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Making a settlement offer - Changes to “Part 36” in force April 2015

19th February 2015

The rules set out in Part 36 of the Civil Procedure Rules are designed to encourage parties to settle their disputes by putting the offeree at risk of being penalised in costs, interest and (in some instances) increased damages if they fail at trial to “beat” a Part 36 offer made by the offeror.

Changes are being introduced to the Part 36 regime which will apply to offers made on or after 6 April 2015. There will be changes to some of the rules and a clarification of others. In this article I consider the main changes which are coming in to force.

Time-limiting offers

For an offer to take effect as a valid Part 36 offer it is not, at present, possible to set a time limit for accepting the offer. The rules provide that the offer must be open for at least 21 days (“the Relevant Period”) and, thereafter, remain open for acceptance until notice of withdrawal of the offer is served. From April it will be possible to time limit the offer although they must still be open for acceptance for not less than 21 days. It will also be possible to frame an offer so that it lapses upon the occurrence of certain events (such as a hearing, trial, or mediation).

As applies at present, the offeror will, from April, still cease to enjoy the automatic costs protection which stems from having made a Part 36 offer as soon as the offer has been withdrawn.

Improving a Part 36 offer

If you have already made a Part 36 offer and then make a second Part 36 offer on “improved” terms, the making of that second offer will not have the effect of withdrawing the original offer (unless you expressly withdraw the original offer). You could, therefore, have two (or more) offers on the table and, consequently, if the offeree fails to beat the original offer at trial, the costs consequences will apply from the date of the original offer.

Part 36 offers and counterclaims

The costs consequences of a claimant accepting a defendant’s Part 36 offer have always been quite different from the costs consequences of a defendant accepting a claimant’s Part 36. Equally, the costs consequences for a claimant which fails at trial to beat a defendant’s Part 36 offer will be different from the consequences for a defendant failing to beat a claimant’s Part 36 offer.

The decision in AF v BG [2009] EWCA Civ 757 confirmed that a Part 36 offer made by a defendant with a counterclaim could be treated as a claimant’s Part 36 offer where acceptance of the offer would have involved a net payment by the claimant to the Defendant. However, since the 2012 decisions in Proctor & Gamble Company v Svenska Cellulosa Aktiebolaget [2012] EWHC 2839 (Ch) and F & C Alternative Investments (Holding) Limited v Barthelemy [2012] EWCA Civ 843, there has been some uncertainty as to how the Part 36 rules apply where the titles of “claimant” and “defendant” given in proceedings do not reflect the reality of who is seeking the greater remedy in financial terms.

The new rules reaffirm the position in AF v BG, in particular confirming that, provided the counterclaiming defendant’s offer involves a net payment or by the claimant to the counterclaiming defendant, or other net benefit to the defendant, it will be treated as a claimant’s Part 36 offer. Therefore, a claimant accepting a counterclaiming defendant’s Part 36 “claimant’s offer” within the Relevant Period will have to pay the counterclaiming defendant’s costs.

Equally, if the claimant fails at trial to get a better result than it could have achieved by accepting the counterclaiming defendant’s Part 36 offer, the counterclaiming defendant will get the same benefits, in terms of costs and other sanctions, as it would have got were it the claimant.

Is a claimant’s offer a genuine offer?

It has, in the past, been a litigation tactic for claimants to raise the stakes in a litigation, whilst taking very little additional risk, by making an offer for the full amount, or nearly the full amount, of their claim. This is because enhanced sanctions (in terms of costs, interest and damages) are available to a successful claimant who has, at trial, obtained a judgment that is at least as advantageous as its offer. Thus, until now, a claimant who has made an offer for the full amount of their claim and who then goes on to win their claim in full at trial, could, potentially, not just get their costs and damages on the usual basis but also be awarded the enhanced costs, interest and damages provided for under Part 36.

The position has now been codified so that, from April, a claimant will only be entitled to benefit from the enhanced sanctions provided for under Part 36 if the offer made by them represents a genuine attempt to settle the claim. It is suggested that this means that the offer must have involved some genuine element of concession on the part of the claimant.

Acceptance of pre-action Part 36 offers

Following the finding in Solomon v Cromwell Group plc [2011] EWCA Civ 1584, it had been established that, where a claimant’s Part 36 offer was made and accepted before proceedings were issued, the claimant was entitled to recover its reasonable pre-action costs. This position was reversed by changes to CPR 44.9(2) introduced in 2013 which currently provide that a claimant has no automatic entitlement to recover its costs where its Part 36 offer is accepted pre-action. Confusingly, regardless of when a Part 36 offer is made (i.e. whether made before of after the issue of proceedings), if it is accepted after proceedings have been issued then Solomon will still hold good and pre-action costs recoverable.

The new rules now reinstate the position in Solomon in full so that, from the 6th April, where a claimant’s Part 36 offer is made and accepted before proceedings have been issued, the claimant will be entitled to recover its reasonable pre-action costs.

Split trials

In some cases there will be a trial of a preliminary issue, with subsequent steps in the proceedings up to the main trial, or there may be a split trial, that is to say the court may have an initial trial to determine liability with a separate trial to determine such things as quantum (i.e. the amount to be paid). In this event the court will often wish to make an order for costs after the trial of the preliminary issue or after the first hearing of a split trial.

Under the current rules, and unless the parties agree to earlier disclosure of the offer, the details of a Part 36 offer cannot be disclosed until all of the issues in the case have been decided, i.e. at the end (Beasley v Alexander [2012] EWHC 2715). This means that if the judge at the trial of a preliminary issue (or at the first hearing of a split trial) chooses to make a costs order at that hearing, he will be doing so in ignorance of any Part 36 offer which may have been made.

Under the new rules it will be permissible to reveal to the court, in a trial of a preliminary issue (or at the first hearing of a split trial), the full terms of a Part 36 offer provided that the offer relates solely to an issue which has been decided at that hearing and does not relate to any yet unresolved issue. In the event that the offer relates either wholly or in part to an unresolved issue, it will be possible to disclose the existence but not the terms of the offer to the court at the preliminary hearing stage.

This change will enable parties to use Part 36 more tactically by making offers limited to certain issues which the parties believe will be determined at an early stage, thereby enabling litigants to increase their prospects of obtaining some early recovery of costs.

Failure to file a costs budget on time

Under rules introduced in 2013, and unless “relief from sanctions” have been obtained, a party which fails to file its “costs budget” on time will be disallowed all of its costs, with the exception of court fees, even if they win at trial.

From April, where the defaulting party (i.e. the party which has failed to file its costs budget on time) makes a Part 36 offer which the offeree fails to beat at trial, the defaulting party (i.e. offeror) will now be entitled to recover from the offeree 50% of the costs which it incurs from the end of the Relevant Period until trial.

Appeals

The changes to Part 36 clarify the rules governing Part 36 offers made in appeal proceedings. In particular they clarify that the costs consequences of a Part 36 offer will only apply in relation to the proceedings in which the offer was made. For these purposes an appeal will be treated as separate proceedings so that a Part 36 offer made at first instance will not be relevant in the assessment of costs of the appeal proceedings. Equally, a party cannot add the costs of an appeal to any costs which they may be entitled to recover as a result of an offer made in first instance proceedings.

Part 36 offers can be made by both the appellant and respondent in appeal proceedings. The rules for them, and costs consequences, will be the same as those which apply to claimants and defendants in first instance proceedings.

Overview

By codifying a number of principles which, until now, have relied on an interpretation of case law (and which, in many respects, is inconclusive), the new rules will give greater clarity and certainty to litigants as to the operation of certain aspects of Part 36 and, in particular, the costs consequences of making or accepting offers. In addition, the changes address some injustices in the existing Part 36 regime.

There is no doubt that, as Part 36 evolves, it becomes ever more complex. The corollary of this, however, is that the rules are now more flexible and adaptable and, as such, better able to suit the diverse requirements of modern litigation.

Oliver Jackson
Dispute Resolution

February 2015

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