Part 36: The reformed settlement regime in practice

7th October 2016

Significant changes to Part 36 of the Civil Procedure Rules (CPR) came into effect in April 2015.  The key changes are explained in Walker Morris’ earlier briefing, Part 36 changes: What you need to know.  As the new rules start to bed in, Commercial Dispute Resolution specialists Gwendoline Davies and Sue Harris review some of the recent key cases and consider how the reformed Part 36 regime is working in practice.

Recent key cases

Gulati – time-limited offers

Since April 2015 it has been possible to make time-limited Part 36 offers, which are automatically withdrawn if not accepted within a specified time. That can be a useful tactic, in appropriate cases, if a party wants to put pressure on its opponent to reach swift resolution of a dispute.  The claimant did that in Gulati & Ors v MGN Ltd [1], making a time-limited Part 36 offer, which the defendant did not accept.

At trial the claimant secured an award that beat her offer. She tried to argue that, regardless of the fact that her Part 36 offer had been automatically withdrawn, she should be entitled to recover her legal costs on the indemnity basis.  (One of the key aspects of the Part 36 regime enables a claimant to recover indemnity costs in certain circumstances.  On assessment by the court, indemnity costs are not subject to or limited by reasonableness.)  The claimant argued that, under the CPR Part 44 general costs rules, the court can take into account a defendant’s conduct.  The conduct complained of here was that the defendant did not accept the good Part 36 while it was open.

Perhaps unsurprisingly, the court did not accept this attempt to effectively obtain Part 36 cost consequences after a time-limited offer expired. The court confirmed that whilst an expired offer and a defendant’s conduct can play a part in a general assessment of costs, they cannot be treated equally to the Part 36 regime.

Sugar Hut Group – global offers and no ‘near miss’ rule

In the Sugar Hut Group [2] case the claimant’s nightclub was destroyed by fire.  The parties reached a compromise on liability that the defendant would pay 65% of the claimant’s losses, but the parties were only able to reach agreement on the amounts of some of the claimed heads of losses.  One of the disputed heads was the claimant’s business interruption losses (“the BI losses”).  The defendant made a global Part 36 offer which covered, amongst other things, a sum reflecting its calculation of the BI losses.

At trial the claimant very narrowly beat the defendant’s offer overall, but the figure allocated for BI losses by the court was less than the defendant’s calculation of BI losses as comprised within the global Part 36.

Nevertheless, the Court of Appeal reiterated that there is no such thing as a ‘near miss’ rule. The defendant could not rely on its Part 36 offer just because the ultimate award had beaten it so narrowly.

It was also irrelevant that the defendant had actually calculated a higher amount in respect of the BI losses. The defendant’s ‘offer’ in respect of BI losses was not separately made – it was bound up in a Part 36 which failed overall.

Bolt Burdon Solicitors – interest and the ‘additional amount’

The successful claimant who has beaten its Part 36 offer is entitled to an additional amount of 10% on awards of up to £500,000, and 5% on awards above that, up to a maximum of £75,000. This gives defendants a significant incentive to carefully consider claimant’s Part 36 offers.  The case of Bolt Burdon Solicitors v Tariq & Ors [3] confirmed that when contractual interest forms part of a court’s award, the additional amount is to be calculated on the interest-inclusive sum awarded.

Whilst it is not absolutely clear whether the same applies in respect of discretionary interest awarded by a court (for example under section 35A Senior Courts Act 1981), that presumably is the case because the court noted that, had the intention been that interest (of any type) should be excluded from the calculation of the additional amount, it would have been very simple for the rule to have specified that; plus the purpose of the additional amount rule is to penalise a defendant who fails to accept a good Part 36 offer.

Purrunsing – another ‘interest’ing point

Purrunsing v A’Court & Co [4] is another case involving interest, but at the earlier stage of working out whether the claimant has actually beaten its Part 36 offer.

The defendant rejected the claimant’s offer to settle at £516,000 including interest. The claimant subsequently succeeded at trial and was awarded £518,983 including interest.  The issue was whether the claimant was entitled to an additional amount because his award was greater than his Part 36 offer, bearing in mind it included interest that had accrued since the time the offer had been made.

The court acknowledged that an interest-inclusive Part 36 offer includes interest to the date when the relevant period for acceptance expires. To work out whether a judgment was more or less advantageous to the claimant, any interest accrued from after that time should not be taken into account.  Otherwise it would not be a like-for-like comparison, nor would it be possible to assess whether or not to accept the offer by means of analysing liability and merits alone – one would have to consider the date of trial and judgment which, in many cases, would be entirely unpredictable.

In this case the claimant’s award less interest which had accrued after the date on which the relevant period had expired was £507,046 and so he did not beat his offer and was not entitled to enhanced costs.

DB Mortgages – Part 36 v non-Part 36

DB UK Bank Ltd t/a DB Mortgages v Jacobs Solicitors [5] highlights the important difference between the common law contractual offer/acceptance regime and the Part 36 regime.

At common law a counter-offer has the implied effect of rejecting the original offer so that it can no longer be accepted. Part 36 is different: Part 36 offers remain open for acceptance unless and until they are withdrawn (by written notice or, as we saw earlier, by expiry of a time-limited offer).

In this case a party made a Part 36 offer to try to improve upon settlement terms which had been made by its opponent in an earlier, non-Part 36 offer in the mistaken belief that, if that settlement attempt failed, it could fall back upon accepting the earlier offer. This tactic backfired.  The Part 36 offer was not accepted and the earlier, common law offer had impliedly been rejected and was therefore no longer on the table.

This case simply reflects existing law, but is the first authority on the point. Parties and practitioners should review their cases carefully to track what offers have been made, of which types, and when, so as to determine what offers, if any, remain open for acceptance.

Titmus v General Motors – no extension for payment

CPR 36.14 (6) allows a 14-day time-limit for payment of a Part 36 sum. In Titmus [6] the defendant applied to extend the time for payment under the court’s general case management powers.  The application failed.

The court held that Part 36 is a self-contained code which is designed to encourage settlement through clear rules and consequences. To extend the time-limit for payment would be to undermine the regime and so it remains the case that this deadline can only be extended by the parties’ written agreement.

Practical points to note

• It is now possible for time-limited offers to be valid Part 36 offers.
• However, time-limited offers should be used with caution. Once such offers have expired, Part 36 cost consequences will not apply.
• There is no ‘near miss’ rule. A party either beats its Part 36 offer (in which case Part 36 cost consequences will flow), or it does not. Even if a party misses beating its Part 36 offer by a very narrow margin, Part 36 cost benefits will not apply.
• Beware global offers. Where a dispute covers different heads of loss, it may be prudent to make separate settlement offers in respect of each.
• The calculation of interest can be crucial, both in terms of determining whether or not a party has beaten its Part 36 offer at all and, following on from that in the case of a claimant’s offer, whether a claimant is entitled to the ‘additional amount’.
• There are important differences between Part 36 and non-Part 36 settlement offers that can have very significant consequences when it comes to the question of costs.
• If you are involved in a dispute and receive a settlement offer – any settlement offer – take immediate expert advice as to its merits and any costs consequences.
• In particular, think carefully before any tactical attempt to improve upon a non-Part 36 offer.
• Part 36 is a self-contained settlement regime, with rules that will be strictly applied.

WM Comment

Our review of the key cases to come out of the reformed Part 36 regime has ended with a judge’s conclusion that Part 36 is a self-contained code comprising clear rules and consequences. That was certainly the aim of the 2015 re-write of this important Part of the CPR; the rule is more comprehensive than was its earlier incarnation; and it does seem that the courts are adhering strictly to its terms whenever they are tested.  However, we have covered here only a small selection of key cases out of what has almost become a cottage industry of Part 36 litigation.

The best advice for anyone involved in a dispute is therefore to take specialist advice as early as possible, not only on the legal merits of a case, but also on the potential, and possible tactics, for settlement. Part 36, and the cost consequences which can flow from the making, rejecting, withdrawing and the expiry of such offers, should play an important part in that discussion.

Please do not hesitate to contact Gwendoline Davies, Sue Harris or any member of Walker Morris’ Commercial Litigation department if you would like any further information or advice.

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[1] [2015] EWHC 1805 (Ch)
[2] Sugar Hut Group Ltd & Ors v A J Insurance Services (a partnership) [2016] EWCA Civ 46
[3] [2016] EWHC 1507 (QB)
[4] Purrunsing v A’Court & Co (a firm) & Ors [2016] EWHC 1528 (Ch)
[5] [2016] EWHC 1614 (Ch)
[6] Titmus v General Motors UK Ltd [2016] EWHC 2021 (QB)