Recent developments have reduced the costs protection afforded by Calderbank offers and asserted the importance of making fully compliant Part 36 offers. We offer guidance about the best course to pick through the minefield of the courts’ conflicting decisions.

A Calderbank offer is any offer of settlement that does not comply with the formal requirements of Part 36. A Part 36 offer requires the defendant to pay the claimant’s costs if it is accepted and is often an unattractive option for this reason. If the defendant chooses not to offer to pay all of the claimant’s costs, the resulting Calderbank offer may afford him some costs protection under CPR 44.3, but not the desirable automatic costs consequences which apply to a Part 36 offer.

A defendant may make a Part 36 offer which subsequently becomes too generous to the claimant. If he withdraws this offer, it acquires the status of a Calderbank offer and loses the benefit of the automatic costs consequences it previously conferred.

In Medway Primary Care Trust v Marcus, a majority of the Court of Appeal held that where the quantum of a clinical negligence claim was greatly (but not improperly) inflated, it was unfair to require the defendant to make a Part 36 offer which, because the claim was being brought under a conditional fee agreement, would impose a liability in costs wholly disproportionate to the outcome of the case. The court held that the defendant would have been fully protected against costs had it made a Calderbank offer for a little more than the sum ultimately awarded (£2,000, as against the claimed sum of £525,000), offering costs proportionate to that recovery.

This decision encouraged defendants to make Calderbank offers in circumstances where both the claim and costs were inflated. However, the dissenting judgment of Jackson LJ in Medway proved to be more potent than the majority decision. In Fox v Foundation Piling Ltd, Jackson LJ reiterated his view that a defendant has to make a Part 36 offer to acquire full costs protection (without referring to Medway in his review of the relevant authorities). On this occasion Jackson LJ was able to persuade a more malleable Court of Appeal to agree with him.

Dominic Regan has revealed that judges are being told to ignore the decision in Medway in their costs training. This is borne out by the guidance given by the Supreme Court last month in Fairclough Homes Ltd v Summers about the circumstances in which it is appropriate for a defendant to make a Calderbank offer.

Jackson LJ in Medway noted that a defendant might not be required to make a Part 36 offer to obtain costs protection where the claim was dishonestly inflated. The Supreme Court agreed with him but, ignoring Medway, referred only to Fox. Where a claim is dishonestly exaggerated, the defendant should make a Calderbank offer in which it offers to settle the genuine claim, while requiring the claimant to pay the defendant’s costs in respect of the dishonest aspects of the case on an indemnity basis.

So these are the circumstances in which a defendant can obtain full costs protection from a Calderbank offer. Where the claim is exaggerated but not dishonestly so, as in Medway, the defendant runs the risk of obtaining minimal, if any, costs protection from an offer which does not comply with Part 36. Given the Court of Appeal’s current trend of requiring strict compliance with Part 36, following Jackson LJ’s lead. See PHI Group Limited v Robert West Consulting Limited and F&C Alternative Investments (Holdings) Ltd v Barthelemy - parties make offers outside Part 36 at their peril.