It is often surprising to non-litigators how much of a litigator’s time is (and should be) spent advising clients on how to avoid the significant cost of litigation.
An important tool in prompting parties to focus on settlement is the effect of a well-timed and compliant offer pursuant to the self-contained regime in CPR Part 36. Its policy is to encourage settlement without recourse to litigation by setting out procedures for parties to follow in making offers, and prescribing the circumstances in which adverse consequences will follow if offers are not accepted. Its utility is most obvious where the case for liability is strong but loss is much more difficult. A badly timed or unclear offer can quickly lead to a satellite dispute and disproportionate cost.
A new CPR 36.5(5) and recent decisions address some of the knotty issues which arise. These cement Part 36 offers on the checklist of essential points to address with clients at an early stage and revisit.
Accessing the consequences of Part 36
The starting point is that an unsuccessful party will be ordered to pay the costs of the successful party (CPR 44.2(2)(a)). Where there is a compliant Part 36 offer which is not accepted, the recipient will be liable for increased costs and interest if the offer is beaten at trial. Indeed, a successful defendant’s offer may shift the cost burden entirely or a defendant will be liable for enhanced costs, interest and other penalties following a successful claimant’s offer. The regime sets out the consequences of acceptance both within and outside a window of 21 days following the offer (‘the relevant period’).
In Global Energy Horizons Corporation v Gray , the defendant was ordered to account for £3.6m in connection with diversion of business opportunities in breach of his fiduciary duties. The judge ordered each party to pay their own costs on the basis the claimant only received 1.6% of the total sum claimed and ‘the overall result was that both parties lost heavily’. The Court of Appeal unusually reversed the decision. The claimant received a significant sum and the fact it was a small fraction of the original claim carried limited weight given the substantial time spent establishing ownership of assets (of limited value) and the absence of reprehensible exaggeration by the claimant. The court’s message was clear: ‘Where a defendant is faced with an exorbitant claim which he wishes to defend vigorously but where he is vulnerable to a finding that he is liable for a much smaller amount, there is a clear process provided by CPR Part 36 which he can follow to protect his position.’
This was reiterated in the context of cost proceedings in Mullaraj v Secretary of State for the Home Department . The defendant made an offer outside of the Part 36 regime which was marginally less than the costs awarded. It failed to protect its position and the usual rule applied.
Displacement of the cost consequences – the high hurdle of injustice
The court has discretion to depart from the cost consequences which apply where judgment is more advantageous than an offer where it is ‘unjust’ to apply the rules or to their full effect. The regime sets out considerable factors, but previous cases have confirmed it as a ‘formidable obstacle’.
In Shah & Anor v Shah & Anor , the defendant was ordered to bear the Part 36 consequences where the claimants were awarded £10 after making a Part 36 offer of £1. The court determined the offer was genuine. It required the defendants in an acrimonious family dispute to concede the liability point they refused to (and later lost), and a large bill payment. The alternative was to take a risk on the litigation and face the consequences if they lose.
In Head (Executrix of the Estate of Michael Head, deceased) v The Culver Heating Co Ltd , the court confirmed reluctance to penalise defendants when critical evidence, on which to assess the merits of a Part 36 offer, was served late without good reason. The claimant beat the offer by a marginal amount and was unlikely to have done so without the late evidence.
Encouraging acceptance within the relevant period
Pallett v MGN Ltd  confirmed a defendant’s acceptance of an offer just outside of the relevant period could not exploit costs arguments which would not be available if accepted within the relevant period (where automatic cost consequences apply). Tactical late acceptance opened the door to argument for the court’s determination of costs and it was ‘unjust’ to award the claimant her costs up to the date of acceptance. However, departure from the application of the usual cost consequences carried a ‘heavy burden’.
This warning and the recently introduced CPR 36.5(5) (in effect 6 April 2021) may serve as a deterrent to use this apparent lacuna. The new rule enables an offeror to make provision for interest to accrue if the offer is accepted late. If no provision is made, it is treated as inclusive of all interest up to the date of later acceptance, with the potential to lose large sums as time goes on.
These cases signal the court’s commitment to strictly follow the regime to drive compromise between the parties.
Parties will do well to remember - Part 36 is a bargaining tool. Many factors must be considered when arriving at an offer likely to gain traction or making a hard choice to accept an offer as the least unfavourable alternative. The weighing of these will depend on the case’s facts and state of play in commercial negotiations, and should include an examination of prospects, what could be awarded and irrecoverable costs. However, key to a successful outcome (both to gain traction and protection at trial) is a claimant’s offer must be less than they believe their claim to be worth, and a defendant’s must be more. Detailed consideration and attention to detail is essential.
Caroline Field is a committee member of the London Solicitors Litigation Association and partner at Fox & Partners, London