One of the most crucial aspects of cost effective litigation, especially in a difficult economic climate, is knowing how best to take advantage of settlement negotiations and in particular, the use of Part 36 offers.

If an offer is made under Part 36 of the Civil Procedure Rules (CPR) and your opponent does not accept the offer, if they are ultimately unsuccessful in obtaining an award which is more advantageous (or if it is a claimant that makes the offer then at least as advantageous) at trial, then you are likely to be awarded your costs from the end of the relevant period until the date of judgment. The relevant period is normally 21 days from the date of the offer. For a claimant, this can include costs on an indemnity basis, which means that when its costs are assessed, it is able to recover all the costs which were reasonably incurred. It can also recover enhanced interest on those costs and on the damages from the end of the relevant period. Clearly, the failure to make or accept reasonable offers of settlement can have significant costs implications.

To state the obvious, it is crucial that any Part 36 offer is held to be validly made. If not, the enhanced costs consequences of Part 36 will not apply.

C v D

The validity of a Part 36 offer was considered in the case of C v D. The issue was whether a settlement offer, that was expressed to be open for acceptance for 21 days, was capable of being a Part 36 offer.

Summary of the case

The claimant commenced proceedings for breach of contract in relation to a sale of land. The claimant initially claimed specific performance, but then dropped this element, retaining only a claim for damages.

In December 2009, the claimant made an offer to the defendant to settle the proceedings on terms. The letter stated that "the offer will be open for 21 days from the date of the letter". The letter also stated that if the offer was not accepted, it was intended to have the costs consequences as set out in Part 36. Eventually, the time limit for the offer expired and the offer was not accepted.

At the beginning of November 2010, shortly before the trial, the defendant attempted to accept the offer made in December 2009. The claimant contended that the offer was no longer open for acceptance. The claimant applied to court to seek a declaration to confirm that this was the case. The defendant's argument was that there had not been a notice of withdrawal served (as is required by Part 36) and therefore, the offer remained open for acceptance.

The court's decision

The High Court held that despite the references to Part 36, the letter, on its true construction, was not capable of being a Part 36 offer because the offer itself was stated to be time limited.

For a valid Part 36 offer to be made, it must remain open for acceptance until it is changed or withdrawn by the service of a notice of withdrawal. Accordingly, the offer was a valid, time limited offer, which had to be accepted within a specified time and if it wasn't, the offer came to an end and could not be accepted. Therefore, it was an offer that the court could take into account under its general discretion to award costs under the CPR, but it was not a Part 36 offer and did not give rise to the Part 36 costs consequences.

Clearly, the warning from C v D is that if you want to make a Part 36 offer (and benefit from the costs consequences) then it must be correctly set out in accordance with Part 36. As the Judge said in C v D "if the words used cannot fit with Part 36, then the result is simply that Part 36 does not apply whatever may have been intended". The offeror's intention is not relevant but the words of the offer letter are crucial.

The Court of Appeal has also considered the proper approach to Part 36 in the conjoined cases of Gibbon v Manchester City Council and L G Blower v Reeves. The Court of Appeal's decision made it clear that some general contractual rules, for example of offer and acceptance, are inconsistent with the provisions of Part 36, and that in those circumstances the rules of Part 36 must be applied. Part 36 was "to be read and understood according to its terms without importing other rules derived from the general law, save where that was clearly intended".

The Court of Appeal held that a Part 36 offer may be accepted at any time unless the offeror has withdrawn the offer by serving a notice of withdrawal on the offeree. The Court of Appeal stated "in seeking to settle the proceedings ... the parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer ... they must follow its requirements".

Points to consider

As a practical guide, if you want to make a valid Part 36 offer, you should ensure it complies with the wording of Part 36. Simply put, it 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 within which the defendant will be liable for the claimant's costs in accordance with rule 36.10 if the offer is accepted;
  • state whether it relates to the whole of the claim, to part of it or to an issue that arises in it and if so to which part or issue;
  • state whether it takes into account any counterclaim.

If the offer does not comply with the above requirements, it will not attract the more advantageous costs consequences which attach to a successful Part 36 offer. It will still be a valid offer of settlement and will be considered by the court when coming to a decision as to what costs order should be made. However, the offer should not be time limited in any way if the intention is that the Part 36 costs consequences should apply.

In some circumstances, for example to encourage a settlement on a commercial basis, a time limited offer maybe a better tactic. If you want to make a time limited offer, do so on a "without prejudice save as to costs" (Calderbank) basis and not under Part 36, as otherwise the offeree may try to argue that, properly construed, the offer was not intended to be time limited and could be accepted at any time.

It is also essential that offers are regularly reviewed. If a Part 36 offer has been made, or received, it should be kept under constant review to determine whether it should be withdrawn, revised, or accepted.