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part 36 offers - significant changes for April 2015

25 March 2015
Parties to litigation are firmly encouraged to consider how best to settle disputes between parties and to use all the necessary tools available from without prejudice negotiations to mediation to the use of Part 36 offers. Given the cost protection which flows from a Part 36 offer, an offer made under the Rules has great importance. However various criticisms have been made by practitioners and judges alike about various aspects of the Rule. As a result the Civil Procedure Rule Committee (CPRC) appointed a sub-committee to review Part 36 and subsequent to this has proposed various amendments which are due to come into force in April 2015.

Introduction

The changes are apparent from the very beginning of Part 36. CPR 36.1 says “This Part contains a self-contained procedural code about offers to settle made pursuant to the procedure set out in this Part”. This makes it very clear that the new Rule does not incorporate the normal contractual requirements of offer and acceptance. If a party wants to accept a Part 36 offer at a later date, that party can do so provided the offer has not been withdrawn.

It also clarifies that Part 36 offers can be made in relation to counterclaims dealing with some of the uncertainty which had built up in case law with the new CPR36.2 (3) saying that “a Part 36 offer may be made in respect of… a claim, counterclaim or other additional claim”.

Further the new Rule also addresses some of the technical point scoring that is referred to in case law where a party to litigation claimed that a Part 36 offer did not comply with the strict wording of Part 36, for instance the case of Thewlis v Groupama [2012] EWHC 3 (TCC). Under the new CPR 36.5 (1) (b) a party only has to make it clear that the offer is “made pursuant to Part 36” (as opposed to the current regime that demands that the offer must “state on its face that it is intended to have the consequences of Section 1 of Part 36”).

Pre issue Part 36 offers

Part 36.7 states that “a Part 36 offer may be made at any time, including before the commencement of proceedings”.

In terms of what happens to the pre-issue costs these are dealt with at Part 36.14 which states that “where a Part 36 offer is accepted within the relevant period the claimant will be entitled to the costs of the proceedings (including their recoverable pre-action costs) up to the date on which notice of acceptance was served on the offeror”.

It will be interesting to see if this provision encourages more early offers from claimants who are keen to settle pre-issue. This is made more significant by the recent increase in the fees for commencement of court proceedings.

Improving offers

Very often in litigation a party makes an initial offer to see if there is any appetite for settlement and then makes a further improved offer.

Under the new CPR 36.9 in order to do this the following must apply:

  • no notice of acceptance can have been served (CPR 36.9(1))
  • written notice of the change of terms must be served (CPR36.9 (2))
  • the enhanced offer can be made without the permission of the court (CPR36.9 (4) (a)).

In terms of costs, the most important change is to CPR36.9 (5) which provides:

“Where the offeror changes the terms of a Part 36 offer to make it more advantageous to the offeree –
(a) Such improved offer shall be treated, not as the withdrawal of the original offer; but as the making of a new Part 36 offer on the improved terms…”

Therefore effectively unless the earlier offer is withdrawn two offers (or more) of settlement can remain on the table pending trial. This could prove to be very important on the question of costs post judgment.

Example
The claimant makes a claim for breach of contract claiming £150,000. The defendant believes that the case has merit but that the damages are overstated. The defendant makes an immediate Part 36 offer at £75,000 during the pre-action correspondence which it increases to £100,000 following service of the defence. At trial the claimant is awarded £60,000. The defendant can refer to the first offer made very early on in the process and claim enhanced costs from that date.

Withdrawing offers

It may be the case that for legal or tactical reasons a party wishes to withdraw a Part 36 offer. Again for withdrawing offers:

  • notice of acceptance cannot have been served
  • written notice is to be given
  • after expiry of the ‘relevant period’ the offer can be withdrawn without permission of the court
  • the offer may be withdrawn in accordance with its terms.

CPR36.10 deals with the consequences of withdrawing the offer before the expiry of the relevant period. This means that parties can become more strategic in how they make offers by setting a date by which an offer must be accepted or the offer falls away. This can be a dangerous strategy since the traditional cost protection would similarly fall away. However in certain cases where pressure needs to be exerted on the other party this provision may prove to be a very effective tool.

Part 36 and issue based trials

Lord Justice Jackson as part of his reform package had envisaged that judges would exert greater case management and this would involve at the case management stage investigating whether any issues in relation to the litigation could and should be dealt with separately. It was envisaged that there would be more split trials.

However a difficulty arose on the wording of Part 36. Effectively a judge could not be told of Part 36 offers and therefore any cost advantage in having a split trial was lost because the cost issues in relation to the part 1 trial needed to be carried over and dealt with when the remainder of the issues came before the court.

This difficulty has now been addressed by the CPRC in CPR36.16.

Under CPR36.16 (3) (d) where there has been an issue based trial and there is a Part 36 offer in relation to the issues decided then that offer can be disclosed to the judge hearing the issue based trial. This means that many of the costs issues pertaining to the part 1 trial can be dealt with at that trial. However parties will need to consider making different settlement offers and in particular structuring a Part 36 offer purely in relation to the first trial.

However it should be noted that the parties cannot divulge the details of any offers that relate to the litigation in general to the judge hearing the preliminary issues but the judge “may be told whether or not there are Part 36 offers”. Therefore the judge can be made aware of the existence of an offer but not what that offer consists of. It may well be the case that if the judge becomes aware that there is a wider offer that he takes the view that the costs need to be reserved until final hearing in any event.

Court discretion when awarding costs

The CPRC has also considered whether there should be any amendment to the Rule to give the court a greater discretion on costs to cater for the situation where a claimant makes a very high Part 36 offer with a view to extracting indemnity costs at the end of the case, higher rates of interest and the post-Jackson windfall of up to 10% of damages. The court is now given the option of considering “whether the offer was a genuine attempt to settle the proceedings”. Commentators are already suggesting that this new, subjective test may lead to uncertainty – will a Part 36 offer at 95% of the value of the case be seen as a cynical attempt to extract a better deal at trial? Personal injury lawyers have suggested that sometimes a 5% discount can be a significant discount on a case with very high prospects of success. The CPRC say that in those cases claimants will be able to justify their position. However there is a real risk of uncertainty in this area.

Mitchell… again!

It may be recalled that in the case of Mitchell v News Group Newspapers, the claimant failed to file a cost budget on time, was denied relief from sanction and was treated as having filed a cost budged limited to court fees. The new Part 36 allows some relief from that limitation on fees in appropriate situations.

If an offeror makes an effective Part 36 offer they can recover “50% of the costs assessed without reference to the limitation”. The concept is that the other party to litigation does not have carte blanche to turn down reasonable offers and run the litigation in an unreasonable way safe believing that even in the event of a bad result they only have to pay court fees.

Appeals

CPR36.4 sets out the application of Part 36 to appeals and provides that Part 36 offers can be made where the appeal relates to a decision made at trial (but not appeals from interlocutory decisions). CPR36.4 also sets out the terminology that needs to be used when making a Part 36 offer in appeal proceedings.

Conclusion

There are some significant and far reaching changes to Part 36 being introduced in April. Most will result in improvements to the Rule although practitioners will need to make themselves familiar with the changes. There are still areas of uncertainty though. This is recognised by the CPRC and in particular the chair of the sub-committee who has stated that “the new rules will not solve all problems and inevitably clever lawyers will find arguments that will lead to unintended consequences. Perhaps all that can be hoped is that these rules are an improvement on 2007.”

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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