High Court finds accepted Part 36 Offer was superseded by subsequent settlement agreement 

The High Court has held that a settlement agreement was a binding agreement which superseded a previously accepted Part 36 Offer. The settlement agreement provided a clearer basis for the recovery of costs and was "not merely an agreement memorialising the Part 36 Offer": Falcon Trident Shipping Ltd v Levant Shipping Ltd [2021] EWHC 2204 (Comm).

In most cases, where a Part 36 offer is accepted, the offer and acceptance (together with the automatic provisions of Part 36 relating for example to the costs consequences of acceptance) will constitute the terms of settlement and there is no need for any further agreement. It is therefore very important that those drafting Part 36 offers ensure their terms are clear, so that there is no room for doubt as to the effect of any acceptance.

Similarly, as the present case shows, where the parties choose to enter into a separate settlement agreement after a Part 36 offer is accepted, they need to ensure it is clear whether that agreement is intended simply to record the terms already agreed in the offer and acceptance, or whether it supersedes those terms – and, of course, that there is no uncertainty as to the terms of the settlement agreement itself.

Background

In April 2019, the parties' vessels were involved in a collision in India. As a result, the defendant's ship was arrested and the defendant ultimately admitted 100% liability for the incident, but quantum remained in dispute.

The parties' solicitors entered into pre-action correspondence in respect of quantum and, on 12 May 2020, the claimant provided the defendant with a Scott Schedule setting out a breakdown of the claim. On the same day, the claimant made a Part 36 Offer of USD 775,000 inclusive of interest. In the usual way, the Part 36 Offer stated that, if the offer was accepted, the defendant would be liable for the claimant's (pre-action) costs in accordance with Part 36. The defendant accepted the Part 36 Offer on 22 May 2020. The defendant's solicitor followed up the acceptance confirming that it would provide a draft Settlement Agreement.

On the next working day the parties entered into a Settlement Agreement which appended the Part 36 Offer and referred to the earlier Scott Schedule in defining the "Claim", stating that it was "in the total sum of USD 876,682.79 plus interest and legal costs". The Settlement Agreement stated at clause 1:

"1. In accordance with the Offer and the Acceptance, the [defendant] will pay and the [claimant] will accept:

(a) the sum of US$775,000, inclusive of interest (the "Principal Sum"); and

(b) the recoverable pre-action legal costs of [the claimant] up to the Acceptance in accordance with CPR Rule 36.13 (the "Costs")

in full and final settlement and discharge of the Claim and all losses, damages, expenses and costs whatsoever and howsoever arising between the Parties out of the Collision."

The Settlement Agreement also included an entire agreement clause, which provided that the agreement superseded the terms of all previous agreements between the parties.

The defendant paid USD 775,000 to the claimant on 2 June 2020. The present dispute arose when the claimant sent a summary of its "Costs" which it said were recoverable under clause 1(b) and which included (in addition to the fees of English solicitors and counsel, which it was accepted were recoverable in principle) four items totalling USD 63,804.75. These had been listed as costs in the Scott Schedule and comprised: agency fees incurred in India relating to instructing Indian counsel, an Indian advocate's fees, Italian lawyer's fees and PANDI (ship owners' liability insurers) correspondent fees which covered liaising with lawyers and surveyors in respect of the arrest.

The claimant argued that, as a result of the Scott Schedule, the parties knew that the four disputed items were not part of the principal claim which was settled for USD 775,000. It argued that the USD 775,000 was intended to cover everything other than the items which the parties had been treating as costs up until that point.

The defendant, however, argued that the Settlement Agreement superseded the accepted Part 36 Offer and that the USD 775,000 covered the Claim as defined in the recital, which included the four disputed items.

Decision

The High Court (Clare Ambrose sitting as a deputy High Court judge) dismissed the claim for the four disputed items, finding that on a proper construction of the Settlement Agreement these items were included as part of the principal sum. The only costs recoverable under clause 1(b) were therefore the English solicitors' and counsel's fees (as previously agreed between the parties).

The key findings were:

• The Settlement Agreement was a binding contact which superseded the acceptance of the Part 36 Offer. The parties had chosen to conclude a written settlement agreement with fresh wording and an entire agreement clause. Their objective intention was to provide a fuller settlement agreement and not merely memorialise the Part 36.
• The Settlement Agreement set a clearer basis for the recovery of pre-action costs than the accepted Part 36 Offer because, as a pre-action offer, it did not in itself give rise to the cost consequences of CPR 36.13. This is because CPR 36.13 is dependent on proceedings being commenced. Where a pre-action Part 36 Offer is accepted there is no deemed order for costs, and so costs-only proceedings must be commenced if agreement cannot be reached.
• However, the Settlement Agreement had to be construed against the background of the accepted Part 36 Offer, which in turn had to be construed against the previous correspondence enclosing the Scott Schedule. The recitals in the Settlement Agreement defined the Claim by reference to the Scott Schedule, and stated that it was in the total sum of USD 876,682.79 (which was the total of the claims in the Scott Schedule, including the four disputed items) plus interest and legal costs. Clause 1 had to be read together with the recital and would be understood to mean that all items within the sum of USD 876,682.79 in the Scott Schedule would be settled by payment of USD 775,000. That included the four disputed items.
• In making and accepting the Part 36 Offer, the parties most likely intended that it would be an effective Part 36 Offer and would not be inclusive of costs. Under the Settlement Agreement, the costs and principal amount were not fully separated except for the English solicitors' and counsel's fees. This meant that it may have had a different effect to acceptance of the Part 36 Offer by including items that could be regarded as costs. This was not wholly surprising where the Part 36 Offer had not clearly identified the claims to be settled and left open what sums were claimed as damages as opposed to costs. The Settlement Agreement was intended to pin down what had been settled and avoid the prospect of further argument or litigation about recoverability.

Note: The Court of Appeal has refused an application for permission to appeal against this decision.