UK: Part 36 Offers - What Are They And Why Are They Important In Property Litigation?

Why make a Part 36 offer?

The courts want parties to settle their disputes. Those who do not attempt any realistic settlement can expect the court to penalise them with costs orders and requirements to pay interest. One way of attempting settlement is by making a Part 36 offer. The name comes from Part 36 of the Civil Procedure Rules which governs the specific mechanisms for these settlement offers.

If a party does not "beat" a Part 36 offer at trial, the inference is that they should have accepted that Part 36 offer and were unreasonable to force the case to continue to trial. The key feature of Part 36 is that it allows the Court to impose penalties for that unreasonableness in the form of enhanced interest and costs. The purpose of making a Part 36 offer is to put pressure on the other side to settle the dispute without the need to go to trial.

The risk of rejecting a Part 36 offer and proceeding to trial

Cost and interest penalties can be imposed if Part 36 offers are not accepted within the relevant period (usually 21 days from the date of the offer), the case proceeds to trial and either:

• a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer; or
• judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer.

A claimant who does not "beat" a defendant's Part 36 offer at trial, can be ordered to pay the defendant's costs from the end of the relevant period. This is a significant departure from the usual position that "costs follow the event" where the losing party pays the winner's costs.

If a defendant does not accept a claimant's Part 36 offer and continues the case to trial but the judgment from the Court is the same or better for the defendant than the claimant's offer, then the defendant can be ordered to pay the claimant's costs on the indemnity basis (where a higher proportion of costs are generally recoverable) and pay interest on damages and costs at an enhanced rate of up to 10% above base rate from the end of the relevant period.

Accepting a Part 36 offer

If a Part 36 offer is accepted, the defendant will pay the claimant's costs up to the end of the relevant period. If parties cannot agree liability for costs after the relevant period, the court will usually order that the party who accepted the offer should pay the offeror's costs from the end of the relevant period to the date of acceptance.

When to make a Part 36 offer?

A Part 36 offer can be made at any time, including before the commencement of proceedings. However, if the offer is made less than 21 days before trial, or after the trial has started, the costs consequences in Part 36 will not be automatic but rather at the court's discretion.

Generally speaking, if a Part 36 offer to settle is accepted, the claimant is entitled to their costs "of the proceedings". The Court of Appeal clarified in Solomon v Cromwell Group plc [2011] EWCA Civ 1584 that steps taken in contemplation of proceedings are to be regarded as proceedings for the purpose of Part 36. Therefore, the costs consequences will apply to pre-action part 36 offers which are accepted before proceedings are issued.

Part 36 offers can be used in almost all areas of property litigation including claims for dilapidations, rent arrears, professional negligence, business lease renewals, or any breach of a contractual arrangement relating to land.

Recent Changes to Part 36

The 57th update to the Civil Procedure Rules came into force on 1 October 2011. It introduced an amendment to Part 36 which was aimed at ending the confusion caused by the decision in Carver v BAA plc [2008] EWCA Civ 412.

The Carver case related to personal injury claim brought by Lisa Carver against BAA plc. Ms Carver was an air hostess. She suffered an injury to her ankle when she stepped into a lift at Gatwick airport which has stopped 2 feet below floor level. She was off work for 4 weeks. BAA accepted liability and the dispute was regarding the appropriate amount of damages. Ms Carver refused to accept a Part 36 settlement offer made by BAA of £4,520. At trial, the damages she was awarded –when interest was added- were slightly above the Part 36 offer- by a grand total of £51. She had technically "beaten" the offer and so should have been entitled to legal costs on an indemnity basis and enhanced interest under the Part 36 rules.

However, the judge took the view that Ms Carver had not succeeded in obtaining a judgment 'more advantageous' than BAA's Part 36 offer. She was ordered to pay BAA's costs and subsequently appealed.

The Court of Appeal decided that the phrase 'more advantageous' was an open-textured phrase which permitted a wide-ranging review of all the facts and circumstances of the case in deciding whether the judgment was worth the fight. They held that the protection under Part 36 should not apply in cases where, objectively speaking, the rejection the Part 36 offer was unreasonable when compared with the amount awarded and the Court should take into account all aspects of the case, including emotional stress and financial factors, such as the incurring of irrecoverable costs. The rationale was that running the risk of litigation, for the sake of £51, was not a justifiably reasonable decision that should attract the benefits of Part 36.

Whilst the Court's reasoning was understandable, the problem was the uncertainty caused by this decision. It was very difficult for lawyers to advise clients on the consequences of Part 36 offers. It was no longer automatically sufficient to beat a Part 36 offer by a small margin. It was impossible to advise how much a party would have to beat a Part 36 offer by at trial to attract the Part 36 costs consequences.

Lord Justice Jackson, as part of his proposals for reforms to civil litigation costs, recommended an amendment to the CPR to bring it back in line with how Parliament intended, i.e. if you beat a Part 36 offer by any margin, no matter how small, you are entitled to the additional benefits of Part 36. Since 1 October 2011, that is the position again and the Carver decision has been laid to rest. CPR 36.14 has been amended so it now clarifies that "more advantageous" in relation to money claims means better in money by any amount, however small:

(1A) For the purposes of paragraph (1), in relation to any money claim or money element of a claim, 'more advantageous' means better in money terms by any amount, however small, and 'at least as advantageous' shall be construed accordingly.

Other considerations

• Parties should be aware that Part 36 offers must comply with the requirements set out in Part 36 in order to attract the cost consequences mentioned above (PHI Group Limited v Robert West Consulting Limited [2012] EWCA Civ 588).
• Part 36 offers remain open until written notice of the withdrawal is served on the other side and therefore can be accepted at any time up until withdrawal.
• Part 36 is a "self-contained" code and so normal contractual principles do not apply. This means that rejection of a Part 36 offer is of no effect and the party rejecting the offer may later accept it unless the offer has been withdrawn. It also means that subsequent offers do not revoke or amend earlier ones (Gibbon v Manchester City Council [2010] EWCA Civ 726).
• Part 36 offers cannot be time limited – only a Part 36 offer which remains open until trial will attract the benefits of Part 36 (C v D [2011] EWCA Civ 646)
• Part 36 offers are "without prejudice" which means that the trial judge cannot be told about the offer before judgment is given and so it will not affect the outcome of the litigation.

Summary

Due to the potential costs consequences which can flow from Part 36 offers, they can be one of the most useful tactical weapons in a litigant's armoury. It is important to consider at all stages of a dispute whether a Part 36 offer should be made, accepted or withdrawn. Part 36 offers which have already been made need to be kept under continual review and re-assessed in light of any new developments in the claim - particularly at key stages of proceedings such as disclosure, exchange of witness statements and expert reports.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.