A Christmas gift on Part 36

Last month, the Gazette reported a straightforward case on Part 36: Hochtief (UK) Construction Ltd & Anor v Atkins Ltd [2019] EWHC 3028 (TCC). 

The claimant had beaten its own Part 36 offer of £875,000 by the relatively narrow margin of £4,847. It argued that, since it had successfully beaten its offer, it should be able to obtain its costs, accompanied by the full suite of generous Part 36 benefits. 

But the defendants contended that, because the claimants had only beaten their offer by a small margin – less than £5,000 – and as they had only won on one aspect of their claim, and failed on the other, the best way forward would be for the court to make an ‘issues-based’ or ‘proportional’ costs award, to reflect these factors. 

It fell to Mrs Justice O’Farrell (pictured) in the High Court to resolve the issue, which she did without any difficulty. This was a clear case of the claimant having beaten its Part 36 offer, and the fact that it had done so by a small margin did not displace the Part 36 regime, she said. 

Mrs Justice O’Farrell also examined all the factors needed to decide whether it would be ‘unjust’ to apply the Part 36 rules in this particular instance. 

She noted that the terms of the offer were clear; and it was made at a very early stage, after the letter of claim, but before the issue of the formal claim. By this time, the parties had had enough time to conduct extensive investigations and make an informed judgement as to the merits of the case. Was it a genuine offer? The level at which it was set – which turned out to be extremely close to the amount ultimately awarded – indicated that it was indeed a meaningful offer, she considered. It could not therefore be unjust to apply the Part 36 consequences.

So all this meant that the claimant could enjoy the hearty platter of benefits that are served up under the Part 36 regime. Mrs Justice O’Farrell awarded the claimants an enhanced rate of interest on damages and costs from the date that the offer expired – she considered 6% above base rate to be the appropriate level – as well as an ‘additional sum’ of £65,123, with costs to be assessed on the indemnity basis.

The claimants had won one of their claims and lost the other. But simply apportioning the costs between the two claims would not have given enough weight to the fact that the defendants should have accepted the Part 36 offer; so instead Mrs Justice O’Farrell ordered the defendants to pay 85% of the claimant’s costs.

The ruling means the claimants ended up being very handsomely rewarded for a cannily pitched offer that ultimately fell just a hair’s breadth below the level of damages the court eventually awarded. Is this fair? Were the rewards excessive? Absolutely not. This is precisely how the Part 36 rules, familiar to all civil litigators, are designed to operate. It is the very risk of the winning party receiving a lucrative windfall at the paying party’s expense that lends a Part 36 offer such weight. It focuses minds. It encourages settlement. Or at least, that is what is supposed to happen. But is it working?

The most interesting aspect of Hochtief is not the ruling itself, which is a straight application of the law. It is the discussion it has prompted among litigators, as to whether judges in the county courts are actually applying the Part 36 rules as they should – and there is a strong feeling that they are not.

When it comes to the crunch, judges in the lower courts are often reluctant to award parties who have made successful Part 36 offers the full extent of the benefits due to them. Perhaps it seems unfair in the individual case for a losing defendant to be penalised in costs to such an extent, particularly when the amount awarded in damages may not have been that much higher than the offer made. 

Judges are tempted to water down the penalties and apply the Part 36 rules in a half-hearted way; for example, by failing to award indemnity costs from the date of the offer, or setting the additional amount much lower than it should be. Applying the Part 36 costs consequences in full may feel like too bold a move for some judges; but the success of the regime depends on it. 

The Part 36 rules are extensive and carefully crafted. But if the teeth of the regime are blunted by a lack of proper application in the courts, it will not be effective. Lawyers need every incentive to both make and accept offers of settlement. After all, the time and resources that are saved by early resolution of cases are vast, and it is the parties themselves, and court users in general, who will benefit most.

While Hochtief may be a fairly simple ruling, it is well reasoned and clear, and comes from the High Court. For lawyers who successfully beat their Part 36 offers in the county court, this could prove a very useful authority to wave before the bench before the judge comes to any decision on costs.

It seems Mrs Justice O’Farrell has given lawyers who are willing to make Part 36 offers the perfect Christmas gift. 

Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs. For subscription details, click here or tel: 020 7841 5523