The usual position, in commercial claims proceeding in the courts of England and Wales, is that the loser pays the legal costs of the winning party – or at least a proportion of them. That said, costs are always at the discretion of the court. Importantly, the Civil Procedure Rules (CPR) provide that the courts must take into account any offer to settle that is made during proceedings when exercising its discretion on costs. But not all offers are treated equally when it comes to costs.

The costs provisions that flow from successful offers made under CPR Part 36 make such types of offers worth considering in many commercial claims.

Here we provide an overview of:

  • How and when to make a Part 36 offer;
  • The usual costs provisions under Part 36;
  • Withdrawing and changing Part 36 offers;
  • Whether Part 36 offers are suitable in all cases; and
  • Some hints and tips to get the most from Part 36.

How is a Part 36 offer made?

Part 36 is a prescriptive, self-contained procedural rule that has to be closely followed to obtain the benefit of the enhanced costs provisions that it provides for.

A Part 36 offer can be made by a claimant or defendant in any type of claim. It must:

  • Be in writing;
  • Make it clear that it is made pursuant to Part 36;
  • Specify a period of not less than 21 days within which the defendant will be liable for the claimant's costs in accordance with Part 36 if the offer is accepted (the Relevant Period);
  • Specify what the offer relates to – whether the whole or part of the claim, or an issue; and
  • State whether it takes into account any counterclaim.

A defendant with a counterclaim can make a 'claimant' Part 36 offer on its counterclaim but it should be made very clear that that is what is intended.

If the court finds that an offer is not Part 36 compliant, the automatic presumptions on costs set out below will not follow.

Can a Part 36 offer be for the full amount of the claim?

No. There must be a genuine attempt to settle the proceedings. A claimant's offer must include a genuine element of concession for the costs and other consequences referred to below to follow. What is a genuine element of concession will be case specific.

When can a Part 36 offer be made?

It can be made at any time before or after proceedings are commenced, in an appeal or cross-appeal and in costs assessment proceedings.

What are the usual costs provisions under Part 36?

There is a rebuttable presumption that the below costs and other consequences will apply unless the court considers it unjust in all the circumstances of the case:

  • If a Part 36 offer is accepted within the Relevant Period, the claimant is entitled to recover its costs of the proceedings (assessed on the standard basis) up until the date of acceptance. This applies regardless of which party made the offer;
  • If it is accepted after the end of the Relevant Period, unless the parties agree the costs, the claimant is awarded its costs up until the end of the Relevant Period and the offeror is entitled to its costs thereafter, again on the standard basis;
  • If a claimant obtains a judgment in its favour following trial, which is at least as advantageous as its own Part 36 offer, the defendant will be ordered to pay the claimant:
    • its costs of the proceedings up until the end of the Relevant Period assessed on the standard basis;
    • its costs from the end of the Relevant Period assessed on the indemnity basis (a higher rate of recovery than on the standard basis);
    • interest on those costs at up to 10% above base rate;
    • interest on the damages awarded at up to 10% above base rate from the end of the Relevant Period; and
    • an additional amount (calculated as set out in Part 36.17) not exceeding £75,000.
  • If the claimant fails at trial to obtain a judgment more advantageous than the defendant's Part 36 offer, the claimant will be awarded its costs until the end of the Relevant Period but thereafter, the claimant will pay the defendant's costs plus interest on those costs, albeit not at an enhanced rate. Although the claimant may be successful at trial in terms of obtaining a judgment and so justified in having brought its claim, the court is, in effect, making the claimant pay the costs incurred for the luxury of having its day in court when it should have accepted what turned out to have been a reasonable offer.

The above shows that a well-pitched Part 36 offer made early on in proceedings provides a means of putting pressure on the recipient to settle the dispute. It can provide the offeror valuable costs enhancement - if a claimant, or protection, if a defendant- if the recipient refuses to accept what turns out, following trial, to have been a reasonable offer to settle.

Would similar costs follow under a non-Part 36 offer?

It is most unlikely. If a non-Part 36 without prejudice save as to costs offer (sometimes called a Calderbank offer) is made, although the court must take the offer into account when exercising its discretion on costs, the automatic Part 36 costs consequences do not follow. Costs will be entirely at the discretion of the court and indemnity costs are rarely awarded.

What happens following acceptance of a Part 36 offer?

Following acceptance, which must be in writing, the claim to which the offer relates is stayed. Any lump sum offered must be paid within 14 days of acceptance, failing which judgment for that sum can be entered. For other types of offers, if accepted but not honoured, an application can be made to enforce the terms of the offer without the need for a new claim.

Can a Part 36 offer be withdrawn or changed?

Yes:

  • If the Relevant Period has not expired, Part 36 sets out the procedure to be followed. An application to court for permission to withdraw may become necessary. Permission is unlikely to be given unless there has been a change of circumstances since the Part 36 offer was made and it would be in the interests of justice to give permission – this is likely to be a very high hurdle.
  • After the Relevant Period has expired, a Part 36 offer can be expressly withdrawn or its terms changed by the offeror serving written notice of the same on the recipient.
  • A Part 36 offer can also be time limited on its face so it is withdrawn automatically on the date specified (which must be after the end of the Relevant Period).

Note however that once withdrawn, the Part 36 costs provisions set out above no longer apply.

Can the court be told about a Part 36 offer?

As a Part 36 offer is made 'without prejudice save as to costs,' it can only be referred to the court either:

  • Following a split trial
    • if the offer relates only to the part that has been tried, the court can be told of its terms;
    • but otherwise, the court can be told of its existence but not its terms; or
  • At the end of the trial dealing with all issues.

This enables the court to consider the appropriate costs orders.

Are Part 36 offers suitable for all cases?

Part 36 offers will be suitable in many, but not all, cases. Such offers cannot be made in arbitrations (to which the CPR does not apply) or small claims track cases.

They may not be appropriate:

  • In more complex proceedings, for example were there are multiple defendants;
  • Where a defendant requires longer than 14 days to pay;
  • Where a claim is spurious, overstated or its value is low but the claimant's costs are likely to be disproportionately high. A defendant may not want to make or accept a Part 36 offer due to the costs consequences that would follow;
  • Where other proceedings or potential claims need to be settled at the same time; or
  • Where non-parties need to be brought into any settlement agreement to avoid future claims or contribution proceedings.

The flexibility provided by a non-Part 36 without prejudice save as to costs offer may be more appropriate in the above scenarios as the terms of the offer can be much wider and could include a costs inclusive offer, for example, which is not possible under Part 36. But remember, the automatic Part 36 costs consequences will not follow.

How to get the most from Part 36

Parties involved in commercial litigation should consider the following when making, or when in receipt of, a Part 36 offer:

  • Make sure any Part 36 offer (made or received) complies with the requirements set out in the rule. If it deviates in any material way the usual costs provisions may not follow;
  • Part 36 does not incorporate all the features of contract law. The recipient's rejection or counter-offer has no effect on a Part 36 offer. Such an offer remains open for acceptance until specifically withdrawn by the offeror. In theory, multiple Part 36 offers may therefore be on the table and open for acceptance at any one time. Don't get caught out;
  • Ask for clarification if the offer is not sufficiently clear. Don't just assume it is a non-compliant offer;
  • Diarise to review offers made or received at strategic points in the proceedings to evaluate whether they should be accepted, amended or withdrawn as the case develops;
  • Where the offer relates to only part of the claim or is made by some but not all of the defendants or is made less than 21 days before trial, there are additional considerations under Part 36; and
  • Understand the rules on service as set out in CPR Part 6.26 so that any attempt to accept, withdraw or amend a Part 36 offer is not thwarted by the opponent getting in first.