Part 36 offers: Court of Appeal re-buries "near miss" rule

The Court of Appeal has overturned a first instance decision which had ordered the claimants to pay the defendant's costs for the period following the defendant's Part 36 offer, even though the claimant had beaten the offer by about 10%: Sugar Hut Group Ltd & ors v AJ Insurance Ltd (a partnership) [2016] EWCA Civ 46.

The judge at first instance had emphasised that he was not seeking to re-introduce a "near miss" rule for Part 36 offers, which would mean that a claimant who beats an offer by only a small margin may be penalised in costs as if it had failed to beat the offer. That approach had been taken in the widely criticised decision in Carver v BAA plc [2008] EWCA Civ 412, but it was effectively reversed by the rules committee following a recommendation by Lord Justice Jackson. The rules now expressly provide that an offer will be beaten if the court's award is better in money terms by any amount, however small.

In this case, however, the judge had effectively penalised the claimants for their "near miss" by treating the offer as if it contained separate offers relating to constituent elements of the claim, when it was in fact a single, indivisible offer. The judge had found that the claimants were unreasonable in continuing to pursue a certain element of their claim when they ultimately recovered less than the value attributed to that element in the defendant's offer. The Court of Appeal was critical of that approach, as there was no free-standing offer in relation to that element of the claim which the claimants could have accepted. There was simply one offer, which the claimants had beaten.

The decision suggests that a claimant will not be penalised simply for failing to improve upon the value attributed to particular elements of its claim by a defendant's Part 36 offer, unless the defendant has made free-standing offers in respect of the relevant elements and the claimant has failed to beat (one or more of) those offers, or there are other factors that make its conduct unreasonable.

Background

The claimants brought a negligence claim against their insurance brokers, after their insurers avoided the policy for non-disclosure. The parties agreed liability on the basis that the defendant would pay 65% of the claimants' recoverable losses. A number of heads of loss were agreed and the defendant made interim payments, but the parties were unable to agree the quantum of business interruption losses and interest.

At trial, the claimants were awarded some £277,000 after deducting the interim payments. This was based on a figure of £568,670 for business interruption losses and interest at 5% for the whole period claimed.

Part 36 and Calderbank offers had been made on both sides, but it was common ground that none had been "effective"; the claimants' offers had been higher than, and the defendant's offers had been lower than, the amount awarded. The last of the Part 36 offers made by the defendant had offered to settle for a payment of £250,000 net of the interim payments. The letter explained that offer had been calculated on the basis of a figure of £600,000 for business interruption losses and interest at 2.5% over various periods.

The High Court ordered the claimants to pay the defendant's costs for the period from 21 days after the Part 36 offer (save for the costs relating to the issue of interest, which the defendant would pay to the claimants). The claimant appealed, arguing that the judge had, in effect, treated the defendant's Part 36 offer as effective although the claimants had beaten the offer.

Decision

The Court of Appeal allowed the appeal. It concluded the judge had fallen into error by effectively treating the Part 36 offer as containing a free-standing offer to compromise the business interruption claim at £600,000, when it was not an offer to settle on that basis. The judge had recognised that there was no free-standing offer, capable of acceptance by the claimants, to pay £600,000 in respect of that aspect of the claim - though a valid offer in that form could have been made. Nonetheless, he concluded that, given the terms of the Part 36 offer, it was unreasonable for the claimants to continue to pursue a claim for business interruption losses of £862,024, or (in effect) for any figure in excess of £600,000. The Court of Appeal said it could not be unreasonable conduct simply to pursue a claim for an amount greater than it is valued by the opponent; something more is required to make pursuit of the claim unreasonable. The court did not agree that here there were other grounds justifying the order.

As the Court of Appeal was satisfied that the judge's decision was outside the bounds of reasonable decision-making, the judge's order had to be set aside and his discretion exercised afresh. The Court of Appeal pointed out that the claimants' recovery had exceeded the Part 36 offer by a comfortable margin and in any event there is no longer a "near miss" rule. There was therefore no reason to deprive the claimants of their costs following the offer, still less to require them to pay the defendant's costs. The claimants' failure to succeed on all of their claim had been adequately reflected in the judge's order by depriving them of 30% of their costs for the earlier period. That order would be extended to the period following the Part 36 offer.