A very recent Court of Appeal decision confirms that a party will not be penalised for making a Part 36 offer to settle, even where the level of the offer turns out to be misjudged: Rolf v De Guerin [2011] EWCA Civ 78.

The costs penalties under Part 36 apply only where a party has refused an opponent's offer but then failed to achieve a better result at trial. The Court of Appeal commented that if Part 36 allowed an offeror to be prejudiced by making an offer, it would make the procedure a most dangerous one to use.

In this case, which concerned a residential building dispute, the claimant homeowner had put forward a Part 36 offer of £14,000, which was later increased to £21,000 (as against her claim for around £70,000). She was ultimately awarded damages of only £2,500. The trial judge made no order as to costs for the period up to 21 days after the Part 36 offer was made (reflecting in particular the low damages award compared to the quantum of the claim) but from that point ordered the claimant to pay the defendant's costs.

The Court of Appeal held that the judge had erred fundamentally in his appreciation of the significance of the Part 36 offer. Part 36 provides advantages for those who make realistic offers, and potential disadvantages for those who decline an offer, but it does not prejudice a party for making an offer. The Court of Appeal therefore overturned the judge's order and made no order for costs for the whole of the action.