Costs consequences of settlement offers made outside Part 36

The Court of Appeal has held that the court was not entitled to apply the Part 36 costs consequences "by analogy" to award indemnity costs and enhanced interest where a party failed to beat an opponent's settlement offer which was not made under Part 36: F & C Alternative Investments (Holdings) Limited & Ors v Barthelemy & Anor [2012] EWCA Civ 843.

The decision illustrates the courts' strict approach to the application of Part 36, and therefore the need for careful drafting to ensure that an intended Part 36 offer complies with the formal requirements. Where an offer falls outside Part 36, whether intentionally or otherwise, the court will not simply apply the Part 36 costs consequences as if it had been a valid offer. In particular, it may be difficult to argue that a claimant's offer which does not comply with Part 36 should attract the same costs consequences as an equivalent offer made under Part 36.

Background

The underlying dispute was between members of a limited liability partnership in relation to (inter alia) the question of whether put options had been validly exercised under the terms of the partnership agreement. The claimants sought a declaration that the options had not been validly exercised and that they had no liability to pay the sums sought. The defendants served a defence and counterclaim seeking that effect be given to the put options and the terms of the agreement. Each party also presented a petition alleging unfair prejudice under sections 994 to 996 of the Companies Act 2006.

The defendants made a "without prejudice save as to costs" offer to settle the proceedings by selling their interests in the LLP to the claimants for approximately £6 million in total. The offer was expressly stated to be made outside of Part 36. This was said to be because, since the offer was put forward by those who were the defendants in the proceedings (in form if not substance), the claimants would "at least arguably" be entitled to their costs under CPR 36.10 if the offer was accepted. 

The offer stated, however, that the defendants would rely on the offer in accordance with CPR 44.3 (which provides that in exercising its discretion on costs, the court must have regard to all the circumstances including any admissible offer to settle which is drawn to the court’s attention and to which the Part 36 costs consequences do not apply) and would invite the court to "apply the same consequences as regards costs and interest as would apply had it been possible to make the offer under Part 36".

Overall, the defendants were successful in the action and were awarded a principal sum of close to £4 million each, thereby obtaining a more favourable result than the settlement offer they had put forward.

Under CPR 36.14, where a claimant obtains a judgment that is at least as advantageous as the proposals contained in its Part 36 offer, the court will (unless it considers it unjust to do so) award the claimant indemnity costs and enhanced interest on both damages and costs (at a rate not exceeding 10% above base rate), in each case from the date on which the relevant offer period expired.

In awarding costs in the action, the judge held that the defendants were entitled to indemnity costs and enhanced interest (at 10% above base rate) from the date for acceptance stated in the offer. This was on the basis that the defendants had "good and legitimate reason" not to make the offer formally under Part 36, and therefore in exercising his discretion on costs it was appropriate to apply by analogy the costs consequences provided under CPR 36.14. The claimants appealed against the costs order.

Decision

The Court of Appeal overturned the judge's costs award, finding that he was not justified in drawing an analogy with Part 36 so as to justify an award of indemnity costs and enhanced interest.

Since the offer was not a Part 36 offer, there was no jurisdiction to make a costs order under CPR 36.14; as the judge accepted, he was required to exercise the jurisdiction under CPR 44.3. Where Part 36 did not apply directly, it was not appropriate to invoke the Part 36 costs regime indirectly or by analogy. This, the court said, would tend to undermine the requirements of Part 36 and the repeated insistence of the courts that intended Part 36 offers should be very carefully drafted so as to comply with the requirements of Part 36.

The court accepted that, in some circumstances, a refusal to accept a reasonable settlement offer might justify an award of indemnity costs. However, this was not the basis for the judge's award and, in any event, the authorities make it clear that the refusal must be unreasonable. An award of indemnity costs (outside Part 36) is a significant departure from the norm and requires appropriate justification. Here, the court said, there was no conduct of a sufficient order of unreasonableness to justify an award of indemnity costs.

The court therefore substituted an order for standard costs in place of the judge's order for indemnity costs, and an interest rate of 3% above base rate (which the judge had awarded for the period prior to the offer) on both the judgment sum and costs until the date of judgment. 

Comment

This decision confirms that the courts will take a strict approach to the application of Part 36 and, where an offer falls outside Part 36, will not simply apply the Part 36 costs consequences "by analogy" to achieve the same result as if it had been a valid offer.

The implications of this approach may differ for claimants' and defendants' offers:

• Where a claimant obtains judgment in its favour but fails to beat a defendant's Part 36 offer, the normal costs consequence is that the defendant is awarded its costs on the standard basis from the end of the relevant offer period. This sanction, of shifting the burden of costs, is well within the court's discretion under CPR 44.3 and so, it would seem, may be applied where the offer is a "without prejudice save as to costs" offer (or "Calderbank") rather than a Part 36 offer.
• Where a defendant fails to do better than a claimant's Part 36 offer (i.e. the claimant obtains judgment that is at least as advantageous as its own offer), the normal costs consequences (indemnity costs and enhanced interest) go further than simply shifting the burden of costs. Although the court can award indemnity costs outside Part 36, and the level of interest is also within the court's discretion, simply failing to accept what turns out to have been a reasonable settlement offer will not, without more, justify an order for indemnity costs or enhanced interest.

This was recognised by the Court of Appeal, obiter, in the recent case of Phi Group Limited v Robert West Consulting Limited [2012] EWCA Civ 588. The point did not arise for decision in that case, but Lloyd LJ (with whose judgment the other members of the court agreed) commented: "... for my part I do not see how the court could award the additional interest unless the offer was a Part 36 offer properly so-called. Even a minor formal or technical defect would be fatal to that entitlement. So far as indemnity costs are concerned, they can of course be awarded under the general provisions as to costs, but absent a true Part 36 offer a claimant's claim for indemnity costs would have to be justified on the relevant general principles, not just by arguing that the offer only just failed to comply with Part 36."

Finally, it is worth noting that although it was accepted by both the parties and the court that the defendants had good reason for not making their offer under Part 36, because the claimants would (arguably) have been entitled to their costs on acceptance under CPR 36.10, it does not appear that the court was referred to the decision in AF v BG [2009] EWCA Civ 757 (see post). In that case the Court of Appeal confirmed that a defendant can be treated as a claimant in respect of its counterclaim so that it can make a "claimant's Part 36 offer" and thereby take advantage of the more favourable costs consequences applicable to such offers, including an entitlement to costs if the offer is accepted.