Pharos Offshore Group Limited v Keynvor Morlift Limited

hand-down is deemed to be 10.30 on the 1ST of October 2025. Mr Justice Constable: A. Introduction

1. This judgment deals with consequential matters which the parties have been unable to agree following hand down of the main judgment following trial (see [2025] EWHC 1764 (TCC)) (‘the Judgment’). The Court determined that the amount owed to Pharos Offshore Group Limited (‘Pharos’) is £608,883.31 inclusive of VAT, subject to Keynvor Morlift Limited’s (‘KML’) counterclaim for damages in the sum of £113,214.63. The balance owed to Pharos after setting off the counterclaim, net of interest, was therefore stated to be £495,668.68 inclusive of VAT. Pursuant to the Court’s directions, the parties submitted written submissions as to consequential matters, with both sides agreeing that the remaining disputes could be determined on the papers. Following the provision of determinations of principle, the parties liaised to agree the appropriate calculations. The Court is grateful to the parties for their assistance to this end.

2. The matters of principle to be determined are: (1) Whether there is a correction to be made to the principal sum awarded in respect of one particular invoice; (2) Whether interest is payable on VAT; (3) The date to which interest should run; (4) The consequences of CPR 36.17; (5) How the Court should award costs prior to 4 March 2025. Whether a correction should be made to the principal sum

3. Mr Macey-Dare KC for KML submits that, at [198] of the Judgment the Court accepted Pharos’ claim for £33,650.76 plus VAT in respect of the cost of “Additional Equipment”, with reference to Invoice No. 02185. That figure included the following costs: (1) £14,640.40 for an 8” Black Oroflex 20 Lay-flat Hose (item #1), plus a 10% uplift (£1,464.04) plus VAT (£2,928.08) = total £19,325.33. (2) £11,785 for an 8” Rotary swivel joint (item #3) plus a 10% uplift (£1,178.50) plus VAT (£2,592.70) = total £ 15,556.20.

4. It is said that Pharos did not in fact claim for those costs in these proceedings, as it had issued a credit for them (as shown on the final two entries in invoice No. 2189). It is therefore said that those costs should be deducted from the principal amount of Pharos’ claim.

5. Mr Macey-Dare KC argues that the Court has power to correct this error on one or both of the following bases: (1) Under CPR 40.12, which provides that the court may at any time correct an accidental slip or omission in a judgment or order. (2) Under its inherent jurisdiction, as discussed by the UK Supreme Court in In re L [2013] UKSC 8 and AIC Ltd v Federal Airports Authority of Nigeria [2022] UKSC 16, and as recently applied by this Court in Tata Consultancy Services Limited v Disclosure and Barring Service [2024] EWHC 2025 (TCC) at paras 4-8 (Constable J).

6. It is accepted by KML in its submissions that it is for it to persuade the Court, if the second of these bases is relied upon, that the factors favouring re-opening the judgment are, in combination, sufficient to overcome the deadweight of the finality principle. In the present case, it points to the following factors: (1) The judgment is some 55 pages long and is not uncomplicated; and the parties had a relatively short time to identify any errors in the draft judgment before it was handed down; (2) once KML had identified the error, it alerted Pharos’ solicitors to it in correspondence without delay on 15 August 2025; (3) the error is not trivial, but makes a material difference to the outcome; (4) the error involves a short point, and the Court can resolve it fairly without significant cost, delay or reallocation of resources, consistent with the Overriding Objective; (5) Pharos has suffered no prejudice as a result of the error, or as a result of the timing with which it was identified.

7. This is not a case in which either there has been a slip, or it would be appropriate to revisit the judgment under the inherent discretion. KML’s submissions ignore the basis upon which the Court approached the quantification of Pharos’ claim in circumstances where, as the judgment makes clear at paragraphs 184-190, there was a mismatch between both (a) the manner in which Pharos invoiced and its entitlement to payment under the Revised Purchase Order; and (b) the pleaded approach of KML in respect of amounts due.

8. In relation to additional equipment, KML admitted, in its Amended Defence, an entitlement on the part of Pharos to the sum of £81,000 which was the ‘not to exceed’ value within the Revised Purchase Order. This is because, as described at paragraph [189], KML’s pleaded position on the entitlement of Pharos started with the amount of the Revised Purchase Order. KML did so without identifying or claiming the credit it now suggests that the Court was wrong in overlooking. In allowing the claimed £33,650.76 at [198], the Court noted, correctly, that this sum was less than the sum admitted in the Amended Defence. In its Master Spreadsheet, KML (contrary to its pleaded case), identified the bases upon which it disputed certain parts of certain invoices. In relation to invoice 02185, it disputed the sum of £4,582.82 in respect of clamps, but made no reference within its Defence to the sums or arguments now advanced, whether in the alternative or otherwise. The Court was not bound (and it was not submitted that the Court was bound) to determine the sum owed to KML precisely by reference to specific sums either claimed or credited, and KML’s own primary case was advanced on a different basis. In the context of the judgment as a whole, which included a determination in KML’s favour of such consequential costs as it could establish caused by any delay to the project caused by the defective equipment of which complaint was made, and in light of KML’s pleaded position as to the amount owed for additional equipment by reference to the Revised Purchase Order which substantially exceeded the sum awarded, the determination of £33,650.76 was not in error. Even if, contrary to the foregoing, this determination was objectively erroneous, that error arose from the failure on the part of KML to articulate its case in the manner it now seeks to, and this is a case in which the importance of the principle of finality should be respected.

9. It is not therefore appropriate to amend the principal sum awarded. VAT on Interest

10. KML accepts that interest runs pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 (‘LPA’) in principle. It denies, however, that it runs on the VAT element of Pharos’ claim. LPA section 4(1) provides that LPA Interest shall run on a “qualifying debt”. A qualifying debt is defined in LPA section 3(1) as: “A debt created by virtue of an obligation under a contract to which this Act applies to pay the whole or any part of the contract price is a “qualifying debt” for the purposes of this Act, unless (when created) the whole of the debt is prevented from carrying statutory interest by this section.”

11. Mr Macey-Dare KC argues that the VAT element is not a qualifying debt for the following reasons: (1) The VAT element itself does not form part of the contract price, both as ‘a statement of the obvious’, but also by virtue of clause 6.1 of KML’s standard terms and conditions which provides: “The Contract Price is fixed and firm, exclusive of VAT and inclusive of packaging and any delivery and insurance costs as stated in the Purchase Order.” (2) The obligation to pay the VAT element is not created by virtue of the obligation under the contract to pay the contract price, within the meaning of LPA section 3(1). Instead, the obligation is created by virtue of the provision of a taxable supply by Pharos to KML, viz. the services which Pharos supplied to KML under the contract, which would have arisen even if there had been no contract; e.g. if the services had been provided for free, or on a non-contractual basis giving rise to a quantum merit.

12. It is said that, if the VAT element was part of the ‘contract price’ for the purposes of the LPA, a supplier in the position of Pharos would receive an unwarranted windfall (and a purchaser in the position of KML would suffer an equally unwarranted penalty) in the form of a 20% uplift on LPA Interest, whenever the underlying debt giving rise to the claim for LPA Interest constituted consideration for a taxable supply. A supplier would not be liable to account for that windfall to HMRC as output tax, and nor would such a purchaser be entitled to recover that sum as input tax, because the sum would not itself constitute VAT. The windfall, it is submitted, would be particularly egregious where the supplier was subject to the VAT Cash Accounting Scheme, under which the supplier need only account for VAT when it is received.

13. Mr Woolgar argues, firstly, that Clause 6.1 is irrelevant, as all it did was make clear that VAT was not already included in the prices stated in the Purchase Order. The Purchase Orders themselves included the express obligation that ‘VAT as required to be charged at the applicable rate’. It is said, therefore, that VAT was part of the consideration, and therefore a ‘qualifying debt’ within the meaning of section 3(1). It is ‘created by virtue of an obligation under a contract…to pay the whole or part of the contract price’. Secondly, it is submitted that if the effect of Clause 6.1 is to remove the VAT element from the scope of the LPA, it is void pursuant to section 8(1), which provides that: “Any contract terms are void to the extent that they purport to exclude the right to statutory interest in relation to the debt, unless there is a substantial contractual remedy for late payment of the debt.”

14. Thirdly, he submits that no windfall arises; interest is compensation for late payment and Pharos does not account for VAT on a cash basis. Fourthly, Pharos claims interest pursuant to section 35A of the Senior Courts Act 1981 in the alternative (at the same rate as under the LPA).

15. Ordinarily, a contract price agreed between parties, unless it is stated specifically to exclude VAT, would include any VAT which is required to be paid (see e.g. Lancaster v Bird (1998) 73 Con LR 22 at 26). The obligation to pay this contract price (inclusive of VAT) would plainly be a qualifying debt for the purposes of section 3(1) of the LPA. This starting point disposes of the arguments raised by Mr Macey-Dare KC about the ‘windfall’ (egregious or otherwise) which would accrue were the position other than that for which he contends. Mr Macey-Dare KC is, of course, right, that if the effect of the LPA is to require enhanced interest to run on the VAT element of a contract price, the recipient may receive a sum in excess of its likely losses – and potentially significantly so if accounting for VAT on a cash basis. However, it is clear that – at least in the simple, default position where any contract price is deemed to include VAT – this is precisely the effect of the LPA. If the intention had been for VAT to be excluded from the definition of a qualifying debt, the statute would have said so in terms. The purpose of the Act was to discourage late payment of commercial debts, and the fact that the recovery by the recipient under the Act is in a sum in excess of purely compensatory interest is inherent in the LPA.

16. The question, against this background, is whether the definition of ‘Contract Price’ within the particular contract in this case as excluding VAT means that VAT is excluded from constituting a ‘qualifying debt’ for the purposes of the LPA. The answer is no. There is no doubt that the contract between KML and Pharos required KML to pay not just the sum which was contractually defined as the ‘Contract Price’, but applicable VAT. That obligation was not created merely by the statutory tax laws, but expressly on the face of the Purchase Orders themselves. The express contractual obligation upon Pharos to charge the applicable VAT was plainly met with the reciprocal obligation to make payment of that sum, as a matter of contract. For the purposes of the LPA, therefore, VAT formed part of the ‘contract price’. Even if, contrary to the foregoing, it were necessary to construe the words ‘contract price’ under section 3(1) of the LPA as synonymous with the definition of ‘Contract Price’ under clause 6.1 of the Purchase Order, VAT would still form part of the “debt created by virtue of an obligation under a contract to which this Act applies to pay the whole or any part of the contract price”, because the obligation to pay the Contract Price gave rise to the (contractual) obligation to pay the applicable VAT upon the Contract Price. Either way, interest under the LPA is due on the VAT element of the sums owed, but unpaid, to Pharos.

17. It is noted that this conclusion also leads to a coherent regime where LPA interest applies in the same way whether the contract is based upon a VAT-exclusive price (to which VAT is added by the payor) or a VAT-inclusive price. The date to which interest should run

18. Section 5 of the LPA provides as follows: “(1) This section applies where, by reason of any conduct of the supplier, the interests of justice require that statutory interest should be remitted in whole or part in respect of a period for which it would otherwise run in relation to a qualifying debt. (2) If the interests of justice require that the supplier should receive no statutory interest for a period, statutory interest shall not run for that period. (3) If the interests of justice require that the supplier should receive statutory interest at a reduced rate for a period, statutory interest shall run at such rate as meets the justice of the case for that period. (4) Remission of statutory interest under this section may be required— a. by reason of conduct at any time (whether before or after the time at which the debt is created); and b. for the whole period for which statutory interest would otherwise run or for one or more parts of that period. (5) In this section “conduct” includes any act or omission.”

19. The trial of this matter was originally listed to commence on 1 April 2025 and to conclude on 8 April. Unfortunately, it had to be adjourned due to Pharos’ Counsel suffering a medical emergency. In the event, it commenced on 9 June and concluded on 19 June. Judgment was handed down on 11 July. Mr Macey-Dare KC makes the point that had the trial commenced when originally scheduled, it is likely that judgment would have been handed down earlier, and that consequentials would also have been dealt with much earlier, without the long vacation intervening: it is suggested (using equivalent time periods) that consequentials would likely have been resolved by 11 May had the matter not been adjourned. It is said, with some justification, that a consequence of the adjournment of the trial is therefore that KML has been exposed to liability for LPA Interest and Part 36 Interest for longer than it would otherwise have been. He submits that while the adjournment of the trial was not the fault of Pharos, it was not the fault of KML either: it would be unjust for KML to pay LPA enhanced interest for the period caused by the adjournment.

20. Mr Woolgar’s succinct response is that KML wrongly failed to pay sums it owed to Pharos. It continued that non-payment during the period of the adjournment of the trial to delay paying even longer. There is no basis for restricting the award of interest to an earlier date. I agree. The adjournment, whilst unfortunate, was simply an exigency of litigation. I do not consider the adjournment (no doubt as unwelcome to Pharos as to KML) is sensibly to be regarded as the type of ‘conduct’ envisaged by section 5 of the LPA; but even if the words of the section are wide enough, purposively construed, to encompass the act of seeking an adjournment, I would not regard the interests of justice to require the disapplication of the LPA when the circumstances in which Pharos did so were entirely beyond its control. Similarly, I do not consider that the hypothetical hand down date should be relevant for the purposes of calculating the consequences of failing to beat the Part 36 offer, referred to below. The consequences of CPR 36.17

21. On 10 February 2025 WFW made a Part 36 offer on behalf of Pharos to accept the sum of £550,000 inclusive of the counterclaim, VAT and interest. KML accept that the judgment Pharos has obtained is “at least as advantageous” as the offer, in the language of CPR 36.17(1)(b). The relevant period ended on 4 March 2025.

22. Pursuant to CPR 36.17(4)(a), Pharos contends that it is entitled to interest on the whole of the principal sum at the rate of 10% above base rate for the whole of the period from 4 March 2025 to the date when the judgment was handed down (in lieu of interest on the principal sum for the same period under the Late Payment Act). KML accept the 10% rate but argue that it should not be due on VAT. In circumstances where, by definition, the purpose of the Part 36 regime is to incentivise settlement, there is no basis to construe its provisions in such a way as to exclude from the definition of ‘sum of money awarded’ under CPR 36.17(4)(a) the element of VAT (particularly in circumstances where CPR 36.17(4)(a) does specifically exclude interest).

23. There is no dispute that Pharos is entitled to indemnity costs from the expiry of the relevant period.

24. Pursuant to CPR 36.17(4)(c), Pharos contends that it is entitled to interest on those costs at 10% above base rate. KML contends that the rate should, in the Court’s discretion, be 4% above base rate, relying upon the following authorities: (1) Dunlop Haywards v Erinaceous Insurance [2009] EWHC 3479 (QB) (at [5]-[15]), in which Part 36 interest on damages was awarded at 4% above base rate, and on costs at 2% above base rate, Hamblen J accepting that the enhanced rate awarded on costs is generally lower than on the principal sum; (2) Greenwich Millennium Village v Essex Services [2014] EWHC 1099 TCC (at [50]-[53]), in which Part 36 interest on damages and costs was awarded at 4% above base rate, described by Coulson J (as he then was) as a not uncommon uplift in Rolls Building litigation; (3) Barnett v Creggy [2015] EWHC 1316 (Ch) (at [48]-[51], [58]-[59]), in which Part 36 interest on damages and costs was awarded at 4% above base rate; (4) BXB v Watch Tower [2020] EWHC 656 (QB) (at [14]-[16]), in which Part 36 interest on damages and costs was awarded at 4% above base rate.

25. As indicated by Sir Geoffrey Vos J (as he was then) in OMV Petrom SA v Glencore International AC [2017] 1 WLR 3465, many factors will be relevant. They may include (a) the length of time that elapsed between the deadline for accepting the offer and judgment, (b) whether the defendant took entirely bad points or whether it had behaved reasonably in continuing the litigation, despite the offer, to pursue its defence, and (c) what general level of disruption can be seen, without a detailed inquiry, to have been caused to the claimant as a result of the refusal to negotiate or to accept the Part 36 offer. In the present case, focussing on these particular factors, the appropriate enhancement would be towards the lower rather than higher end of the scale: the offer was later, rather than earlier, in the litigation and, not least in light of its timing, the decision to see the litigation through could certainly not be regarded as unreasonable. I regard the appropriate rate as 5% over base. How the court should award costs prior to 4 March 2025

26. It is common ground that there should be no order as to costs in relation to the adjournment of the trial. Previous costs orders plainly remain unaffected.

27. As to the balance of costs, Mr Macey-Dare KC submits that the Court should depart from the general rule and make an order that KML should pay a proportion of Pharos’ costs up to 4 March 2025. He relies in particular on the fact that it succeeded, not only in reducing Pharos’ claim by £174,540.48 (over 20%), from the pleaded sum of £783,423.79 to £608,883.31; but also in proving its counterclaim in the sum of £113,214.63. In so doing, Mr Macey-Dare KC emphasises that KML proved that Pharos was in breach of contract in several respects, and that proving these allegations involved consideration of factual (documentary and witness) evidence and expert evidence, and took up a significant amount of court time at trial, which ought to be matters which deserve to be reflected in the costs order that the Court makes.

28. It is not appropriate to depart from the ordinary rule that costs follow the event in this case. The reduction in the sum awarded to Pharos was, in the scheme of things, relatively small. A very large part of the dispute on the invoices related to waiting on weather as to which, for the reasons set out in the Judgment, KML’s position was – to put it at its most neutral – opportunistic. Whilst there was a recovery on the counterclaim as a result of various ways in which Pharos’ services were sub-standard, I am in little doubt that a driving force behind the continuation of this litigation was the size of KML’s counterclaim which was – notwithstanding modest success – substantially overstated. These are not circumstances which lend themselves to a percentage reduction in Pharos’ costs, even if their success was not complete.

29. In the circumstances, Pharos is to recover 100% of its reasonable costs on a standard basis up to the end of the relevant period.