Settlement is a fundamental part of litigation, and parties should be alive to the potential costs advantages (and pitfalls) of making the right offer. This article provides a brief refresher on the Part 36 settlement process, and considers a recent English Court of Appeal case that in a party losing the right to extensive benefits on costs because the settlement offer did not comply with the technical requirements of Part 36.

Part 36 of the Civil Procedure Rules offers parties valuable costs protection, and can put pressure on them to settle. The recent Court of Appeal case of F&C Alternative Investments (Holdings) Ltd v Barthelemy & Anor [2012] EWCA Civ 843 is a reminder that parties need to be aware of the technical requirements of Part 36.

This article examines Part 36, and analyses the impact of the F&C Alternative Investments case.

Settlement Offers and Costs — A Brief Refresher

The Civil Procedure Rules allow any party to make a settlement offer at any point during litigation (or indeed, before litigation commences). The costs consequences of such an offer are dealt with in the normal way under Part 44 of the Civil Procedure Rules; that is, the Court will “have regard” to an offer of settlement that is not a Part 36 offer when exercising its discretion on costs.

If a party chooses to make a settlement offer in the form of a Part 36 offer, then special costs consequences result if that offer is accepted or rejected, which can impact on a party making settlement decisions. The table on the following page summarises the key costs consequences of making a Part 36 offer of settlement which is then accepted or rejected:

Click here to view table.

In summary, the consequences (for both claimant and defendant) for failing to accept a Part 36 offer are significant. For a claimant, rejecting and failing to beat, a defendant’s offer could lead to a large costs penalty. For a defendant, there is the risk that it may have to pay indemnity costs and interest on those costs, together with a punitive rate of interest on any damages awarded to the claimant, in cases where the claimant equals or beats its offer at judgement.

The Court of Appeal in F&C Alternative Investments

F&C Alternative Investments made a settlement offer of £5.8 million. The offer did not comply with the formalities of Part 36. Barthelemy & Anor rejected that offer, and, following trial, F&C Alternative Investments were awarded £7.8 million at judgment. The Defendants were ordered to pay F&C Alternative Investments’ costs on the indemnity basis, plus interest on those costs, which cumulatively amounted to between 22 and 40 per cent. per annum. This was ordered on the basis that the judge at first instance had concluded that the settlement offer made by the F&C Alternative Investments was “akin” to a Part 36 offer, thus attracting the consequences of Part 36 as regards costs.

The Court of Appeal, in rejecting this conclusion, was clear that a Part 36 offer had to comply with the strict formal requirements in Part 36, namely that it has to:

  1. Be in writing 
  2. State on its face that it is intended to have the consequences of Part 36 as regards costs
  3. Specify a 21 day (or longer) period within which a party will be liable for the other party’s costs, in accordance with Part 36, if the offer is accepted
  4. State whether the offer relates to the whole or part of a claim
  5. State whether it takes into account any counterclaim

The Court of Appeal noted that the offer in question did not comply with these requirements (indeed the offer was never expressed to be a Part 36 offer), and, as such, F&C Alternative Investments were not entitled to the costs protection afforded by Part 36. Instead, the normal rules on costs (in Part 44 of the Civil Procedure Rules) should apply. The Court of Appeal thus reduced significantly the rates of interest awarded on F&C Alternative Investments’ costs payable by the Defendants.

Lessons

Making a Part 36 offer is an important step in litigation. To maximise the impact of the offer, it is crucial to make sure that it is in the correct technical form, lest the costs protection be lost.