Calonne Construction Ltd v Dawnus Southern Ltd

Hearing date: Thursday 11 th April 2019

Approved Judgment

Order at bottom of this judgment.

This appeal concerns the requirements of a Part 36 offer. In particular, it is concerned with whether such an offer is valid if: it is made by a defendant in respect of both a claim and a proposed counterclaim which has yet to be pleaded; and it contains provision for interest to accrue at a particular rate after the expiry of the “Relevant Period”.

The Appellant, Calonne Construction Limited (“Calonne”) contends that an offer dated 22 February 2017 (the “Offer”) which was made on behalf of the Respondent, Dawnus Southern Limited (“Dawnus”) was not a valid offer for the purposes of CPR Part 36, His Honour Judge McKenna was wrong to treat it as such and that Dawnus should be ordered to pay at least part, if not all of Calonne's costs of the proceedings below. The appeal is from the Judge's order dated 25 July 2018. The Judge had dealt with the substantive matters in a written judgment the citation of which is [2018] EWHC 1634 (TCC) which had been handed down on 29 June 2018.

Background and substantive decision

The proceedings in which the Offer was made were concerned with the disputes which arose in connection with works carried out by Dawnus in relation to the extension and refurbishment of a residential property at 12 Calonne Road, Wimbledon (the “Property”). The Property is owned by Mr Nader Farahati and his wife. Calonne was set up as a special purpose vehicle to manage the works. It then appointed Iesis Limited (“Iesis”) as independent contract administrator and Visu Verum Limited (“VV”) as project manager.

Dawnus was engaged by Calonne to carry out works as part of the refurbishment pursuant to a contract dated 20 January 2014 (the “Contract”). The works were subject to delays and the completion date under the Contract was not met. Applications for extensions of time were rejected by Iesis. Practical completion was certified on 26 January 2016, conditional on certain outstanding works being completed.

On 25 February 2016, Dawnus served a Statutory Demand on Calonne based on three invoices issued between November 2015 and January 2016. In any event, it provided its final account on 1 March 2016 and Iesis produced a final account review on 9 March 2016 on behalf of Calonne. A Non-Completion Notice was issued the following day.

On the night of 22 June 2016, a storm caused water ingress into the basement of the Property, and on 6 July 2016, Calonne agreed to accept £131,598.70 by way of insurance payment in full and final settlement of the claim for the damage caused by the water. As a condition of payment Mr Farahati, on behalf of Calonne, and a Mr Squirrel, on behalf of VV, signed a declaration to the effect that Calonne and VV had not and would not be recovering any compensation from any other source.

Thereafter, by a claim form dated 20 December 2016, Calonne sought: declarations as to the sums due under the Contract, including issues relating to provisional sums, changes to the works and extensions of time; liquidated damages in the sum of £103,420.00; damages for defective and incomplete works in the sum of £70,911.66; loss and damage in relation to the water ingress in the sum of £256,382.23; and damages in the sum of £120,000, allegedly equivalent to six months' rental income for the period during which it was alleged that the Property could not be inhabited as a result of the water damage.

On 3 February 2017 Calonne made an offer to settle the proceedings which was expressed to be a Claimant's Part 36 offer. It stated that Calonne was willing to settle the claim and the “anticipated counterclaim” if Dawnus accepted the offer and paid £100,000 inclusive of interest within 14 days of having done so. On 22 February 2017, within the 21 day period specified in Calonne's offer, Dawnus' solicitors sent a letter to Calonne containing the Offer. In so far as relevant, the Offer provides:

“ WITHOUT PREJUDICE SAVE AS TO COSTS

OFFER MADE PURSUANT TO CPR PART 36

As you are aware, we are in the process of preparing our client's defence and counterclaim which will be filed on 3 ^rd March 2017…

… We are therefore, authorised by our client to make your client, the following offer to settle under Part 36 (“the Offer”).

This Offer is intended to have the consequences set out in Part 36 of the Civil Procedure Rules. In particular, your client will be liable for our client's costs up to the date of notice of acceptance which must be in writing (“Notice of Acceptance”), in accordance with CPR 36.11, if the offer is accepted within 21 days (“the Relevant Period”).

This offer will remain open for a period of 21 days from the date of receipt of this letter.

Terms of the Offer

Our client is willing to settle the whole of your client's claim contained within the claim number HT2016000331, together with the counterclaim which our client will shortly be issuing within the same proceedings:

1. You pay to our client the sum of £100,000 (“the Settlement Sum”) payable within 14 days of service of the Notice of Acceptance.

2. The Settlement Sum does not include costs and, as mentioned above, your client will be liable to pay our client's costs on the standard basis, to be assessed if not agreed, up to the date of service of Notice of Acceptance if this Offer is accepted within the Relevant Period.

3. The Settlement Sum is inclusive of interest until the relevant period has expired. Thereafter, interest at a rate of 8% per annum will be added.

…”

Dawnus then served its Defence and Counterclaim dated 3 March 2017. The counterclaim was for damages in the sum of £407,524.93. Dawnus abandoned its claim in relation to an extension of time under the Contract and for loss and expenses in that regard in its Defence. Furthermore, most of the claim in relation to the Contract sum, all of the liquidated damages and the claim in relation to changes had been agreed before trial. At trial, therefore, the Judge was only concerned with whether the Contract included certain provisional sums, whether the works were defective and/or incomplete, whether defective works had allowed the water ingress into the basement, and if so, whether Dawnus was liable for it and in what amount and whether there was an agreement that Calonne would settle Dawnus' account within 14 days of practical completion.

In summary, the Judge found that Dawnus' claim in relation to provisional sums failed: see judgment at [25] – [29]. As to the alleged agreement about payment, the Judge concluded that in reality, “there never was a concluded agreement entered into in November 2015” in the form alleged by Dawnus. If he was wrong about that, he held that, in any event, Dawnus did not comply with the terms it asserted were agreed and was not entitled to suspend its works: [36].

In relation to the claims relating to water ingress in the basement, the Judge noted that Mr Farahati had tried to keep the insurance claim and the settlement of that claim secret, did not provide standard disclosure of the documents concerning the insurance claim and that it was not until the end of 2017 that Calonne finally accepted that the documentation should be disclosed: [52]. He went on to note that the claim had been pursued successfully against the insurers on the basis that the loss and damage were caused by a storm, and not by any negligence on the part of Dawnus, that Calonne had been compensated for the water ingress and damage and that it followed that Calonne could not pursue the claim: [55] – [56]. The Judge went on to make detailed findings in relation to Calonne's claims in relation to defective works ([57] – [67]) and, lastly, he rejected its claim for damages equivalent to six months' rental income: [75].

Hearing in relation to consequential matters

At the hearing of the consequential matters, amongst other things, the Judge addressed the two main submissions which it was said rendered the Offer invalid for the purposes of CPR Part 36. First, the Judge rejected the argument that the inclusion in the Offer of a counterclaim which had yet to be pleaded rendered the Offer invalid. He did so on the basis that although the argument was supported by the judgment of Morgan J in Hertel & Anr v Saunders [2015] EWHC 2848, he was either bound by the decision of the Court of Appeal in AF v BG [2009] EWCA Civ 757 [2010] 2 Costs LR 164, which had not been cited to Morgan J, or it was very persuasive. The Judge is recorded in the transcript of the consequential hearing as having described the AF v BG decision in the following terms:

“. . the judgment of the court is given by Lord Justice Lloyd, where it's absolutely plain that he considers that there is nothing preventing an offer purporting to settle a counterclaim not yet formulated which would take the offer outside Part 36.”

Second, the Judge rejected the argument that the addition of a provision relating to the rate of interest to be charged after the end of the relevant period rendered the Offer invalid as a Part 36 offer. The wording was contained in paragraph 3 of the Offer and provided that interest at the rate of 8% would be added. The Judge dealt with this aspect of the matter quite briefly. He concluded that Offer did comply with the provisions of CPR Part 36.5 and accordingly, that the argument...