There have been two great cases that I have followed last year (2019), both of which resulted in cost arguments that stem from notorious Part 36 offers.
What is a Part 36 offer?
A valid Part 36 offer is made by either a claimant who is the person or company bringing a claim, or a defendant who is the legal entity that the claim is made against. Part 36 offers are a tactical action intended to persuade the other party to settle the claim without the cost of going all the way to court. This is because if a claimant or defendant doesn’t accept a reasonable Part 36 offer then there are punishing consequences if they go on to lose at a final hearing.
If a party receives a valid Part 36 offer and refuses it, and then in court the judge makes an award of less than the Part 36 offer, the party that rejected the offer will likely pay a majority of costs for both sides and have other punishing consequences imposed upon them.
Part 36 offers can be made throughout the claim but, importantly, they are made without a party admitting liability or without accepting any blame. Part 36 offers can be accepted within a 21-day period specified under the Civil Procedure Rules. The party making the Part 36 offer can withdraw it and if withdrawn the party that could have accepted can make an application to the court for an order allowing them to accept it.
The punishing elements of failing to accept a Part 36 offer are:
- Interest on the award of 10%, and
- Cost on an indemnity basis, and
- Interest on legal costs of 10%, and
- An uplift in the award of 10%.
Knight and another v Knight and others 2019
In the case of Knight and another v Knight and others 2019, the defendants failed to accept a Part 36 offer. The claimants argued for indemnity costs. Indemnity costs are where the court orders the losing party to pay the winner’s legal costs, regardless of whether the costs were reasonably incurred or were reasonable in amount. Put more simply, if the winning party says its costs are £100,000 then that is what is usually accepted and awarded. There is no condition for costs to be proportionate or assessed by a costs judge.
It was in March 2019 when the case was put to trial, the issue was the beneficial ownership of the proceeds of a property sale. The administrators were the claimants of the estate with the defendants being a brother and sister-in-law of the deceased. The brother and sister-in-law lost and would now be responsible for legal costs of the claimants and an interim payment was awarded to the claimants for being successful. A dispute arose regarding an offer that was made before the claim was issued, which was alleged to be a Part 36 offer made by the claimants. The claimant therefore sought costs on an indemnity basis and the other punishing elements listed above, this was obviously rejected by the brother and sister-in-law which forced the judge to make a final ruling.
The claimants had made an offer purporting to be a Part 36 offer and without prejudice save as to costs. The offer, amongst other things, offered to pay the sum of £35,000 from the proceeds of the property, which included a line stating:
“of your client’s costs which we understand to be under £20,000. The offer also excludes any payment by your client of our clients’ costs, which as you know are around £30,000.”
As the offer imposed a condition regarding costs, the judge found it to be not a valid offer as defined in the Civil Procedure Rules at part 36. The case has also been noted by practitioners as the judge further rejected the claimants’ argument that the defendants failed to accept the reasonable offer, now considered to be made outside of Part 36, which should lead to the claimants being awarded indemnity costs. The claimants were essentially unsuccessful in obtaining indemnity cost and any of the punishing elements that would have applied if the Part 36 offer had been made properly and within the rule 36.
King v City of London Corporation 2019
The next case is King v City of London Corporation which considered Part 36 offers that exclude interest making them inconsistent with Civil Procedure rule 36 and therefore not valid. That is the recent decision in the Court of Appeal by Newey, Coulson and Arnold LJJ. They rejected submission on behalf of the claimant that an offer exclusive of interest could be relied upon as a valid Part 36 offer for any part of the proceedings. The Court of Appeal found that Part 36 proceeds on the basis that interest is secondary to a claim, rather than a part which can be saved off. The Court of Appeal also confirmed that the position is no different where an offer is made in the context of a detailed assessment. In Practice Directions 47.19 the wording indicates that a valid Part 36 offer should state if it includes interest or not.
Lord Justice Newey looked at Practice Direction 47.19 and found that it did not govern the interpretation of Civil Procedure Rule 36. In Newey’s opinion, CPR 36.5(4) (which states that Part 36 offers to pay or accept monetary sums will be treated as inclusive of interest) is compulsory (agreed by the other judges). This covered every type of interest, whether contractual or statutory. Newey went further to say that it was inconceivable that Civil Procedure Rule 36.5(4) could turn an offer that was made exclusive of interest into one that was inclusive of interest. Civil Procedure Rule 36.5(4) was not envisioned to turn a non-compliant offer into a compliant offer, but instead to stipulate the requirements for a valid offer.
Lord Justice Coulson highlighted the wording of CPR 36.2(2) in support of the court’s finding that an offer not made in accordance with Civil Procedure Rule 36.5 will not have Part 36 consequences. Lord Justice Arnold said, “the wording of Civil Procedure Rule 36.5(4) is key”. In Judge Arnold’s view, it was doubtful that CPR 36.2(3) and 36.5(1)(d) allowed a valid Part 36 offer to be made in respect of the primary amount alone. Arnold considered that those requirements must be read subject to the limitation in Civil Procedure Rule 36.5(4).
Before the King v City of London Corporation case there had been a lot of conflicting lower court decisions on whether an offer which excludes interest could be a valid Part 36 offer or not. The Court of appeal has now made it abundantly clear that an offer which excludes interest, made in substantive proceedings or in costs proceedings, will not be a valid Part 36 offer. Solicitors must now calculate the interest due and then add it to the sum claimed when making valid Part 36 offer.
Part 36 offers are a potential minefield that can backfire on practitioners and litigants who do not know what they are doing. If you have a dispute and are considering making a Part 36 offer to encourage a settlement, then you must ensure the offer is compliant to the Civil Procedure Rules if it is to have any effect and if you want to rely on it later. Part 36 offers are in place to punish the party that does not accept a reasonable offer to settle and therefore it must be done correctly. If you are struggling with Part 36 offers, or you require independent legal advice, then speak to Britton and Time Solicitors today. You can navigate to the contact us page on this website or call now on 01273726951.