Court of Appeal finds offer relating to unpleaded counterclaim was valid under Part 36

The Court of Appeal has upheld a decision that a defendant's offer to accept £100,000 in settlement of both the claim and its unpleaded counterclaim was a valid "claimant's offer" under CPR Part 36: Calonne Construction Ltd v Dawnus Southern Ltd [2019] EWCA Civ 754.

The decision confirms that a defendant can be treated as having made a claimant’s Part 36 offer in respect of its counterclaim, even though the counterclaim has not yet been pleaded.

The court reached its conclusion despite the decision in Hertel v Saunders [2018] EWCA Civ 1831 (considered here) where the Court of Appeal found that an offer made in existing proceedings was not valid under Part 36 where it related only to a proposed claim by amendment. The court in the present case distinguished Hertel and applied the Court of Appeal decision in AF v BG [2009] EWCA Civ 757 (see post), which it noted was not considered in Hertel. It will of course be for the courts in future cases to determine how these authorities should be applied in any given circumstances, but the present decision suggests that the decision in Hertel may be applied quite narrowly in future.

The decision is also of interest in confirming that, although a Part 36 offer must be inclusive of interest up to expiry of the relevant offer period, it can specify a rate of interest to apply from that point up to any later acceptance.

Background

The underlying dispute concerned a contract for building works at a property in Wimbledon. The employer under the building contract (Calonne) issued a claim against the contractor (Dawnus) seeking declarations as to the sums due under the contract as well as damages.

Before serving its defence and counterclaim, Dawnus made a Part 36 offer (the "Offer") to settle both the claim and its anticipated counterclaim on the basis that Calonne would pay to Dawnus the sum of £100,000 plus costs. The Offer stated that it was inclusive of interest until the 21-day relevant offer period had expired, and thereafter interest would be added at a rate of 8% per annum.

Ultimately the case went to trial and judgment was entered for Dawnus in the sum of £116,616.89 plus interest of £11,751.78.

Calonne argued that the Offer was not a valid Part 36 offer on two grounds:

1. it included a counterclaim which had yet to be pleaded which Calonne argued, relying on Hertel, rendered the Offer invalid; and
2. it included a provision relating to the rate of interest to be charged after the end of the relevant period.

The High Court (HHJ McKenna) rejected both of these arguments and found that the Offer was valid. Although the judge did not fully apply the usual Part 36 costs consequences for a claimant's offer, taking the view that it would be unjust to do so, Dawnus was awarded (75% of) its costs on an indemnity basis and enhanced interest (at a rate of 7%), in each case in respect of costs incurred after expiry of the relevant period.

Decision

The Court of Appeal (Hamblen, Flaux and Asplin LJJ) dismissed the appeal, Lady Justice Asplin giving the lead judgment.

Inclusion of anticipated counterclaim

Asplin LJ noted that in AF v BG [2009] EWCA Civ 757, the Court of Appeal decided that an offer was a valid Part 36 offer relating to both the original claim and a proposed counterclaim. Although she said the decision was obiter, so far as it related to the unpleaded counterclaim, and there was no direct argument on the point, the court's conclusions in that case were reached on the basis that it did not matter that the counterclaim had not been formulated or pleaded, and that under CPR 20.2 a counterclaim must be treated as a claim for the purposes of the CPR except as expressly provided otherwise.

Accordingly, Asplin LJ concluded, a defendant's proposed counterclaim must be treated as a claim for the purposes of Part 36. Since under CPR 36.7 a party is entitled to make a Part 36 offer at any time, including before commencement of proceedings, "it cannot be correct that a Part 36 offer cannot be made in relation to a counterclaim before that claim has been pleaded". The Offer was therefore not invalidated by reference to the unpleaded counterclaim.

Asplin LJ stated that she reached her conclusion despite the decision in Hertel, in which no reference had been made to AF v BG. In that case, an offer was found to be invalid under Part 36 where it related only to a claim put forward in draft amended particulars of claim, in circumstances where the claimant accepted the offer and abandoned the rest of the claim. The court found that the offer was in breach of the mandatory requirement (in what is now Part 36.5) to state whether the offer "relates to the whole of the claim or to part of it or to an issue that arises in it" since the proposed amendment was none of these things.

In Asplin LJ's view, Hertel was primarily concerned with the effects of CPR 36.10(2) - a provision which has since been reversed by amendment but which provided that, as a default position, a claimant would be entitled to its costs of the entire proceedings where it accepted a defendant’s Part 36 offer relating to only part of the claim and abandoned the balance of the claim - and a defendant's offer in relation to part of a claim intended to be made by amendment in proceedings that had already been commenced. It did not consider the effect of CPR 36.7 in relation to a counterclaim which is to be treated as a separate claim by virtue of CPR 20.2. Hertel was therefore not directly relevant to the circumstances under consideration in the present case.

Inclusion of provision for interest after relevant period

The court dismissed the appeal on this ground for a number of reasons, including that there is nothing in Part 36 which precludes the inclusion of terms as to interest which apply after expiry of the relevant period. The only express provision in relation to interest is CPR 36.5(4) which provides that an offer to pay or accept a sum of money will be treated as inclusive of interest until the relevant period expires.

Further, there is nothing in Part 36 which expressly precludes the inclusion of terms additional to the formal requirements of a Part 36 offer which are set out at CPR 36.5. Indeed, Part 36 expressly preserves the ability to make an offer to settle in whatever form a party chooses, although if it does not comply with CPR 36.5 it will not have the Part 36 costs consequences.

If a party could not provide for interest to run after the relevant period, that would mean it would be left uncompensated for any delay in acceptance of the offer beyond the expiry of the relevant period.