Part 36 of the Civil Procedure Rules (CPR)(1) introduced a procedural regime for settlement offers in disputes and prescribed the costs consequences for offers made in accordance with its terms, designed to encourage parties to make and accept reasonable offers. Part 36.14 sets out the most notable consequences - following judgment - of Part 36 offers that are not accepted.
If a claimant makes a Part 36 offer which is not accepted by the defendant and judgment against the defendant is at least as advantageous to the claimant, the court will - unless it considers it unjust to do so - order the defendant to pay the claimant's costs on an indemnity basis from the date on which the relevant period expired. In addition, interest must be paid on those costs and on all or part of any sum awarded (excluding interest on that sum) at a rate of up to 10% above the base rate.
If a defendant makes a Part 36 offer and the claimant does not accept it, but then fails to obtain a more advantageous judgment, the court will - unless it considers it unjust to do so - order the claimant to pay the defendant's costs from the date on which the relevant period expired, plus interest on those costs.
Meaning of 'at least as advantageous' or 'more advantageous'
When is a judgment deemed to be 'at least as advantageous' or 'more advantageous' than an offer for the purposes of Part 36.14?
In its original form, Part 36 referred to circumstances, in respect of a defendant's offer, in which a claimant "failed to better" a payment into court which had been made.(2) From April 5 2007, following a substantial rewrite of Part 36, this became "fails to obtain a judgment more advantageous" than a defendant's offer - payments into court had long since ceased to be a requirement. Although the former phrase implied a purely monetary comparison, the change in wording suggested that it might be appropriate to take other criteria into account, such as the inconvenience and anxiety of taking a matter to trial. This interpretation was confirmed in Carver v BAA Plc,(3) in which the Court of Appeal stated that the courts should take a broad view of all circumstances in order to determine whether taking a matter to trial had really been really worthwhile, in light of a Part 36 offer that had been made.
Carver was strongly criticised for introducing unwanted uncertainty into what had previously been a binary issue, and was called into doubt in obiter (ie, passing) comments by the High Court in LG Blower Specialist Bricklayer Ltd v Reeves.(4) The position will be resolved on October 1 2011 when Part 36 will be amended to define 'more advantageous' as "better in money terms by any amount, however small".(5) This effectively reverses Carver.
Formal requirements of Part 36 offers
The formal requirements of a Part 36 offer are contained in Part 36.2(2), which provides that a Part 36 offer must:
be in writing;
state that it is intended to have the consequences set out in Section 1 of Part 36;
specify a "relevant period" of no less than 21 days;
state whether it relates to all or only part of a claim; and
state whether it takes in to account any counterclaim.
Although these basic requirements are straightforward, it is important to note the following points.
The 'relevant period' is a key concept in Part 36 and, despite its simplicity, it is sometimes misunderstood. This is perhaps because in the old version of Part 36, in force from 1999 until April 2007, a Part 36 offer had to state that the offer was capable of acceptance for 21 days. This is no longer the case and Part 36 offers now remain capable of acceptance unless and until they are withdrawn. Rather, the relevant period, which was not a concept used in Part 36 before April 2007, is a period of at least 21 days from the date of offer (unless trial is to start within 21 days), within which the defendant must pay the claimant's costs in accordance with Part 36.10 if the offer is accepted. If the offer is not accepted and costs are to be awarded following judgment in accordance with Part 36.14, costs incurred before and after the end of the relevant period are also treated differently.
No time limitation
Although there is no express rule to this effect, it is implicit in the wording of Part 36 that a Part 36 offer cannot be time limited - that is, it may not be expressed to be open for acceptance for a fixed period only. This was recently confirmed by the Court of Appeal in C v D.(6) However, in that case the court saved a seemingly defective Part 36 offer by construing a statement that the offer was 'open for 21 days' to mean that it would not be withdrawn for 21 days, rather than that it would automatically lapse after 21 days (for further details please see "Part 36: case law conclusions and plans for reform").
Terms as to costs
A Part 36 offer cannot be on a 'drop hands' basis, otherwise costs inclusive or include any term as to costs. Again, there is no express rule to this effect. However, in Mitchell v James (Costs)(7) the Court of Appeal made clear that the contrary position would be inconsistent with the purpose and wording of Part 36. This is one reason why it may sometimes be preferable for a party to make a Calderbank offer,(8) rather than a Part 36 offer, as the former can contain proposals in relation to costs and hence offer greater certainty.
However, there is nothing to prevent a claimant from making a Part 36 offer and writing separately to inform the defendant of its costs to date, so that the defendant is aware of the likely additional liability for costs that it will face if it accepts the offer or the claimant matches it at trial.
Part 36 pitfalls
Express withdrawal of offers
Part 36 offers are not contractual in nature and must be expressly withdrawn. Given the contractual language of offer, acceptance, rejection and counter-offer that is used in relation to Part 36, it is tempting to assume that contract law principles apply to Part 36 offers, but they do not. Part 36 offers belong to the procedural regime of the CPR, not the common law.
In Gibbon v Manchester City Council(9) the Court of Appeal, having recognised that Part 36 offers are not contractual, confirmed that a Part 36 offer which the offeree purports to reject therefore still remains capable of acceptance at a later date. Perhaps unhelpfully, Gibbon also suggests that if a party makes two Part 36 offers, the later being less generous to the other party, the earlier offer is not impliedly withdrawn and will remain capable of acceptance. Similarly, in Mahmood v Elmi(10) the High Court held that a Part 36 offer in respect of an entire claim is not impliedly withdrawn by a subsequent settlement of part of the same claim and remains capable of acceptance.
A party should never assume that its Part 36 offer is no longer 'on the table' unless it has expressly withdrawn it in writing. However, if a Part 36 offer is withdrawn, the costs rules in Part 36.14 no longer apply to it.(11) The costs value of a Part 36 offer should therefore be considered carefully before it is withdrawn.
Litigants in person
If a Part 36 offer is made to an individual without legal representation, it is prudent not only to state in the offer that is intended to have the cost consequences set out in Part 36 (as required by Part 36.2(2)(b)), but also to explain those consequences.
In Kunaka v Barclays Bank Plc(12) the defendant bank made a Part 36 offer to the unrepresented claimant. The offer was not accepted. Following negotiations, the bank wrote to the claimant to remind him of the Part 36 offer, which remained open for acceptance. The claimant accepted the offer. As a result, applying Part 36.10(5)(b), he would normally have been liable for the bank's costs from the date on which the relevant period expired. However, the court considered that the bank, in its letter reminding the claimant of the offer, should have explained that acceptance at that time would result in a liability to pay some costs to the bank. Accordingly, the court exercised its discretion under Part 36.10(5) not to award the bank its costs from the date of expiry of the relevant period, instead making no order as to costs for that period.
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