CPR Part 36 contains a set of rules aimed at encouraging parties to settle their disputes. It does this by imposing sanctions where a party refuses an offer to settle made under Part 36 but then fails to get a better result by going to trial.

Although Part 36 is generally seen as one of the success stories of the Civil Procedure Rules, its provisions are highly technical and have led to a significant amount of case law. Part 36 has been revised a number of times to address various issues or uncertainties, and is being revised again following a review by the CPR Committee.

The new version of Part 36 will apply to offers made on or after 6 April 2015. The key changes are summarised below.

Time-limited offers

Under the current version of Part 36, a “time-limited” offer (ie an offer which is open for acceptance for only a limited period) is not capable of being a valid Part 36 offer so does not carry the costs sanctions associated with Part 36 (though the court can still take it into account in exercising its discretion on costs). This was established by the Court of Appeal decision in C v D [2011] EWCA Civ 646, considered here.

Some commentators consider that this gives rise to an anomaly, in that a Part 36 offer can be withdrawn after expiry of the initial offer period (normally 21 days) by sending a separate notice, but cannot be automatically withdrawn after that period. In other words, a Part 36 offer can be withdrawn by writing two letters, but not by writing just one.

This perceived anomaly has been addressed by a new provision at CPR 36.9(4)(b), which allows a Part 36 offer to be automatically withdrawn after expiry of the relevant period in accordance with its terms.

However, since under CPR 36.17(7) the Part 36 costs consequences do not apply to an offer that has been withdrawn, it is hard to see any advantage in making a Part 36 offer if it is to be automatically withdrawn in this way.

Split trials

A number of High Court decisions in recent years have highlighted the difficulties arising from the application of Part 36 in the context of split trials, or trials of preliminary issues (see for example Ted Baker Plc v Axa Insurance UK Plc [2012] EWHC 1779 (Comm) considered here).

Under the current rules, the fact that a Part 36 offer has been made must not be communicated to the trial judge “until the case has been decided”. There is no carve-out for split trials. This means that, following a trial of preliminary issues, the court may have to decide whether to make a costs order in respect of the preliminary issues in ignorance of whether or not a Part 36 offer has been made (unless the parties agree to disapply the prohibition, but this will often be against the interests of one or other party).

This difficulty has been addressed in the new version of Part 36. New CPR 36.16 allows the judge to be told of the existence, but not the terms, of a Part 36 offer after judgment has been given on the preliminary issues (unless the Part 36 offer relates only to the issues that have been decided, in which case the terms of the offer can also be disclosed).

Although most of the provisions of the new Part 36 will apply only in relation to offers made from 6 April onwards, the rules relating to offers in split trial cases will apply where the split trial starts on or after that date, even if the offer was made before it.

Very high claimant offers

The current rules have given rise to difficulties where a claimant makes a Part 36 offer for nearly all the relief it is seeking in the action. On the face of the rules, the costs consequences apply where a claimant obtains a judgment that is “at least as advantageous” as its offer, ie it does not need to better its offer. So in theory the costs consequences could apply where a claimant makes an offer to settle for the full amount claimed and then succeeds in full.

This difficulty was addressed to some extent in AB v CD [2011] EWHC 602 (Ch), considered here, where the High Court held that a claimant’s Part 36 offer had to contain some genuine element of concession that was of significant value in the context of the litigation. However, in Huck v Robson [2002] EWCA Civ 398 a claimant’s offer for 95% of the value of the claim was considered valid.

The new Part 36 seeks to address the perceived difficulty of claimants being able to obtain the costs benefits of Part 36 where they have made very high offers. It does this by adding a new factor for the court to take into account in deciding whether it would be unjust to order the Part 36 costs consequences, at 36.17(5): “(e) whether the offer was a genuine attempt to settle the proceedings”.

The idea is that a very high claimant offer is unlikely to be a genuine attempt to settle the claim, save perhaps where the case is extremely strong, and therefore this factor should tend to lead the court to decline to award the costs consequences of Part 36 where a claimant’s offer contains little in the way of concession. Clearly, however, the court will retain significant flexibility both in determining whether an offer was a genuine attempt to settle and what weight this factor should be given in deciding whether it would be unjust to order the Part 36 costs consequences.

Counterclaims 

Under the current version of Part 36, there has been some confusion as to how the rules are meant to apply in a case where the formal roles of claimant and defendant do not reflect the reality of who is seeking a greater remedy in financial terms. See for example Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA [2012] EWHC 2839 (Ch) considered here and F & C Alternative Investments (Holdings) Limited v Barthelemy [2012] EWCA Civ 843 considered here.

In the earlier case of AF v BG [2009] EWCA Civ 757 the Court of Appeal held that a defendant could be treated as a claimant in respect of its counterclaim and be deemed to have made a “claimant’s Part 36 offer” in circumstances where the offer was for the defendant to receive a net payment and therefore the defendant was, in substance, the claimant to the action (see our post on that decision). That decision, however, appears to have been overlooked in a number of subsequent cases, including those referred to above.

The new Part 36 states expressly (at CPR 36.2(3)) that a Part 36 offer may be made in respect of a counterclaim or other additional claim. It cross-refers to CPR 20.2 and 20.3 which provide that counterclaims and other additional claims are treated as claims and that references to a claimant or defendant include a party bringing or defending an additional claim.

This amendment should reduce the scope for confusion, and reinforce the ability of defendants/counterclaimants to take advantage of the more favourable costs consequences of claimants’ Part 36 offers, including an entitlement to costs if the offer is accepted. In considering whether an offer is genuinely a claimant’s offer, however, the court seems likely to look at the reality of the situation, in particular whether the offer involves a net payment (or other net advantage) to the party making the offer. In such circumstances the offeror may sensibly be seen as the “real” claimant. In contrast, where the offer involves a net payment to the offeree, it is more difficult to see why it should be treated as a claimant’s offer, regardless of how it is described on its face.

Appeals

The new Part 36 also deals expressly with the application of Part 36 to appeals. The current rule states that a Part 36 offer may be made in appeal proceedings, but the new CPR 36.4 clarifies how the rule will be applied in those circumstances, in particular that references to the claimant / defendant in Part 36 will be treated as references to the appellant / respondent respectively. Presumably, however, it will be possible for a respondent to make a “claimant’s offer” in respect of a cross-appeal, just as it is possible for a defendant to make a claimant’s offer in respect of a counterclaim (as discussed above).

Improved offers

There is a new provision (at CPR 36.9(5)) that where an offeror changes the terms of an offer to make it more advantageous to the offeree, it is treated as a new offer rather than a withdrawal of the original offer.

It is not clear why this amendment was considered necessary. The rules have always distinguished between withdrawing an offer and changing its terms, so it is difficult to see why a variation of an existing offer might be thought to result in its withdrawal. This may be important particularly in relation to the costs consequences of an offer, since the costs consequences do not apply to an offer that is withdrawn but apparently do apply to an offer that has been varied (unless the offer has been made less advantageous to the offeree and the offeree has beaten that offer).

Perhaps the intention was simply to ensure that parties who are seeking to improve the terms of their offer do not unthinkingly withdraw their previous offer and thereby lose out on the potential costs benefits from the date of that offer. But it is not entirely clear.

Late acceptance

The new 36.14(5) makes clear that where a Part 36 offer is accepted late, the court must make the usual order (ie that the delaying party pays the costs for the period of delay) unless it would be unjust to do so, applying a similar test to where the court considers whether to depart from the usual costs consequences where an opponent fails to beat a Part 36 offer at trial.

The current wording of Part 36 states that on late acceptance the usual order will apply unless the court orders otherwise, which might be thought to suggest a broader discretion. However, the position adopted in the case law is that the usual order should be made unless it would be unjust to do so (eg Lumb v Hampsey [2011] EWHC 2808 (QB)). The amendment therefore just codifies the existing position.

Costs budgets

If a party has failed to file a costs budget in time, under CPR 3.14 it is treated as having filed a budget limited to court fees, so that in effect (and subject to obtaining relief from sanction) its recoverable costs are limited to court fees. Where that is the case, there may be little incentive for the opponent to settle in the face of a Part 36 offer from the party in default, as the costs risk if it fails to beat the offer may be minimal.

The new CPR 36.23 addresses this difficulty by providing that, in such circumstances, the defaulting party’s recoverable costs for the purposes of Part 36 will be 50% of the costs that would otherwise be recoverable, but will not be limited to court fees. Note however that this provision only applies to the costs from expiry of the relevant period onward. Where it is the claimant that is in default, and the offer is accepted within the relevant period, this new rule does not allow the claimant to avoid the limitation to court fees.