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Rowan Turrall
Rowan Turrall,
SENIOR ASSOCIATE - SOLICITOR
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Part 36 round-up
27 February 2012

We have previously commented on important decisions in relation to the interpretation of Part 36 of the Civil Procedure Rules. It seems that the court continues to grapple with question of interpretation of offers to settle made pursuant to Part 36. 

As Judge Behrens said in the case of Thewlis v Groupama Insurance Co Limited [2012]: "there is considerable recent jurisprudence on Part 36 which has spawned significant satellite litigation."

With large amounts of costs often at stake, it remains ever important for practitioners to keep up to date to ensure compliance. It is all very well to win the case but if you end up having to pay your opponent’s costs and/or not recovering your own the victory may be a pyrrhic one.

Failure to refer to the costs consequences of Part 36 in offer letter

In Thewlis ironically it was the claimant arguing that its own Part 36 offer was not valid! The defendant applied to court for a stay of proceedings on the basis it had accepted a Part 36 offer made by the claimant some 3 years previously. The claimant argued that the offer was not still open for acceptance.

The wording of the letter in question, so far as material, stated:

"…this offer is made pursuant to Part 36 of the CPR and remains open for acceptance for a period of 21 days…thereafter it can only be accepted if we agree the liability for costs or the court gives permission…"

The claimant argued that the letter failed to comply with Part 36.2(2)(b) which states so far as is material:

"a Part 36 offer must…state on its face that it is intended to have the consequences of Section I of Part 36."

The offer in question did not mention that it was intended to have the consequences of Part 36. Secondly, the claimant argued that the letter was inconsistent with Part 36 because after 21 days it could only be accepted if the parties agreed liability for costs or the court gave permission. That wording was inconsistent with Part 36 which had been amended in 2007.

In response the defendant argued that the letter was clearly intended to be a Part 36 offer and so should be construed as complying with Part 36 insofar as there was any ambiguity. The judge did not accept this argument. Part 36.2 uses the word “must” and in the judge’s view that means what it says. The letter did not comply with Part 36.2 and so was not an offer within Part 36.

This is another example of a case which has come before the court for determination when a Part 36 offer has been expressed as remaining open for acceptance for a period of 21 days. This is how offers were phrased before the amendment of Part 36 in 2007, prior to which a Part 36 offer was open for acceptance for a period of 21 days and thereafter could only be accepted if the parties agreed the position regarding costs or if the court gave permission. It is therefore important to comply clearly with the amended provisions of Part 36 and not assume that the court will come to the rescue to make an otherwise invalid offer valid. One can only assume in this case that the offer was no longer one which the claimant wanted to be open for acceptance and it seems that it therefore had a lucky escape. It will be interesting to see the eventual outcome of the trial and whether the claimant did indeed do better than the Part 36 offer!

Acceptance of pre-action Part 36 offer

Two recent cases have clarified the position where a Part 36 offer is made and accepted before the issue of proceedings. The provision in question in both cases was Part 36.10 which, so far as relevant, provides as follows:

"(1)…where a Part 36 offer is accepted within the relevant period the claimant will be entitled to the costs of the proceedings up to the date on which notice of acceptance was served on the offeror.

(4) Where… (b) a Part 36 offer is accepted after expiry of the relevant period, if the parties do not agree liability for costs, the court will make an order as to costs.

(5) Where paragraph 4(b) applies, unless the court orders otherwise-

(a)    The claimant will be entitled to the costs of the proceedings up to the date on which the relevant period expired; and

(b)    The offeree will be liable for the offeror’s costs for the period from the date of expiry of the relevant period to the date of acceptance."

Previously the situation regarding an offer made and accepted before proceedings was unclear, as explained in the notes to Part 36 in the 2011 edition of the White Book:

"One of the ambiguities left by the wording of the current Part 36 is that it is somewhat unclear as to what the costs consequences might be of a Part 36 offer which is made and then accepted before proceedings are commenced: rr36.10 and 36.11 are both written in anticipation of there being extant proceedings...Any failure to clarify the precise intention of the parties as to costs in making a pre-action offer could lead to the highly undesirable consequences of the need to bring Pt 8 proceedings on the issue of costs, or indeed the whole efficacy of an intended Pt 36 settlement."

In Thompson v Bruce [2011], a Part 36 offer made before proceedings was accepted by the claimant before proceedings were issued but after the expiry of the 21 day relevant period. It was agreed that the offer was a valid offer complying with Part 36 and so the sole question was whether Part 36.10 could be invoked, thus allowing the defendant to recover its costs from the date of expiry of the relevant period to the date of acceptance. It was common ground that if proceedings were issued then the costs would include those incurred on a pre-action basis but what if there were no proceedings on foot? Did the use of the word “proceedings” in Part 36.10 mean that it is only triggered once proceedings have been issued?

The judge decided that “proceedings” in Part 36.10 should be given a wider meaning to include steps taken prior to issue which would ordinarily be payable as costs on a formal assessment. Part 36.10 is therefore not confined to offers accepted after the issue of proceedings.

The question came before the Court of Appeal again shortly afterwards in the conjoined appeals of Solomon v Cromwell Group plc and Oliver v Doughty [2011]. The Court of Appeal agreed with the Judge in the Thompson case that the effect of accepting a Part 36 offer made before a claim has been issued, is that the claimant is entitled to recover costs he has incurred in contemplation of the proceedings up to the date of acceptance insofar as they would have formed part of his recoverable costs if proceedings had already been issued. There was also an argument about exactly what costs should be payable and whether these should be fixed in accordance with the regime for road traffic accidents. The court again reminded:

“All this only goes to show, however, that parties should do their best to avoid any ambiguity about costs when making offers to settle.”

Taking into account conduct when applying Part 36 costs consequences

Epsom College v Pierse Contracting Southern Limited [2011] was another case serving as a stark reminder of getting Part 36 wrong. The case concerned a flooding incident at Epsom College and was essentially a fight between two insurers. The College’s insurers alleged that during the course of undertaking works at the college the defendant had put a nail through a water pipe which had eventually dislodged causing flooding. Damages were alleged to be approximately £25,000. At the time the proceedings were issued it was asserted by the claimant that the damaged pipe had been disposed of. The defendant denied liability and relied on an expert report which had been prepared based on photographs taken of the pipe. Part of the defence was based on a theory that the pipe in question was an old one which had not been replaced by the defendant when it undertook the works.

The claimant made a Part 36 offer of £19,200 in March 2009. A second Part 36 offer of £12,768.50 was made by the claimant in April 2010 but it expressly stated that it did not amount to a withdrawal of the first offer which also remained open for acceptance. A third without prejudice offer (not made in accordance with Part 36) was made in July 2010.

In October 2010, following an application by the defendant for a site visit, the pipe was discovered by the College. It was apparent that it was a new pipe and so a large part of the defence was no longer sustainable. On the same day that it wrote to the defendant to let it know of the pipe’s miraculous re-discovery the claimant’s solicitor wrote withdrawing the offers made in April and July 2010 but leaving open the offer made in March 2009.

The parties were unable to settle matters and eventually the case proceeded to trial. The claimant succeeded and was awarded damages of £21,075 plus interest but by that stage its estimated costs were in the region of £165,000 excluding a CFA uplift of 92%, i.e. over £315,000 in total. The claimant wanted Part 36 consequences to apply as from March 2009 as it had beaten its first Part 36 offer which remained open for acceptance. Perhaps not surprisingly the defendant objected. The judge at first instance decided that the first offer did not provide a sufficient discount on the claim to make up for the claimant’s conduct regarding the non-production of the pipe. He therefore awarded Part 36 consequences from the April 2010 offer (i.e. indemnity costs and enhanced interest on costs and damages) and awarded interest at 6% over base rate.

The defendant appealed. Before the Court of Appeal it admitted that once the pipe came to light its position deteriorated significantly but capitulation would mean taking on board the claimant’s costs which had been incurred to date. It had therefore decided to gamble on the outcome of the litigation in the hope that it might win. The court was unimpressed by this approach. As from the time the pipe was produced the court felt that the defendant could have accepted the first offer and then argued before the court that the Part 36 costs consequences of doing so should not apply.

The defendant also sought to argue that the first offer was not valid as it stated it remained “open for acceptance for 21 days” and so was a time limited offer not complying with Part 36. The court was again unimpressed by this argument and decided the offer should be construed in accordance with the case of C v D [2011] in which the Court of Appeal held that “open for 21 days” meant that an offer was open for at least 21 days but was a warning that after those 21 days the offer might be withdrawn – for more information on that case see our previous article.

The Court of Appeal decided it was undesirable to go behind the judge’s exercise of discretion in relation to the first offer. In relation to the second offer, that offer had been withdrawn and therefore could not form the basis of a Part 36 award of costs. The Court of Appeal therefore held that the first Part 36 offer was valid but that it was unjust to give effect to that offer until a suitable time after the production of the pipe. The offer was therefore held to give rise to Part 36 consequences with effect from 1 November 2010, being a suitable period for the defendant to consider its position following production of the pipe in October 2010. This meant that with effect from 1 November 2010 the defendant was required to pay costs on an indemnity basis together with enhanced interest on costs and damages at 6% over base rate.

Practice points 

  • Keep Part 36 offers under review and consider withdrawing them where necessary – remember though that withdrawal of a Part 36 offer means that the protection of Part 36 is then lost.
     
  • To avoid any ambiguity ensure that any offers made prior to the issue of proceedings are expressed on the basis that acceptance prior to the issue of proceedings will require payment of pre-issue costs as well as those that might be incurred after the issue of proceedings.
     
  • Ensure that offers comply with the requirements of Part 36.2 and in particular that they state that they are intended to have the consequences of Section I of Part 36. 

For more information about the issues raised in this article or to find out more about how the Construction team can help you please contact Rowan Turrall on 0118 952 7206 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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