Part 36 offers to settle: some lessons from recent decisions

This post discusses practical points arising from four recent decisions relating to Part 36 offers - though of course each case will turn on its facts and so the points outlined will not necessarily be of universal application.

(1) A term as to costs which is (even slightly) inconsistent with the effect of Part 36 itself may invalidate the offer: James v James [2018] EWHC 242 (Ch).

(2) If making a second or subsequent Part 36 offer, there are ways to preserve (or lose) the costs protection of earlier offers: Ballard v Sussex Partnership NHS Foundation Trust [2018] EWHC 370 (QB).

(3) If making a payment on account of a claim, it will reduce the amount of any previous Part 36 offer unless stated otherwise: Gamal v Synergy Lifestyle Ltd [2018] EWCA Civ 210.

(4) A claimant's Part 36 offer to accept 90% of the claim may well be effective if the claim succeeds in full: JMX v Norfolk and Norwich Hospitals NHS Foundation Trust [2018] EWHC 185 (QB).

(1) Dangers of including a term as to costs

In James v James, a claimant's offer stated that, on acceptance of the offer, the opponent would be liable to pay costs "up to the end of the Relevant Period or, if later, the date of service of notice of acceptance of this Offer." (In fact the offer was made by the defendant to the proceedings, but the court accepted that a defendant can make a Part 36 offer in respect of a counterclaim, which also takes into account the claim made against it. It was therefore treated as a claimant's offer.)

HHJ Matthews (sitting as a High Court Judge) held that the offer was not a valid Part 36 offer because it contained a term as to costs that was inconsistent with Part 36. This is because CPR 36.13(1) provides that where a Part 36 offer is accepted within the "relevant period" stated in the offer, the claimant will be entitled to the costs of the proceedings "up to the date on which notice of acceptance was served on the offeror". In contrast, as noted above, the offer in this case said costs would be payable to the later of acceptance or the end of the relevant period.

The judge said that as this was different, "albeit not by very much", from the effect of CPR 36.13(1), it was not a valid offer.

The lesson: If spelling out in a Part 36 offer the costs consequences of acceptance, make sure you track carefully the wording of Part 36.

(2) Preserving costs protection of earlier offers

In Ballard, the defendant made a Part 36 offer to settle for £50,000 in January 2016. It was not accepted. Just over a year later, on 8 February 2017, the defendant made an offer of £30,000.

The offer stated that all previous offers were withdrawn and, in spelling out of the consequences of non-acceptance of the offer, said that if the claimant failed to obtain a judgment more advantageous than the offer, the defendant would seek an order that the claimant should pay costs from 1 March 2017, ie the end of the 21 day "relevant period" for the offer.

At trial the claimant was awarded some £23,315, which meant she had failed to beat both offers. The question was whether the defendant should have costs protection from expiry of the relevant period of the first offer, or only from the second offer. It was accepted that the first offer did not carry the costs consequences of Part 36, as it had been withdrawn (and CPR 36.17(7) provides that the costs consequences do not apply where an offer which has been withdrawn, or which has been changed to be less advantageous to the offeree if the offeree has beaten the less advantageous offer). However, the court could still take the first offer into account in its general discretion on costs.

Foskett J held that the defendant should have costs protection only from the second offer, essentially because the second offer itself stated that the claimant would be liable for costs from the end of the relevant period for that offer, and did not mention the earlier offer. It would not be fair to the claimant if the defendant could send a detailed letter spelling out the consequences of failing to beat the Part 36 offer and then argue that something different was intended.

The lesson: If you want to preserve any costs protection of an earlier offer, do not suggest in a subsequent offer that the costs consequences will run only from that offer. In addition, it is generally better to amend an earlier offer rather than withdrawing it altogether; had the defendant done so in this case, it is at least arguable that the Part 36 costs consequences would have continued to apply to the first offer, under CPR 36.17(7), as the offeree had not beaten the subsequent less advantageous offer.

(3) Effect of a payment on account

In Gamal, the defendant made a Part 36 offer of £15,000 in respect of a claim for sums due for building work carried out to a property she occupied. She subsequently made a payment of £10,000 in respect of the works. The claimant was ultimately awarded £14,275.

The question was whether the £10,000 payment reduced the amount of the Part 36 offer to £5,000, so that the claimant had beaten the offer, or whether the offer was still £15,000 so that the claimant had failed to beat it for the purposes of Part 36.

The Court of Appeal (Arden and Flaux LJJ) held that the £10,000 payment did reduce the amount of the offer, so the claimant had beaten it. In Macleish v Littlestone [2016] EWCA Civ 127 the Court of Appeal reached a similar conclusion where a defendant had made a payment pursuant to a partial admission subsequent to its Part 36 offer. In the present case, the court held that the reasoning in Macleish applied equally to any payment on account which reduced the defendant's liability for the claim as a whole (as opposed to an interim payment under CPR Part 25 or a voluntary payment made without prejudice to the defendant's case, which would be repayable if the claim failed).

Such a payment will reduce the defendant's liability in respect of both the claim and the Part 36 offer, unless the paying party states expressly that the payment is not intended to reduce the amount of the offer - ie the offer stands in its original amount. Where that is the case, the amount of the claim will be reduced by the amount of the payment, but the Part 36 offer will not be reduced. The obvious effect is that the offer will become correspondingly more advantageous to the claimant. However, it is not clear whether this will be treated as a change to the terms of the Part 36 offer to make it more advantageous to the claimant, so that there is a further "relevant period" in which the claimant can accept the offer and be entitled to its costs (as per CPR 36.9(5)). If not, then the claimant's prospects of beating the offer will have diminished as a result of the payment, but without a further opportunity to reassess its position and accept the offer without being at risk on costs.

The lesson: If you make an admission or payment on account after making a Part 36 offer, make clear whether or not it is intended that the payment will reduce your liability in respect of the offer.

(4) Very high claimant offers

In JMX, the claimant made a Part 36 offer to accept 90% of the damages to be agreed or assessed in due course. The "relevant period" for the offer came to an end one working day before the trial on liability began. The court then found in favour of the claimant on the issue of liability, and so the defendant failed to beat the claimant's offer.

Under CPR 36.17(4), where a party fails to beat an opponent's offer, the relevant costs consequences must be ordered unless the court considers it unjust to do so. CPR 36.17(5) sets out a number of factors the court must take into account in considering whether it would be unjust, including "(e) whether the offer was a genuine attempt to settle the proceedings."

In this case, the defendant argued that it would be unjust to award the claimant the Part 36 costs consequences (ie indemnity costs and enhanced interest from the expiry of the relevant period, plus an additional amount of up to £75,000 calculated as 10% of the first £500,000 awarded and 5% of the next £500,000). Its case was that the offer was not a genuine attempt to settle the claim because it did not reflect any realistic assessment of the risks of the litigation, and did not explain why only a 10% discount was being offered for settlement as the relevant White Book note suggests may be prudent.

Foskett J rejected this argument, describing it as "one which could hardly ever succeed". For the court to determine an appropriate discount to reflect the litigation risks would require "a mini-trial in the post-trial situation" and was an exercise that should not ordinarily be carried out. He noted that it would be open to the offeror to explain the reasons for giving only a small discount, but expressed doubt as to whether this would assist the settlement process in most cases. Foskett J said the offer was to be regarded as a genuine offer of settlement, so that the normal Part 36 consequences applied. (Note that in previous cases the court has found that a claimant's offer of 95% of the claim was effective for the purposes of Part 36: see Huck v Robson [2002] EWCA Civ 398 and Jockey Club Racecourse Limited v Willmott Dixon Construction Ltd [2016] EWHC 167 (TCC) considered here.)

The lesson: If you are a defendant and the claimant makes a 90% plus Part 36 offer, do not assume it can be ignored without risk of consequences; the Part 36 costs consequences may well apply if the claim succeeds in full.

Note: Permission to appeal against the Ballard decision was refused on 17 July.