The Jackson reforms, which came into force on April Fools’ Day, provide that a defendant who rejects a part 36 offer is at risk of paying a penalty of up to £75,000, in addition to the usual interest and cost penalties.

Part 36 settlement offers

Since their introduction under the Woolf reforms 15 years ago, part 36 offers have had a sting in their tail. Cost and interest penalties ordinarily follow on from rejecting a reasonable offer, for example costs from the date of expiry of the offer on an indemnity basis, penal interest on those costs and interest on damages.

The Jackson reforms have strengthened that sting for claimants only, by imposing yet another sanction on a defendant who rejects a claimant’s reasonable part 36 offer (where the claimant secures an award as advantageous as the settlement offer). Where a defendant fails to accept such a reasonable part 36 offer, defendants also face having to pay an additional penalty of 10% of damages (or 10% of costs for non-monetary claims) for awards up to £500,000, and 5% of damages for awards over £500,000.

Jackson concluded that the consequences of failing to beat part 36 offers for claimants were more devastating than for defendants. This reform is his attempt at levelling the playing field by giving claimants’ offers more teeth. He hopes this will result in more settlements and less costly litigation. By making an offer early on, defendants will be under pressure to accept claimant offers and settle early. It is likely that Jackson will meet his laudable objective of an increased number of settlements. However, at what cost to business?

The new rules clearly increase the financial incentive for defendants to accept claimant part 36 offers, particularly in claims near £1m in order to avoid proportionately significant penalties. This, combined with the case/costs management reforms under Jackson (which inevitably will lead to further front-loading of costs), is likely to mean that businesses may become prone to over-compensate claimants, in an attempt to mitigate the risk of penalties and seek to avoid the costs of fully assessing the merits of the claims.

Again, it is costs (albeit upfront) which will become the main driver of the decision-making process over settling, rather than what is necessarily the correct decision for the business in the mid- to long-term. At a time when the UK economy is in troubled waters, this is not what many defendant businesses will have been hoping for. On a wider basis, claimants, knowing of this added pressure tactic on defendants, are likely to be tempted to bring more speculative claims to take advantage of the tactic. Defendant businesses (and their insurers) are likely to be tempted to accept over-valued offers, and end up paying out more than necessary, in an effort to gain some control over risk.

Small to medium-sized businesses will feel the hit of this risk of over-compensation. However, large businesses should not be lulled into a false sense of security here, as multiple over-settlements will have a marked impact on balance sheets. It is worth noting that for modest or very substantial claims these reforms will have little impact.

The future

While the measure of success for the rest of the Jackson reforms is largely dependent on the judiciary’s effective adoption of the changes, for part 36 the key for defendant businesses will be to fully consider any part 36 offers quickly as part of a detailed case review. Failure to do this will run the risk of onerous penalties as the post-Jackson litigation landscape unfolds. Welcome to the aftermath of this year’s April Fools’ Day.

Alex Fox is a partner at Manches. He heads the litigation / arbitration team within the technology, media and intellectual property group