OMV Petrom SA v Glencore International AG

Factual and Procedural Background

The Appellant, Company A, a Romanian oil company, brought a claim against Company B concerning 32 shipments of oil supplied between 1993 and 1996. The dispute arose because the oil delivered was a blend of lesser value than the types contracted for, a fact concealed by Company B. After a whistle-blower revealed the deceit in 2002, initial arbitration proceedings by an agent failed to recover damages on behalf of Company A. Subsequently, Company A commenced its own arbitration and tort proceedings for deceit, with the arbitration claim failing due to res judicata. Company A then pursued High Court proceedings, where the trial began in January 2015 after an adjournment. Judgment was given in March 2015 awarding damages of approximately US$40 million to Company A, excluding interest. The trial judge found Company B's conduct unreasonable and dishonest, describing it as a "very flagrant case of fraud."

Company A had made a CPR Part 36 offer to settle for US$35 million inclusive of interest and costs, which Company B did not accept or counter. The judge awarded interest on the judgment sum at a base rate plus an uplift, along with indemnity costs and additional sums under CPR Part 36.14. Company A appealed the rates of interest awarded for the period between the expiry of the Part 36 offer and judgment, arguing that the maximum permissible uplift of 10% should have been applied.

Legal Issues Presented

1. Whether the court may award an enhanced rate of interest up to the maximum 10% above base rate under CPR Part 36.14(3)(a) and (c) when a claimant's Part 36 offer is rejected but the claimant obtains a greater award at trial.
2. Whether the enhanced interest provisions under CPR Part 36.14(3) are compensatory or penal in nature.
3. Whether the defendant’s unreasonable conduct forfeits any reduction in the rate of additional interest payable.
4. The appropriate basis and discretion for setting the rate of enhanced interest on both damages and costs following a successful Part 36 offer.

Arguments of the Parties

Appellant's Arguments

• The judge erred in treating the enhanced interest provisions as purely compensatory, limiting the interest to what compensated for disruption and litigation difficulties.
• Following the guidance in Petrotrade Inc v. Texaco Ltd, a party behaving unreasonably forfeits any reduction in the rate of enhanced interest.
• The power to award enhanced interest should serve as a deterrent against unreasonable conduct and incentivize settlement, justifying the maximum 10% uplift in this case.
• Recent developments in case law and procedural reforms support a tougher approach to sanctions for unreasonable litigation conduct.
• The award of interest on costs under CPR Part 36.14(3)(c) should also be enhanced to 10%, reflecting the unreasonable conduct and costs incurred.

Respondent's Arguments

• The judge correctly applied the established compensatory approach from Petrotrade and McPhilemy v. Times Newspapers Ltd, which have been consistently followed for over 14 years.
• The enhanced interest provisions under CPR Part 36.14(3)(a) and (c) are not penal but aim to fairly compensate claimants for litigation disruption.
• The relatively new penal provision under CPR Part 36.14(3)(d), allowing an additional sum up to £75,000, is the sole penal mechanism and its adequacy should not be a reason to alter the compensatory basis for interest rates.
• Applying a 10% uplift would be disproportionate and anomalous given the size of the award and the existing penalties.
• Previous cases awarding enhanced interest on costs have applied more modest uplifts, typically around 4% over base rate.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Petrotrade Inc v. Texaco Ltd [2000] EWCA Civ 512	Guidance on enhanced interest under CPR Part 36; unreasonable conduct forfeits reduced interest rates.	Respected but not binding; ratio limited to non-application to summary judgment; guidance on incentives and compensation considered persuasive.
McPhilemy v. Times Newspapers Ltd [2001] EWCA Civ 871	Enhanced interest provisions are compensatory, not penal; incentives to encourage settlement; distinction between interest on damages and costs.	Obiter for enhanced interest on damages, ratio for enhanced interest on costs; court followed compensatory approach but acknowledged discretion.
Hunt v. R M Douglas (Roofing) Ltd [1990] 1 AC 398	Interest is generally not allowed on costs paid before judgment.	Supported rationale for awarding interest on costs to achieve a fairer result.
Halsey v. Milton Keynes General NHS Trust [2004] 1 WLR 3002	Unreasonable refusal to mediate may attract costs sanctions as penalties.	Referenced to illustrate evolving approach to sanctions and penalties in litigation conduct.
PGF II SA v. OMFS Company 1 Limited [2013] EWCA Civ 1288	Costs sanctions for unreasonable litigation conduct; "carrot and stick" approach.	Used to support argument for penal elements in enhanced interest awards.
Mitchell v. News Group Newspapers Limited [2014] 1 WLR 795	Tougher approach to relief from sanctions; sanctions as incentives for reasonable conduct.	Referenced to demonstrate the direction of procedural reforms.
Denton v. TH White Limited [2014] 1 WLR 3926	Sanctions for unreasonable conduct; importance of overriding objective and cooperation.	Supported the principle that courts should penalise unreasonable litigation behaviour.
DHL v. Erinaceous [2009] EWHC 3479 (QB)	Award of uplifted interest on costs at 4% over base rate.	Used as precedent for appropriate interest rate on costs.
Barnett v. Creggy [2015] EWHC 1316 (Ch)	Award of uplifted interest on costs at 4% over base rate.	Supported the reasonableness of a 4% uplift on costs interest.
Pankhurst v. White [2011] Costs LR 392	Enhanced interest awards not intended to be compensatory; limits on judicial innovation.	Supported the compensatory approach and limited scope for penal interest.

Court's Reasoning and Analysis

The court distinguished between the decision to award enhanced interest and the rate at which it should be set, noting that the judge's decision to award enhanced interest was not challenged. The key issue was whether the judge erred in limiting the uplift on interest to what was compensatory for disruption caused by litigation, thereby excluding a penal or incentive element.

The court held that the 10% figure in CPR Part 36.14(3)(a) is a maximum, not a starting point, and that the objective of the rule includes encouraging good litigation conduct and settlement. The court emphasized that unreasonable conduct by the defendant forfeits any reduction in the rate of enhanced interest, consistent with Lord Woolf's guidance in Petrotrade and Chadwick LJ's in McPhilemy.

The court rejected the view that the enhanced interest provisions are purely compensatory, recognizing that a non-compensatory element is appropriate to incentivize parties to settle and to mark disapproval of unreasonable conduct. The court noted the reforms introduced by Jackson LJ and subsequent case law emphasizing sanctions and incentives to promote proportionate litigation conduct.

Regarding the enhanced interest on costs, the court found that the judge failed to consider that the costs were largely incurred unreasonably due to the defendant's dishonest and unreasonable defence. The court concluded that the full 10% uplift was appropriate for both the award and the costs interest given the egregious conduct of the defendant, including ignoring the Part 36 offer and refusing mediation.

The court acknowledged that the total enhanced interest award, amounting to approximately 6.5% of the damages, was not disproportionate in context. The court also noted that the judge's discretion is wide but that the circumstances here justified maximum uplift.

Holding and Implications

The appeal was ALLOWED. The court held that the judge should have awarded the maximum 10% uplift above base rate for enhanced interest on both the damages award and the costs for the period from the expiry of the Part 36 offer until judgment.

This decision clarifies that the enhanced interest provisions under CPR Part 36.14(3)(a) and (c) are not strictly compensatory but may include a penal or incentive element to discourage unreasonable litigation conduct and encourage settlement. The ruling reinforces the court's power to impose enhanced rates of interest as a sanction for uncooperative behaviour, thereby strengthening the effectiveness of Part 36 offers as settlement incentives.

The court emphasized that such appeals should be rare, given the broad discretion judges have in setting enhancement rates, but confirmed that in egregious cases of unreasonable conduct, the maximum uplift is appropriate.