Making an offer of settlement under Part 36 of the Civil Procedure Rules (Part 36) is one of the most crucial tactical steps in litigation. If pitched correctly it puts an opponent under pressure and may avoid lengthy and expensive litigation; if not accepted, it can provide the offering party enhanced protection on costs.

In this, the fourth and final part of our mini series on managing the costs of dispute resolution, we take a look at Part 36: its essential components, issues to be aware of and points to consider.

The essentials

A Part 36 offer must:

  • Be in writing.
  • State on its face that it is intended to have the consequences of Part 36.
  • Specify a period of not less than 21 days (the relevant period) within which the defendant will be liable for the claimant's costs if the offer is accepted.
  • State whether it relates to the whole of the claim, or to part of it, or to an issue that arises in it, and, if so which part or issue.
  • State whether it takes into account any counterclaim.

Enhanced costs provisions

Where a claimant has made a Part 36 offer and subsequently obtains a judgment against the defendant which is at least as advantageous to the claimant as the proposals contained in its offer, the following enhanced costs consequences can apply:

  • Interest on any sum awarded up to a rate of 10% above base rate from the end of the relevant period.
  • Costs from the end of the relevant period on an indemnity basis.
  • Interest on those costs up to a rate of 10% above base rate.

Where a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer, the defendant is only entitled to its costs from the expiry of the relevant period plus interest on those costs. Neither is at an enhanced rate.

The court's discretion

Despite some case law to the contrary, whether or not a judgment is more advantageous than a Part 36 offer should be judged on financial considerations. It should not be based on other features such as stress, anxiety and irrecoverable legal costs. On 29 March 2011, the Government responded to Jackson LJ's 2010 report on the costs of civil litigation. It confirmed that Part 36 will be amended to make it clear that where a money offer is beaten at trial, by however small a margin, the costs sanctions applicable under Part 36 will apply.

That said, the court does retain some discretion on costs. It may not order the usual costs sanctions if it considers it would be unjust to do so because of, for example, the conduct of the parties both before and during the litigation.

Express withdrawal required

The courts have also confirmed that the Part 36 regime does not follow the general principles of contract law. Once a Part 36 offer is made, it remains open for acceptance until expressly withdrawn by notice in writing. Withdrawal will not be implied either by the offeror making a further offer or by the opposing party making its own Part 36 (or other) offer. An offeror can have more than one Part 36 offer on the table.

Don't time limit offers

A Part 36 offer must be capable of acceptance unless and until it is withdrawn. Any attempt to get round this provision by making an offer open for acceptance for a specified period of time only will fall foul of the requirements of Part 36. A time-limited offer will not have the costs consequences of Part 36, although it can still be taken into account by the court when exercising its discretion on costs generally.

The future

The Government has also accepted Jackson LJ's recommendations to equalise the incentives between claimants and defendants to make and accept reasonable offers. The detail of this proposal is still under consideration. However, an additional sanction (equivalent to 10% of the value of the claim) will also be introduced to be paid by a defendant who does not accept a claimant's Part 36 offer that is then beaten at trial. Amendment to the Civil Procedure Rules will be required to bring these changes into force.

Points to consider

In respect of any dispute:

  • Consider whether a comprehensive letter before claim, coupled with a properly considered Part 36 offer, may avoid litigation altogether.
  • Ensure that any offer intended to have the Part 36 costs consequences complies strictly with Part 36.
  • If any aspect of a Part 36 offer is unclear upon receipt, seek clarification in writing.
  • If a Part 36 offer is made less than 21 days before the start of a trial, the Part 36 costs provisions do not automatically apply. Costs will be determined by the court if not agreed.
  • Review and revise Part 36 offers throughout the course of proceedings, especially at key stages such as disclosure and the exchange of evidence. If the prospects of success have altered, ensure that any offers made - but which are no longer appropriate - are quickly and formally withdrawn. Likewise, consider accepting an offer made where the evidence changes and suggests your case is not as strong as initially anticipated.
  • A defendant with a counterclaim can make an offer to settle its counterclaim (and the rest of the claim). If properly worded, that offer can also be deemed to be a "claimant's" Part 36 offer with the enhanced claimant costs consequences referred to above.