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Part 36 offers: what type of settlement offer should I make? - Stephen Innes
CostsPart 36 offers: what type of settlement offer should I make?
This article was co-written with my chambers colleague Hannah Daly. In it, we consider the pros and cons of different types of without prejudice settlement offers, following a decision on claimants’ Part 36 offers in JLE v Warrington & Halton Hospitals NHS.
We are often asked by professional and lay clients to advise on making “without prejudice” settlement offers. The level of the offer may be crucial, but so too will be the type of offer.
Why make an offer?
At the outset, it is helpful to have clearly in mind that there are two distinct purposes for making an offer:
to achieve a settlement and resolve the matter, and
to obtain costs protection in the event that the offer is not accepted.
Some offers will be made with both purposes equally in mind, and there must always be some overlap – you may be aiming solely for costs protection, but you need to be sure that you can live with the offer being unexpectedly accepted.
But some offers will really only be aiming for a resolution (for example at, or very close to, trial where is too late to achieve meaningful costs protection) whilst others are really only seeking costs protection (such as where you think the other side has unrealistic expectations and is unlikely to be interested in what you consider to be a reasonable settlement).
A Part 36 Offer is an offer which complies with Part 36 of the Civil Procedure Rules. There are particular requirements in certain situations, but in all cases the offer must satisfy the requirements as to form and content prescribed by CPR 36.5, meaning that it must:
These requirements must be strictly adhered to: if an offer fails to comply in any respect, it is not a Part 36 Offer and the offeror will not automatically be entitled to the benefits provided for by Part 36 (see Mitchell v James [2004] 1 WLR 158, although the court will still have a discretion to take it into account (and see Huntley v Simmonds [2009] EWHC 406 (QB) for a rare example where it made no difference.)
Given the importance of compliance, we recommend, particularly to non-lawyers, that any Part 36 Offer be drafted using the precedent form N242A.
As CPR 36.2(2) expressly states, there is nothing to prevent a party making an offer to settle in whatever way that party chooses.
Different terms are used for offers which are not Part 36 Offers. A “Calderbank offer” takes its name from the offer made by the wife in Calderbank v Calderbank, [1975] 3 All ER 333 in that case in an affidavit, “I am willing, and have always been willing, to make over to the [husband] the house at Alderley Edge“.
Such an offer is usually now marked “WITHOUT PREJUDICE SAVE AS TO COSTS” so that it may not be seen by the court or tribunal until the substantive decision has been made and costs are argued. A Part 36 Offer does not need to be marked in that way because it is treated as such already by CPR 36.16.
However, it is worth remembering that it is possible to make an open offer, rather than one which is without prejudice. In detailed assessment proceedings, when the paying party serves its Points of Dispute, it is required to paragraph 8.3 of Practice Direction 47 to state in an accompanying open letter what sum, if any, it offers to pay.
More generally, it is possible to make an open offer of settlement of which the court can then be made aware. It can sometimes be a very effective strategy to make an open offer of settlement and to refer to it in the statement of case: the objective is for the judge to see that the offer has been made, to agree that it is a sensible offer, and to conclude that the offeree must be behaving unreasonably.
Advantages of Part 36 Offers
In general terms, for all parties the benefit of an offer being made under Part 36 is that the offer is subject to a series of rules designed to bring certainty; the consequences of the offer will automatic in particular situations, rather than entirely at the discretion of the court (albeit that some of the rules do contain provisos leaving the court a tightly circumscribed discretion).
The courts have repeatedly emphasised that Part 36 is a self-contained procedural code, and thus for instance, therefore should be no scope for an argument that making a second offer amounts to an implied withdrawal of a first offer, because a Part 36 Offer can only be withdrawn by the mechanisms prescribed in 39.9 and 36.10: see Gibbon v Manchester CC [2010] EWCA Civ 726.
For a defendant, the great advantage of Part 36 is the protection afforded by 36.13(5) and 36.17.3 to a defendant who has made a Part 36 Offer, in each case unless the court considers it unjust:
(a) by 36.13(5), if a the claimant does not accept the offer by the date of expiry of the relevant period for acceptance, but decides to accept it later (for instance if the claimant’s perception of the strength of its case subsequently weakens), the claimant will have to pay the defendant’s costs from the date of expiry of the relevant period;
(b) by 36.17(3), if the claimant does not accept the offer, but fails to obtain a judgment more advantageous than then offer, the claimant will have to pay the defendant’s costs from the date of expiry of the relevant period, together with interest on costs.
It should be noted that if a claimant fails to beat an offer by a defendant which does not comply with Part 36, the defendant could still argue that the claimant should pay the defendant’s costs from after the offer, but this would not be an automatic result but would depend on the exercise of the court’s general discretion on costs under CPR 44.2.
For a claimant, there is one particular potential advantage of a Part 36 Offer. Part 36.17(4) applies where a claimant makes a Part 36 Offer, the defendant does not accept it, and the claimant gets a judgment against the defendant which is at least as advantageous to the claimant as the proposals in the offer.
In those circumstances, the rule provides that the court must, unless it considers it unjust to do so, order that the claimant is entitled to:
interest on the whole or any part of the sum awarded at rate up to 10% above the base rate for some or all of the period starting from the time that the relevant period expired;
costs on the indemnity basis from the date on which the relevant period expired;
interest on those costs up to 10% above the base rate, and;
provided that the case has been decided and there has not been any previous award under sub-paragraph 36.17(4)(d), up to 10% of the total sum or (where there is no monetary award) costs awarded, up to £75,000.
One of the questions recently considered by the courts is whether, upon the making of a successful claimant’s Part 36 offer, the court must take an ‘all or nothing’ approach to the consequences in (a) to (d) of rule 36.17(4), or whether the consequences can be considered separately.
In JLE v Warrington & Halton Hospitals NHS, Lawtel 24.12.2018, the claimant presented a costs bill after the hearing of the substantive action of £615,751.51. It made a Part 36 offer to accept costs including interest at £425,000 which was not accepted by the defendant. After a detailed assessment, the claimant was awarded just under £432,000, thereby beating its offer by around £7,000.
There was no dispute that the claimant was entitled to claim the benefits under sub-paragraphs (a) to (c) of rule 36.17(4). However, the parties disagreed as to whether the claimant should be allowed to benefit from the 10% award in sub-paragraph (d).
Based on the bill as assessed, a 10% award would amount to a significant sum in excess of £40,000. That in turn raised the question of whether the court had the power to order some, but not all, of the consequences in the rule. In other words, the question for the Master was: was she entitled to consider whether it would be unjust to make an order under each separate sub-paragraph of the rule, or, once she had decided whether it would be unjust to make an order under the rule, did the consequences in (a) to (d) follow on an ‘all or nothing’ basis?
The Master, having considered similar authorities (though none dealing directly with the point in question), concluded that it was open to the court to apply rule 36.17(4)(d), to the extent considered just, independently of sub-paragraphs (a) to (c) of the rule. She pointed out that if the court had been required to take a global approach to all of those consequences, then the fact that a judge might consider it unjust to make an award only under sub-paragraph (d) might tip the balance against the claimant receiving any award at all.
Turning to the case in hand, the Master considered that it would be unjust to make an order under rule 36.17(4)(d). She took into account the fact that a 10% award would amount to a windfall for the claimant, particularly where the claimant had only beaten its offer by a very small margin. She also bore in mind the fact that the original costs bill had been significantly reduced on assessment.
While the Master based her decision on the fact that a 10% award would in the circumstances be clearly disproportionate, she indicated there may be other circumstances where a court would disapply sub-paragraph (d). The judgement offers welcome insight how the courts will exercise their discretion in making awards following successful claimant Part 36 offers and indicates the kinds of factors they will take into account in doing so.
For both parties, a particular situation in which a Part 36 Offer should be considered is where a split trial is to be held. CPR 36.16 contains rules about disclosure of Part 36 offers. When the first part of the case is decided, if a party has made a Part 36 Offer which deal with only the part of the case which has been decided, the court can be told of the fact and the terms of the offer, so that it can be taken into account in considering what order to make about the costs of the first part of the case. However, if the Part 36 offer does not only deal with the part of the case which has been decided, the court can be told about the fact of the offer, but not of its terms.
To illustrate this, it may be helpful to give an example: in a case pleaded at £1 million, there is trial on liability only, with quantum to follow; the Claimant succeeds on liability; in the absence of any offers; the Claimant would want to get its costs of the trail on liability then.
If the Claimant had made an offer to accept 90% on liability, it could show that to the court then. But if the Defendant made a Part 36 Offer to settle the whole of the case for £500,000, it could tell the court that it had made a Part 36 Offer, without mentioning its terms, and say that the court should not make any costs at this stage – hoping that at the quantum stage of the trial damages would be awarded of less than £500,000, so that the Claimant should pay the Defendant’s costs (relating to both liability and quantum) from the date of expiry of the relevant period.
Situations in which other without prejudice offers may be preferable
Under 36.6 a Defendant’s Part 36 Offer to pay a sum of money must be an offer to pay a single sum of money. By CPR 36.14 the money must be paid within 14 days of acceptance of the offer. It follows that if the Defendant is not in a position to pay the entire sum within 14 days, but would wish to pay later and/or by instalments, it would need to make an offer other than under Part 36.
So too, CPR 36.5 specifies that a Part 36 Offer must be open for acceptance for a period of at least 21 days. There can often be situations where a part will not want an offer to be open for that long, for example if an important procedural hearing is to take place in less than 21 days’ time and the outcome may affect the balance of advantage in the case, the party making the offer may not want the offer to be available for acceptance by the offeree after the hearing if the decision at the hearing goes strongly against the offeree. In that case a non-Part 36 Offer could be made but expressed to expire at a stated time and date before the hearing.
The paradigm example of a feature of a Part 36 Offer making it unsuitable for a particular case is the requirement under 36.5(c) that within the period for acceptance which must be specified, the defendant will be liable for the claimant’s costs if the offer is accepted.
Two issues spring from that. One is that the claimant’s costs will be assessed if not agreed, but the defendant will not know how much those costs will be assessed at. If it is concerned that the level of costs could come as a nasty shock, it may prefer to seek to achieve certainty by making an offer which is inclusive of costs. Such an offer achieves certainty if it is accepted, but if it is not accepted, it can be less effective at achieving costs protection: how will the court assess whether or not the claimant has done better than the offer at the end of the trial when it has determined the damages but not the costs?
The second issue is that the defendant may be willing to pay a modest amount for damages, but not the whole of the claimant’s costs. This is an acute concern in a case where the defendant considers that the claimant’s claim is exaggerated but substantial costs will have been incurred in bringing it.
In Summers v Fairclough Homes [2012] 1 WLR 2004 the Claimant succeeded on liability in a personal injury claim arising out of an accident at work. She claimed damages of over £800,000 but the judge found that the claim had been fraudulently exaggerated and awarded £88,716. In the Supreme Court Lord Hope commented on how a defendant could protect itself on costs in such a case:
“It was submitted that a Part 36 offer is of no real assistance because, if it is accepted, the defendant must pay the claimant’s costs under CPR 36.10[now 36.13. We accept the force of that argument. However, we see no reason why a defendant should not make a form of Calderbank offer (see Calderbank v Calderbank [1976] Fam 93) in which it offers to settle the genuine claim but at the same time offers to settle the issues of costs on the basis that the claimant will pay the defendant’s costs incurred in respect of the fraudulent or dishonest aspects of the case on an indemnity basis. In Fox v Foundation Piling Ltd [2011] EWCA Civ 790 the Court of Appeal correctly accepted at para 45 that the parties were entitled to make a Calderbank offer outside the framework of Part 36. The precise formulation of such an offer would of course depend upon the facts of a particular case…”
The examples given above demonstrate that at a given point in time, in a particular case, there may be good reasons for a party favouring one type of offer over another.
Equally it may be advantageous to make different kinds of offers at different times, or indeed to make alternative offers at the same time. It can for example be a good strategy to make a non-Part 36 offer with a short time limit before a procedural hearing or a mediation, with a view to then making a Part 36 Offer after the hearing or mediation. Litigants must think carefully about the type of offer they may wish to make, and this should be kept continually under review.
© Hannah Daly and Stephen Innes
No legal responsibility is accepted for the contents of this article and parties should take their own legal advice specific to the circumstances of their own case.
For further information on Part 36, see my other articles:
–making a genuine Part 36 Offer
–Part 36 – a beginner’s guide