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14 August 2012
Part 36 of the Civil Procedure Rules (CPR) provides a statutory procedure for settlement that is a self-contained code. Parties to litigation are free to make settlement offers outside the terms of Part 36, but the recent decision by the Court of Appeal in F & C Alternative Investments (Holdings) Ltd v Barthelemy ( EWCA Civ 843) provides a salutary reminder that a party which fails to make an offer in accordance with the strict terms of Part 36 cannot expect to secure the costs benefits which Part 36 confers.
Part 36 as exception to Part 44 rule on costs
Part 36 provides an exception to the ordinary rules concerning costs, set out in CPR 44.3, which give the court a wide discretion in making costs orders. Under CPR 44.3(1) the court has discretion as to:
CPR 44.3(2) states that if the court decides to make an order about costs, the general rule is that the court will order the unsuccessful party to pay the costs of the successful party – that is, the principle that the loser pays – but that the court may alternatively make "a different order". Under CPR 44.3(4)(c), in deciding what costs order (if any) to make, the court must have regard to all circumstances, including the conduct of the parties and any party's admissible offer to settle that is not a Part 36 offer.
Costs consequences of rejecting a Part 36 offer
In contrast, if a Part 36 settlement offer is made, the costs consequences following judgment are not subject to such a wide discretion. For example, if a claimant makes a Part 36 offer which is rejected by the defendant, but the defendant subsequently loses at trial (ie, fails to obtain a judgment more advantageous than the Part 36 offer), CPR 36.14 provides that the court will (unless it considers it unjust to do so – a high bar) order the defendant to pay the claimant's costs on an indemnity basis from the date on which time for acceptance of the offer expired, with interest payable both on those costs and on all or part of the sum awarded at a maximum rate of 10% above the base rate.
There are similar provisions applicable to Part 36 offers made by defendants, and Part 36 thus encourages defendants to settle claims brought against them, as the relatively certain costs consequence for a claimant in rejecting a defendant's Part 36 offer – which it does not 'beat' at trial – is more severe than would otherwise be the case if the claim is defended and lost at trial. Of course, if a defendant makes a Part 36 offer which is accepted by the claimant, it is generally committed under CPR 36.10 to pay the claimant's costs up to the date of the claimant's acceptance of the offer.
In F & C Alternative Investments (Holdings) Ltd v Barthelemy the defendants (which had made substantial counterclaims) succeeded after a 95-day trial. The issue of the substantial costs incurred (the defendants had run up fees of over £5 million) then had to be resolved. At first instance, Justice Sales gave a detailed judgment on costs ( EWHC 2807 (Ch)) which held, among other things, that an offer of settlement that had been made by the defendants (by a letter from their solicitors of December 24 2009) had the effect of a Part 36 offer, despite the fact that it was not an offer made in accordance with the provisions of Part 36.
The offer included a wordy preamble explaining that it had to be made outside the terms of Part 36 on the basis that:
"the fact that formally (although not in substance) your client is in the position of claimant...would have the result, were the offer to be made under part 36, that a rigid application of CPR 36.10 would render our clients liable for the costs of the...proceedings in the event that the offer was accepted by your client. That would be a nonsensical result, given the fact that in substance our client is in the position of claimant in the...proceedings and if your client were to accept this offer, it would be making a substantial payment to our client in respect of their Counterclaim, albeit not the full sum claimed, so that in substance the right costs consequence of that would be that your client should pay our clients' costs of the...proceedings. However, regardless of that absurdity on the facts of the present case, that seems to us to be at least arguably the effect of the rules. Consequently, for that reason and that reason alone, this offer is made outside the scope of Part 36. However, we shall be drawing this offer to the attention of the Court and relying upon it on the question of costs...in accordance with CPR 44.3."
Notwithstanding that the offer was not, and was expressly stated not to be, an offer within the terms of Part 36, it concluded by stating that:
"in the unfortunate event that this offer is not accepted then in due course our clients will be inviting the Court to apply the same consequences as regards costs and interest as would apply had it been possible to make the offer under Part 36."
This argument was apparently sympathetically received at first instance and the judge accepted (at Paragraph 49 of his judgment) that:
"there was a good and legitimate reason why the Defendants should not have been expected to make a formal CPR Part 36 offer in the context of this case...where that is the case and where a party makes an offer of settlement which seeks to comply with the requirements of CPR Part 36 while adjusting for the infelicity in the wording of CPR Part 36.10, while explaining why the offer is made outside CPR Part 36 and that the court will be invited to exercise its discretion on costs by analogy with CPR Part 36, it may often be appropriate for the court to do just that."
The judge therefore ordered that (in part) costs should be paid by the claimants to the defendants on an indemnity basis and at a higher rate of interest than would have otherwise been the case.
The Court of Appeal noted that "at all stages of his reasoning…the judge attached prime importance to the analogy which he drew with Part 36". However, the Court of Appeal disagreed that it was correct to draw such an analogy. Lord Justice Davis stated in his trenchant judgment that:
"I simply do not think that the judge was justified in drawing an analogy...with Part 36 so as to justify an award of indemnity costs...the offer...was neither in substance nor in form compliant with Part 36 – indeed it was expressly designed not to be a Part 36 offer – the judge was wrong in principle, in my view, to take as directly analogous, and as applicable, the potential costs consequences had it been a Part 36 offer."
Among other things, the Court of Appeal's decision referred to:
"Nothing in this section prevents a party making an offer to settle in whatever way he chooses, but if the offer is not made in accordance with rule 36.2, it will not have the consequences specified in rules 36.10, 36.11 and 36.14"; and
"4. In seeking to settle the proceedings, therefore, parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer, in relation to which the courts' discretion is much more confined, they must follow its requirements.
5. Part 36 is drafted as a self-contained code."
Finally, a key passage in the Court of Appeal's decision discussed the reasoning underlying the prescriptive nature of Part 36:
"Part 36.14 represents a departure from otherwise established costs practice. It imposes a deliberately swingeing costs sanction, by Part 36.14(3), on a claimant who fails at trial to beat a defendant's Part 36 offer. That is, for policy reasons, designed to encourage a sensible approach of claimants to offers and to promote settlement...there is no reason or justification, in my view, for indirectly extending Part 36 beyond its expressed ambit. Indeed to do so would tend to undermine the requirements of Part 36 and the repeated insistence of the courts that intended Part 36 offers should be very carefully drafted so as to comply with the requirements of Part 36...The judge thought that the failure of Part 36 to extend to the position of litigants in the position of the respondents constituted a "glitch" in the operation of Part 36 and called for adjustment to reflect "the infelicity in the wording" of Part 36. With respect, I do not regard that as a permissible approach. Parliament has decided what the ambit of Part 36 is to be. It is to be regarded as self-contained for these purposes and it is not parties or the courts to go around looking for asserted glitches or asserted omissions so as to bring a case indirectly within the reach of Part 36 when it cannot directly so brought in."
The Court of Appeal has clearly confirmed that in order to secure the certainty of costs protection offered by Part 36, a party must make an offer within the strict terms of Part 36. An offer made outside those terms is not entitled to the benefits of Part 36 costs consequences by analogy with an offer made within its terms. This is a useful reminder that in order to secure the costs benefits which Part 36 offers, a settlement offer must be made in accordance with the strict terms of Part 36. Interestingly, if the defendant's solicitors had made a Part 36 offer expressed to be a claimant's offer within the terms of Part 36 on the basis of their client's counterclaim, a very different costs outcome may have resulted.
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