When are the cost consequences of a Part 36 Offer unjust?

By Paul Nathan and Abtin Yeganeh

Making an offer under Part 36 of the Civil Procedure Rules (a 'Part 36 Offer') is almost always a good tactical approach by a party to achieve an early or earlier resolution of a dispute once litigation is contemplated or has been commenced. Not only does a Part 36 Offer have the purpose of resolving the dispute, but it also provides the party making the offer with costs protection if:

  1. the offer is not accepted on a timely basis; or
  2. in the case of the Claimant he/it is successful at trial and recovers not less than the amount of the offer; or
  3. in the case of the Defendant, the Claimant wins at trial but is awarded less than the amount of the Defendant's offer.

In the recent case of IT Protect Ltd, Re [2020] 10 WLUK 135 (also known as Bramston v Pye), ICC Judge Barber had to consider whether it would be just to apply the automatic cost consequences of CPR 36.17(4) where the offer had been made to joint to two defendants. Whilst CPR 36.17(4) contains automatic consequences for the unsuccessful party, the decision serves as a reminder that this is not always the case.

Part 36 Offers

Before addressing the judgment, it is helpful to consider the mechanics of a Part 36 Offer.

A Part 36 Offer is an offer made pursuant to Part 36 of the Civil Procedure Rules. In order for the offer to be a valid Part 36 Offer, certain requirements must be met. CPR 36 requires the offer to:

  1. be in writing;
  2. state that it is being made pursuant to CPR 36;
  3. specify a period of not less than 21 days within which the defendant will be liable for the claimant's costs if the offer is accepted;
  4. make it clear whether it relates to the whole or part of the claim, including interest. The offer should not include any amount for costs as this will invalidate the offer as a Part 36 Offer, so that the usual costs consequences will not apply (see below); and
  5. clarify whether it takes into account the counterclaim (if there is one).

Part 36 Offers may be made by the Claimant pre action, or during the proceedings. Part 36 Offers may also be made by the Defendant, once proceedings have been commenced.

If a Part 36 Offer is made by the Claimant and is either accepted by the Defendant after a period of 21 days has passed, or the Claimant succeeds in recovering not less than the amount of the offer at trial, the usual rule is that the Claimant is then entitled to his costs from the Defendant. This will normally be 'Indemnity Costs', meaning that the Court will resolve doubt as to the reasonableness of the costs claimed in favour of the Claimant which can see a greater costs recovery between the parties. In addition, where the Defendant fails to accept a part 36 Offer within 21 days the Claimant may also be entitled to recover an enhanced amount of 10% of its claim (up to a maximum of £75,000) and to enhanced interest.

If a Defendant accepts a Part 36 offer within 21 days of it being made then the Defendant pays costs at the lower 'Standard Basis' rate, meaning payment that the Court will resolve doubt as to the reasonableness of the costs claimed in favour of the paying party, which may be less favourable than the indemnity basis.

If a Defendant makes a Part 36 Offer and the Claimant fails to accept it within 21 days or proceeds to trial but fails to recover more than the offer, then the Claimant must pay the Defendant's costs of the proceedings from a date 21 days after the offer was made.

Part 36 Offers are 'secret.' The trial judge does not know the existence of the offer until the conclusion of the trial when he will be advised of the offer and the parties will then argue about the cost consequences which flow from the offer.

The Case

In IT Protect Ltd (In Liquidation), Re, the applicant liquidators ('A') had brought proceedings against two individuals. A alleged that the first respondent ('R1') was a de jure director (a director by legal right) and had breached his fiduciary duties with regard to certain transactions he had entered into. With regard to the second respondent ('R2'), A alleged she was a de facto director of the company.

During the course of the proceedings a number of offers were made to settle the dispute which can be summarised as follows:

  1. A made a Calderbank Offer[i] of £57,000 to settle the proceedings, which R1 and R2 rejected.
  2. R2 denied the allegations that she was a de facto director, and she and R1 made a Calderbank Offer to settle the claim for £57,000, which was to be paid by way of weekly instalments over a period of 3 years. A rejected the offer.
  3. A made a Part 36 Offer to R1 and R2 to settle the proceedings for £39,500. R1 and R2 did not accept the offer.

At trial A obtained judgment against R1 for £114,000 (substantially more than the Part 36 Offer). The claim against R2 was dismissed.

Having been the successful party and having beaten the Part 36 Offer, A sought costs against R1 which took into account the consequences provided by CPR 36.17(4) (i.e. Indemnity Costs).

In response, it was argued on behalf of R1 that it would be unjust to apply the costs consequences set out in CPR 36.17(4). because the Part 36 Offer had been made to R1 and R2 jointly and as a result, R1 could not accept it without the agreement of R2.

In applying the principles set out in Smith v Trafford Housing Trust (Costs) [2012] EWHC 3320 (Ch), ICC Judge Barber held that if R2 had accepted the Part 36 Offer before trial she would have been liable for A's costs, despite the claim having been dismissed against her at trial. Similarly, if R1 had accepted the offer he would have been liable for A's costs in pursuing R2. Accordingly, ICC Judge Barber held that it would be 'unjust' to impose the cost consequences set out in CPR 36.17(4).

Not only were the usual cost consequences not applied, but A was only awarded 50% of their total costs against R1. With the claim having been dismissed against R2, A was ordered to pay R2's costs.

[i] A Calderbank Offer (also known as 'Without Prejudice Save As To Costs' Offer) is a Contractual Offer made by either party, which includes costs. It is therefore different to a Part 36 Offer which is a Procedural Offer. A party can make both Calderbank Offers and Part 36 Offers as they are mutually exclusive, and one does not cancel or negate the other.

Comment

Parties often fall foul of the stringent provisions of CPR 36 and it often transpires that the offer made is not a valid Part 36 Offer. Whilst in the present case the offer met the requirements set out in CPR 36, the judgment serves as a reminder that a judge has an overriding discretion in relation to costs and that the automatic costs consequences under CPR 36.17(4) will not always be applied if it is unjust to do so.

When pursuing multiple defendants, it is important that a claimant considers whether separate offers should be made against each defendant rather than taking a blanket approach.

 

The authors of this article are Paul Nathan (Partner) and Abtin Yeganeh (Associate) who are part of the commercial dispute resolution team at Fletcher Day. For advice and information in relation to the issues set out in this article, please contact Paul Nathan at paul@fletcherday.co.uk or Abtin Yeganeh at abtin@fletcherday.co.uk

10 November, 2020
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