One of the tools used by the English court to encourage parties to settle a dispute without going to trial is to impose costs consequences on a party who rejects an offer to settle which they later fail to beat at trial.

Part 36 of the English Civil Procedure Rules contains strict rules on how such offers must be made in order to obtain the benefit of costs consequences against the other party. These include that the offer must be left open for acceptance; once withdrawn, Part 36 makes it clear that its automatic cost consequences no longer apply.

But to what extent can the Court use its discretion to apply costs consequences in respect of a withdrawn Part 36 offer which the offeree fails to beat at trial or which the Court considers it should have accepted? A recent case contains important guidance on how this question will be approached by the courts.

In Blackpool Borough Council v Volkerfitzpatrick Limited [2020] EWHC 2128 (TCC), the High Court considered the costs consequences of an “extremely well judged” Part 36 offer once it had been withdrawn by the defendant (who later went on to be unsuccessful at trial). Although Part 36 makes it clear that its automatic cost consequences do not apply where an offer is withdrawn by the offeror, the court still has discretion to consider that offer when making its final assessment on costs.

In this case, the High Court exercised its discretion to make a costs order favourable to the defendant, similar to that which it would have been bound to make if the Part 36 offer had not been withdrawn. However, as the judgment acknowledges, each case will turn on its own facts, including on the “crucial question” of whether “the offeree acted reasonably or unreasonably in failing to accept the offer while it was on the table”. The case contains important guidance on how this question will be approached by the courts.

The Facts

The claimant contracted with the defendant for the construction of a new tram depot. The claimant subsequently brought proceedings on grounds that, as designed and constructed, parts of the tram depot did not meet their intended design life and nor were they suitable for the exposed coastal environment where the tram depot was located. The claimant claimed £6,698,736.45 in damages accounting for the cost of the required remedial works.

In August 2019 the defendant made a Part 36 offer of £750,000 in respect of certain items referenced in the claimant’s claim. This offer was not accepted by the claimant and the defendant withdrew this offer in January 2020 (for reasons that the judge later concluded were tactical).

Following the trial in February 2020 the claimant was awarded £1,110,782.10 - much less than the £6,698,736.45 claimed. Within that total award, only £631,510.25 was awarded for the items that had been included in the defendant’s Part 36 offer - a lower amount than the £750,000 Part 36 offer. Therefore, the claimant failed to obtain a judgment more advantageous than the defendant’s Part 36 offer in relation to that part of the claim. A further hearing was held to deal with costs, including what, if any, consequences should follow from the Part 36 offer, particularly in light of the fact that it had been withdrawn.

The legal principles

CPR 36.17 states that where a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer, the court must, unless it considers it unjust to do so, order that that the defendant is entitled to its costs from the date on which the relevant period expired and interest on those costs.1 Where the defendant has withdrawn that offer,2 those automatic costs consequences will not apply.3 However, the withdrawn offer may still be properly considered by the court in its assessment of costs.4 The question therefore arises as to how the court will consider the withdrawn offer in its final assessment on costs.

The Judgment

On the facts, HHJ Stephen Davis sitting in the High Court found that the claimant was properly to be regarded as the successful party, despite the fact that it had recovered significantly less than the amount claimed (£6,698,736.45 claimed vs £1,110,782.10 awarded). Therefore the general rule applied that the claimant should recover all of its costs from the defendant.5

The claimant failed to obtain a judgment more advantageous than the defendant’s Part 36 offer in respect of the part of the claim to which the offer related (£631,510.25 awarded vs. £750,000.00 offered). The judge accepted that the withdrawn offer could not have the automatic costs consequences prescribed by Part 36, although the existence of this withdrawn offer was a factor that should be taken into account in exercising the court’s discretion on costs.

The judge turned to the observations made by the Court of Appeal in Thakkar v Patel [2017] EWCA 117 that in considering a withdrawn Part 36 offer “the crucial question is whether the offeree acted reasonably or unreasonably in failing to accept the offer while it was on the table”. The judge noted this would not be the only relevant question and inevitably each case would turn on its facts.

Following the guidance in Thakkar, the judge considered whether this “crucial question” should properly be considered “by reference to the claimant’s reasonable perception of its own interests or by reference simply to the eventual outcome of the case”. This will often be an important distinction.

The judge stated that, in deciding whether the claimant acted reasonably or unreasonably in failing to the accept the offer while it was on the table:“(a) the court must put itself into the position of the claimant at the time and not simply decide the case by reference to hindsight; but (b) the focus must be on the reasonableness of the refusal by reference to the facts and matters relevant to the merits of the claim as they ought reasonably to have appeared to the claimant at that time, not by reference to wider commercial factors.”

On the facts, the judge concluded that the claimant had acted unreasonably in not accepting the defendant’s Part 36 offer. The claimant was in a position to undertake its own assessment and valuation of the case – it had the benefit of its own investigations, its own test results and experts’ views from which it knew, or at least was in a position to know, that its case had become significantly weakened such that there were real risks that if it went to trial it would not recover more than the Part 36 offer.

Having regard to all the relevant considerations, the court ordered that the defendant should pay 80% of the claimant’s costs up to the end of the relevant period for acceptance of the defendant’s Part 36 offer and that the claimant should pay 80% of the defendant’s costs thereafter.

Comment

In this case, due to the court's exercise of its discretion, the defendant's decision to withdraw its Part 36 offer did not impact its ability to recover the majority of its costs from the expiry of the relevant period of its offer, even though it had withdrawn the offer for tactical reasons. Parties should always proceed with caution when withdrawing a Part 36 offer as such a move will result in far less certainty with regard to potential costs protection. Conversely, those litigants who choose not to accept a Part 36 offer that is later withdrawn should be aware that they may still face adverse costs consequences if the court concludes that they should have accepted it.