This case looks at what happens when a party attempts to use a Part 36 offer in a disingenuous way to settle proceedings as a whole. Courts have now adopted a flexible approach to award enhanced costs consequences in respect of a beaten Part 36 offer which represents a genuine attempt to settle – but not the proceedings as a whole.
To understand the implications of this case, it is important to understand what a Part 36 offer is and what it does. A Part 36 offer is a formal written offer made by one party to attempt to settle matters outside of Court. It is made under Part 36 of the Civil Procedure Rules (“CPR”). The purpose of making such an offer early on is to encourage parties to settle early and avoid long and costly litigation. There are also important cost consequences when considering Part 36 offers if the offer is not accepted. If an offer is made and is not accepted, and matters proceed to Court, if the person who received the offer receives a less advantageous outcome at trial, the following will be considered:
1. A Claimant’s unaccepted offer: If a Defendant fails to obtain judgement at least as good as the Claimant’s original unaccepted Part 36 offer, they will typically pay the Claimant’s costs and interest from the end of the relevant period, which is often on an indemnity basis. Essentially, the ‘cost clock’ starts running from when the offer is made.
2. A Defendant’s unaccepted offer: if the Claimant fails to beat a defendant’s unaccepted Part 36 offer at trial, the Claimant may likewise be liable for the Defendant’s costs.
Why should you make a Part 36 offer in the first instance?
This is often used as a strategic tool to put pressure on the other side to settle. By doing so, you are shifting some of the litigation risks to the other party and away from yourself, whilst also encouraging early resolution, which in turn seeks to reduce the legal costs for all parties concerned.
Look at the case at hand, the brief background is as follows:
In December 2021, a claim was issued by the Claimant in the sum of £373,295.06 for unpaid invoices against the Defendant. The Defendant admitted to around half of the invoice debts, but a set-off was raised in respect of a substantial counterclaim arising out of alleged breach of express good faith obligations.
The counterclaim was initially pleaded by the Defendant in the sum of £4.8 million in February 2022, which was then later revised on amendment to £18.92 million.
By the time of the trial, almost all of the unpaid invoice claim was admitted, and the remainder was found to be owing. On 4 April 2022, The Claimant made a Part 36 offer in the sum of £350,000, which included the following comment:
“our client is aware that the costs of these proceedings will quickly become disproportionate to the value of their claim (disregarding in its entirety, of course, your client’s unmeritorious and entirely speculative counterclaim, which is bound to fail)”.
At the hearing, the Claimant argued it was a valid Part 36 offer and that full consequences set out in Part 36 should follow in respect of both the claim and counterclaim, unless the Defendant could cross the formidable obstacles of demonstrating injustice.
The Defendant therefore argued that the Part 36 offer made by the Claimant was not a genuine attempt to settle proceedings, given the overwhelming majority of the costs were concerned with the Counterclaim, and this did not amount to a genuine offer to settle said counterclaim, which had been treated dismissively.
What did the Court decide?
The Court had to decide whether it would be unjust to apply the full enhanced cost consequences in CPR 36.17(4). In short, this says that the Court must, unless it considers it unjust to do so, order that the defendant is entitled to:
(a) interest on the whole or part of any sum of money, at a rate not exceeding 10%;
(b) costs;
(c) interest on those costs and;
(d) provided the case has been decided and there has not been a previous order, an additional amount which shall not exceed £75,000 by applying a prescribed percentage increase.
Based on the facts, the claim value represented around 8% of the value of the counterclaim, although the Part 36 offer amounted to nearly 90% of their original claim. The Court therefore concluded that this Part 36 offer of £350,000 did not amount to a genuine offer to settle the proceedings as a whole; however, it was a genuine attempt to settle their original claim.
The Court found that CPR 36.17(5)(e) could be applied flexibly in the circumstances. The Court rejected the submission that Defendant did not have sufficient information before it to justify the application of the enhanced cost consequences, simply before the offer was made prior to disclosure and mutual exchange of witness statements.
With regard to the costs, the Court ruled that the Claimant should be entitled to its costs of the claim on a standard basis up to the relevant date affected by the Part 36 offer and on the indemnity basis thereafter. However, the Claimant was entitled to its costs of the counterclaim on a standard basis only throughout.
Comment
This case is important in highlighting the strategic and tactical decision making required in litigation. It is important to understand the facts and the best way to proceed. It is important that you therefore have skilled, experienced, and knowledgeable solicitors on hand throughout the duration of your claim to assist you with the decision making. When considering whether or not to start litigation and issue proceedings, you need to consider the costs and any cost consequences which you may face, including whether to make a Part 36 offer to protect your position.
How can we help?
Sophie Wilson is an Associate in our Dispute Resolution team.
If you have any queries relating to the above subject, please contact Sophie or a member of our team, who will be able to assist you. Please call 0800 024 1976 or contact us via our online enquiry form.
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