Court of Appeal provides guidance on Part 36 offers to settle in context of counterclaims

In AF v BG [2009] EWCA Civ 757 the court confirmed that a defendant can be treated as a claimant in respect of its counterclaim and be deemed to have made a "claimant's Part 36 offer", even in circumstances where the defendant's counterclaim has not yet been pleaded. Further, such an offer can take into account the claimant's original claim so that the costs consequences of the offer apply to both the claim and counterclaim.

This allows defendants/counterclaimants to take advantage of the more favourable costs consequences of claimants' Part 36 offers, including an entitlement to costs if the offer is accepted. Until now it has been unclear how the Part 36 regime applies in the context of counterclaims so it is useful to have Court of Appeal authority on the point.

The Facts

The defendant sent a letter to the claimant marked as a Part 36 offer. In it he notified the claimant of his intention to amend his defence to incorporate a counterclaim for a specified sum. The defendant stated that he considered the claimant's claim to have no realistic prospect of success and was therefore making a claimant's Part 36 offer to accept a lesser sum in "full and final settlement of the whole of [the defendant's] claim and the whole of [the claimant's] claim against [the defendant]" (emphasis added). The offer stated that:

• it was intended to have the consequences of a claimant's Part 36 offer;
• the claimant would be liable for the defendant's costs up to the date of written notice of acceptance, in accordance with CPR 36.10, if the offer was accepted within 21 days of service of the letter; and
• if the offer was refused but not beaten at trial the defendant would seek costs on the indemnity basis as well as interest on any damages awarded and costs at 10% above the base rate (CPR 36.14(3)).

The claimant answered the letter in terms which gave rise to a dispute over whether the offer had been accepted. In his subsequent application to determine this issue, the claimant argued that:

• the defendant's offer was not a valid Part 36 offer because a "claimant's offer" made by a defendant in circumstances where no counterclaim had been pleaded meant that the letter could not be said to "state on its face that it is intended to have the consequences of Part 36" – as required by CPR 36.2(2)(b);
• if the offer was a valid Part 36 offer, it related only to the proposed counterclaim and any costs consequences should therefore apply only in relation to the costs of the counterclaim, by virtue of CPR 36.3(4); and
• treating the defendant's offer as a claimant's offer would be inconsistent with CPR 36.10(6) which states that the claimant's costs for the purposes of a claimant's offer "include any costs incurred in dealing with the defendant's counterclaim if the Part 36 offer states that it takes into account the counterclaim". These words could only fit with a claimant properly so-called, and not with a defendant who, as claimant on a counterclaim, makes an offer which takes into account the claimant's original claim.

The Decision

The Court of Appeal (Lloyd and Rimer LJJ) rejected the claimant's arguments. The court held that it was "entirely appropriate and legitimate" for the defendant's offer to spell out not just that it was a Part 36 offer, but that it was a claimant's Part 36 offer. The question of whether the offer truly was a claimant's offer depended on the construction of the terms of the offer itself, but the fact that it was being made by a defendant, even in circumstances where no counterclaim had been pleaded, did not mean that it was not a valid Part 36 offer at all. In this context the court noted that CPR 36.3(2) permits Part 36 offers to be made before the commencement of proceedings.

The court also found that the "costs of proceedings" to which the Part 36 offer applied included the costs of the original claim. As such, had the defendant's offer been accepted the claimant would have been liable to pay the defendant his costs not only of asserting the counterclaim, but also of defending the original claim.

The court observed that if the claimant's arguments were to be accepted, the question of whether a party in a case with competing claims and counterclaims could make a claimant's offer would depend entirely on which party had started proceedings, which was a "matter of chance". Furthermore, a reading of Part 36 which prevented a counterclaiming defendant from making a "claimant's Part 36 offer" would be inconsistent with the provisions of CPR 20, which provides that "additional claims" (which, by CPR 20.2(2) includes counterclaims) should be treated as claims for the purposes of the CPR. Nothing in Part 20 excluded Part 36 from this.

Accordingly, the defendant's counterclaim should be treated for the purposes of Part 36 as if it were a claim and the defendant as if he were the claimant.

Comment

This is the first time that the Court of Appeal has considered whether an offer made by a defendant in respect of a counterclaim can constitute a "claimant's Part 36 offer". The court's judgment, that defendants can make such offers, even where the counterclaim is not yet pleaded, gives logical effect to the wording of CPR 36 and CPR 20.

The costs consequences under Part 36 are more advantageous for claimants' offers than defendants' offers, both because the claimant has an entitlement to costs if a Part 36 offer is accepted and because there are more favourable costs consequences if the offer is rejected and the opponent fails to beat it at trial. As such it is clearly in a counterclaiming defendant's interest to characterise himself as the "claimant" when making a Part 36 offer.

Caution is required, however. The result in AF v BG is clearly sensible where the defendant's offer is for the claimant to pay a net sum to the defendant (because the counterclaim exceeds the claim or the Part 36 offer is to accept a net sum because the defendant rejects the claimant's claim). In such circumstances a counterclaiming defendant can sensibly be said to be the "real" claimant. However, it does not necessarily follow that the same reasoning should apply where a counterclaiming defendant offers to pay a net sum to the claimant, irrespective of whether his offer is framed as a "claimant's Part 36 offer". In such circumstances the court may well treat such an offer as a defendant's offer regardless of how it is described on its face.