DR for services in fact caused by KMG’s own breaches, and extra spare parts used because of KMG’s breaches,  IGL consultants on board to investigate breaches and finally a wholly misconceived claim for the cost of marine diesel fuel.  The claim for marine diesel fuel was in the sum of £3,760,746, representing the cost of fuel brought in when processed fuel produced by the platform could not be used to fuel the platform by reason of DR’s breaches.  This claim was misconceived 
  (i) 	because as observed in the main judgment at paragraph 662, any such loss proved was a consequential loss within clause 19.7 of the Purchasing Contract and thus irrecoverable.  This was not part of DR’s pleaded case, however.
 (ii)	in any event the claim was a global claim and not susceptible of apportionment as between causative events, the responsibility of DR and those which were not.
4.	The diesel claim was added by way of amendment.  No objection was taken that it was bad in law.
5.	It took the pleaded claim from £4,166,741 to £7,432,678 by the time the re-amended Particulars of Claim was served on 22 June 2006.
6.	The issue occupied a modest part of the hearing time.  Mr Boyne, KMG’s quantum expert, was unable in the event to support the claim and answer DR’s quantum expert’s succinct principled objection on reviewing the claim that there were no evidence to warrant an apportionment of sums expended on marine diesel oil.  Mr van Voorst in his supplementary report of June 2006 briefly and effectively exposed the flimsy basis of KMG’s quantification of marine diesel oil claim.
7.	DR’s 550 pages of submissions helpfully sought to analyse the principal issues into sub-issues.  Thus there were many trees.
8.	At the end of the day this is a case about a package that was not fit for purpose in significant respects and the claimant, KMG, proved this to be the case.
9.	DR submits that in relation to each of the principal issues when the damages are compared against the whole, the recovery is modest and should be reflected in the assessment of costs.
10.	Miss Chambers submits that the recovery of £1,764,555 is only 22 per cent of the sum claimed using the total sum which includes the marine diesel claim.
11.	There was of course a contractual cap on damages under clause 42 of the Purchasing Contract.  See paragraphs 109 to 122 inclusively of the main judgment.  The cap on damages was £3,133,400.  Miss Chambers criticises KMG for pursuing claims above this sum. She submits that this emphasised a perception of the claimant that its claims were weak and everything had to be pursued.
12.	In the event, with the exception of the marine oil claim, the claims pursued by the claimant were based upon credible technical and expert evidence in the main admitting of no easy answer.  In relation to those general issues where no award of damages was made, or a very cautious approach was adopted, there was established a breach, but the exact extent of the damage could not be demonstrated.
13.	Miss Chambers submits that DR experienced difficulties in relation to making any proper assessment of quantum.  Miss Chambers relies upon the passage in her written submission:
“KMG’s omissions to fully inform DR of its case – both by its failure to provide copies of the 60 invoices which Mr van Voorst had been unable to assess within a reasonable period of time and in particular its late reliance on additional documents as discussed in the experts’ meetings and placed before the court – placed DR in an impossible position in its attempts to gauge the strength of the case against it and is a matter which DR submits must necessarily impact on the court’s assessment of costs.”
14.	There were a number of Part 36 offers made in this case to which reference will be made later.  There were also attempts made to mediate a settlement, which were unsuccessful.
15.	For a party to be able to make a realistic offer to settle he must be in a position to form a judgment as to the forensic risks in the context of any relevant commercial considerations such as market reputation, future dealings with the other party and the tying up of resources both of personnel and financial.  It behoves parties to be open and transparent in relation to the litigation process, and in particular by furnishing the other party to the litigation with full and up to date details of the claim as may be reasonable and bear relation to the stage of litigation reached.
16.	Miss Chambers supports her submission by reference to Mr van Voorst’s valuations of KMG’s claims.  In his report of 23 April 2006 they totalled £1,568,106 and this increased by £13,131 to £1,581,237 in his second addendum report on 26 June 2006.  This sum then increased to £2,415,494 subject to liability in the few days prior to the quantum hearing in July 2006.  It is said that the increase was due to two factors, namely there was inadequate referencing in Mr Boyne's report and, secondly, the expert’s discussions of various documents were late in the day.
17.	Mr McMaster submits that there was no failure to supply information on quantum and the suggestion that Mr Boyne failed to supply copies of 60 vital invoices is not accurate.  He points to the invoices in Mr Boyne’s report, which gives each invoice the file and tab number where the documents relied upon could be found.  I am satisfied that the invoices were supplied in a timely manner. The filing system made it easy to locate them. The files were provided in hard copy in 2005 and were tabbed, and DR were also supplied with PDF copies of the documents containing necessary file and tab references.
18.	It is evident from the correspondence produced to me that Mr Boyne spoke to Mr van Voorst and explained how he could locate the invoices referenced.  Mr Boyne’s report at file 50 is fully referenced and I can see that no difficulty properly should have arisen in relation to these invoices.
19.	Furthermore, the pre-action protocol was complied with by KMG.  Before this, on 17 December 2002, KMG wrote to DR with a technical report and with supporting documents for the purposes of settlement discussions notifying the claim.  A meeting took place on 15 April 2003 following DR’s request for supporting documentation and justification of the costs.  No settlement was achieved at the meeting of 15 March 2003 and a formal protocol Letter of Claim was provided on 12 February 2004 containing substantially all of the claims upon which KMG succeeded at trial.  Significantly, they were quantified in a schedule by reference to the job numbers which Mr van Voorst found so helpful in his approach and reporting.
20.	On 2 April 2004 the claim was denied in emphatic terms, denying compliance with the pre-action protocol and asserting that KMG had not properly set out or understood the contractual terms between the parties.  Thereafter followed further protocol letters and requests for particulars of invoices and information which I am satisfied were supplied.
21.	I reject the submission that DR were not able to take stock of their position in the litigation and to make informed offers to settle the litigation.
22.	I accept that the actual meetings of the experts did not take place until late in the course of litigation.  I am not persuaded that this was by reason of Mr Boyne’s unwillingness to meet or discuss matters with Mr van Voorst.
23.	Following receipt of DR’s defence and counterclaim, KMG made a Part 36 offer in the sum of £1,250,000 on 4 October 2004.  It related to the pre-amended claim and was withdrawn and accordingly is of no effect under CPR 36.5(8) which states that “If a Part 36 offer is withdrawn it will not have the consequences set out in this part”.
24.	On 27 May 2005, KMG made a Part 36 offer of £2,000,000 which included the counterclaim and interest but not costs.  DR concedes that on the basis of the judgment sum of £1,764,555 the sum including interest would have been of the order of £2,100,000, which means that KMG has comfortably beaten its claimant’s Part 36 offer.
The effect of the Part 36 offer on the court’s discretion on costs
25.	The Part 36 offer does not affect the court’s underlying discretion on costs.  Part 36.21(b) provides:-
“(3)	The court may also order that the claimant is entitled to
(a)	his costs on an indemnity basis from the latest date when the defendant could have accepted the offer without needing the permission of the court:  and …”
26.	The reference to “his costs” in CPR 36.21(3)(a) was agreed by Tomlinson J to refer to “such costs as would ordinarily be awarded to him applying the principles set out in CPR 44.3, i.e. without regard to the impact of Part 36.” Kastor Navigation Co Ltd and Atlantic Bank of New York v AGF M A T etc [2003] EWHC 472, and approved in the judgment of Rix LJ, in the Court of Appeal Kastor Navigation Co Ltd v AGF MAT Lloyds LR (204) at page 119, para 137.
27.	In Ian McGlinn v Waltham Contractors etc [2007] EWHC 698, HH Judge Coulson QC helpfully reviewed the approach to costs in a case such as this at paragraph 89 and summarised the authorities. I accept his analysis.
“Summary as to applicable principles
89.	I consider that the following principles can be derived from the authorities cited above:
	(a)	the starting point for the exercise of the court’s discretion is that costs follow the event (CPR 44.3(2) (Johnsey) to work out who is the successful party, the court has to ask:  who, as a matter of substance and reality, has won? (Roache: Painting)
	(b)	In a commercial case it is important to identify which party is to pay the money to the other (A L Barnes).  Where there has been a payment into court, it is important to see whether or not that payment into court has been beaten (Johnsey)
	(c)	A defendant’s failure to beat a payment will usually mean that he is treated by the party as the losing party, particularly if the case is not appropriate for an issue based costs order (Johnsey; Firle; Jackson).  However such failure may not always be regarded as decisive (Baiwa)
	(d)	Depending on the facts the court may treat a defendant who has failed to beat the payment into court as the successful party or make no order as to costs;  although it is not possible to list all the circumstances in which this may be appropriate, they may include the situation where the claimant has only just beaten the payment into court;  where the payment into court reflected much more closely the amount eventually recovered, as compared to the amount claimed;  where the claimant’s conduct made it difficult or even impossible to make an effective payment in;  and where the trial was largely devoted to the failure of the claimant’s exaggerated case (Baiwa; Molloy;  Islam;  Painting).  
	(e)	It may not always be possible for the court to say, when considering the action as a whole, that one party should be regarded as the overall winner (Roache).  Indeed, even if it is possible to identify one party as the successful party it may be appropriate depending on the circumstances to make an issue based costs order so as to give effect to the substance of the result and to move away from too rigid an application of the ‘follow the event’ principle. (AEI; Summit; Flume Leisure, Kotonou)
	(f)	In making an issue based costs order the court will generally endeavour to translate success/failure on particular issues into percentage terms (Summit; Fulham Leisure, Kotonou). In an exceptional case (namely as compared to the general run of cases) such orders may result in an otherwise successful party paying the otherwise unsuccessful party’s costs of a particular issue (as in Summit).
	(g)	Conduct must also be taken into account pursuant to CPR 44.3(4)(a) and (5).  These will include questions of exaggeration, whether intentional or unintentional, and whether the parties demonstrated a willingness to negotiate and/or make offers and counter offers (Painting). ”
28.	It is evident that the starting point must be the fact that KMG is as a matter of substance in reality the winner and DR, in this commercial case, will have to pay substantial monies to KMG.
29.	In my judgment there is no basis for impugning the claimant’s conduct and concluding that they made it difficult or impossible to make any effective payment in.  Whilst there was a belated exaggeration of their claim by the addition of the marine fuel claim, this did not in costs terms distort the litigation or, in the event, place DR in a difficult position.
30.	It seems to me that at all stages of this litigation KMG have been willing to negotiate and themselves make offers on a very realistic basis to achieve a settlement.
31.	As I observed in the main judgment, it is a sadness that DR sought to impugn the integrity of Mr Campbell echoing in part the antagonism displayed in the reply to the protocol letter of 2 April 2004:
“You have not properly set out or understood the contractual terms between the parties … but consider Kerr McGee’s reliance on documents that have apparently been manufactured after the event to be indicative of the manner in which it is pursuing this purported claim … In such circumstances we believe that Kerr McGee’s claim made so long after the event is an entirely commercial move on its part with no foundation in fact or in the contract …”
32.	This is not a case where I consider it appropriate to make an issue based costs order as sought by DR.  That does not mean to say, however, that the late enhancement of the claim by the addition of marine fuel costs should not be reflected in the ultimate costs order despite a relatively small part of the court’s time being occupied by this claim.  I have considered the openings and closings of both parties and the evidence of Mr Sharpe, Mr Boyne and Mr van Voorst, and my assessment is that no more than three per cent of the court’s time was expended upon this issue.
33.	The costs and other consequences where a claimant does better than he proposed in his Part 36 offer are so far as material set out in Part 36.21: 
“(2)	The court may order interest on the whole or part of any sum of money (excluding interest) awarded to the claimant at a rate not exceeding 10 per cent above base rate for some or all of the period starting with the latest date on which the defendant could have accepted the offer without needing the permission of the court.
(3)	The court may also order that the claimant is entitled to 
	(a)	his costs on the indemnity basis from the latest date when the defendant could have accepted the offer without needing the permission of the court; and
	(b)	interest on those costs at a rate not exceeding 10 per cent above base rate.
(4)	Where this rule applies the court will make the orders referred to in paragraphs (2) and (3) unless it considers it unjust to do so.”
34.	Also relevant in this context is:
“(5)	In considering whether it would be unjust to make the orders referred to in (2) and (3) above, the court will take into account all of the circumstances of the case including 
	(a) 	the terms of any Part 36 offer;
	(b)	the stage in the proceedings when any Part 36 offer or 		Part 36 payment was made;
	(c)	the information available to the parties at the time 			when the Part 36 offer or Part 36 payment was made; 		 and
	(d)	the conduct of the parties with regard to the giving or 		refusing to give information for the purposes of 			enabling the offer or payment into court to be made or 		evaluated.”
35.	None of the matters in CPR 36.2.1(5) above affect the position here, but the circumstances set out are not exclusive.
36.	The fact is that there was late introduced a hopeless claim that caused extra expenditure to the parties and for which the defendant should not be penalised. That is a material circumstance,
37.	The period to be considered in relation to the claimant’s costs application must be divided into three periods.
38.	Firstly, until 25 October 2004, the date of the first Part 36 offer made by KMG in the sum of £1,250,000.  Until that date the interest on damages would be at base rate plus one percent.
39.	Secondly from 25 October 2004, the last date for accepting the £1.25 million offer, the claimant seeks its costs on an indemnity basis with interest on costs at 10 per cent above base rate and interest on damage at 10 per cent above base rate, until May 2005.
40.	Thirdly from May 2005, when the increased offer of £2.1 million was substituted for that of £1.25 million.  
41.	Had DR accepted the £1.25 million offer the substantial costs on each side would have been avoided.  The total costs are just under £5 million for the second period.  It is clear the court cannot award indemnity costs or enhanced interest under Part 36 because the lower offer was superseded by the higher offer.  It does, however, seem to be nonsensical that a party who substitutes a less attractive offer which gives protection should be in a worse position.  
42.	In my judgment the proper order to make from 25 October 2004 until the date of the second Part 36 offer in May 2005 under CPR Part 44 is costs on an indemnity basis with interest on damages at 7.5 per cent above base rate and interest on indemnity costs at 5 per cent above base rate.
43.	In relation to the third period May 2005 onwards under Part 36 there will be costs on an indemnity basis with interest at 5 per cent above base rate, and interest on damages at 7.5 per cent above base rate.
44.	The reduction in interest reflects the view that the court takes that it would be unjust to make a full indemnity and enhanced costs order which does not reflect the addition of the hopeless fuel marine claim and associated wasted costs.
45.	Miss Chambers submits that it would be unjust in any event to make an indemnity costs order, for two reasons.  Firstly because the information as to prospective costs expenditure given by KMG was an underestimate, and secondly because rates charged by KMG’s solicitors and experts on the face of it seemed to be high.  As to the costs estimates given it must have been apparent to the legal advisers advising DR what the true rate of costs expenditure was.  It was open to them to enquire at any stage during the proceedings.  It is naïve to consider that they were in any way misled.
46.	As to the rates charged by KMG’s solicitors, I note that they are significantly less than those charged by DR’s solicitors and the rates for the personnel involved, in my experience, sadly, do not surprise.  
47.	Mr Boyne, the quantum expert who advised KMG, had to make the running and was responsible for the compilation of the Scott Schedule in relation to quantum.  It is inevitable that his costs regime will be greater than that of the responsive defendant.  These are not “circumstances” that warrant the court to conclude that it would be unjust to award indemnity costs in this case.