Part 36 Offers food for thought

In this article we look at recent cases that highlight the potential advantages of making a Part 36 offer, as well as the risks of getting it wrong. We have assumed a level of knowledge about Part 36, but if you need a refresher, here's our quickguide.

Part 36: quick recap

A Part 36 offer is a special type of settlement offer, which can be made by claimants and defendants, and can be used to settle all or any part of a claim. An offer can be made at any time, including before proceedings are commenced.

For an offer to fall within Part 36 it has to be:

•  a genuine offer to settle (as opposed to a tactical offer made purely to attract Part 36 costs consequences); and
•  made in accordance with the strict requirements of Part 36 (which are not onerous).

Why use Part 36?

Part 36 is different to other types of settlement offers in that it operates within the confines of the strict procedural code set out in Part 36. That code also prescribes the potential costs advantages to a party who makes a successful Part 36 offer.

For the claimant that makes a Part 36 offer and then goes on to secure an award that is equal to or better than the offer, the advantages can be substantial. In addition to the standard basis costs and interest of around 2% above base rate it would normally recover, pursuant to CPR 36.17(4) the successful claimant can potentially secure the following four enhancements:

• indemnity costs from the end of the relevant period (usually 21 days after the offer was made);
• enhanced interest on those costs of up to 10% above base rate;
• enhanced interest on the sum awarded of up to 10% above base rate from expiry of the relevant period; and
• an additional 10% of the amount awarded by the court, capped at £75,000.

The advantage to the defendant arises in the scenario where the claimant is successful at trial, but fails to better the defendant's Part 36 offer. Instead of the usual position where the claimant would expect to recover all of its standard basis costs (i.e. its reasonable and proportionate legal costs), the claimant only recovers costs incurred up to the end of the relevant period. From that point, the costs rule is reversed and the defendant becomes entitled to its standard basis costs. If made at an early stage of the proceedings, these costs can be substantial.

However, if the claim is dismissed or the claimant recovers nothing, the Part 36 offer has not improved the defendant's position on costs as they would have been entitled to them regardless of the Part 36 offer. Consequently, claimants are able to use Part 36 offers to much greater effect in "all or nothing" claims.

Advantages of utilising Part 36 offers

Recent cases illustrate the benefits of understanding the Part 36 rules and utilising Part 36 offers.

Claimant entitled to enhanced interest of £900,000

A Part 36 offer could entitle a party to potentially large amounts of enhanced interest – as was the case in Telefonica UK Ltd v The Office of Communications.

There the claimant had beaten its own Part 36 offers. In the High Court, the judge awarded indemnity costs and the additional £75,000 available pursuant to CPR 36.17(4)(d). However, he considered it unjust to order enhanced interest on damages and costs, especially given the small difference between the claimant’s offers and the amount claimed (and awarded), and the fact that the extra interest on damages would be substantial.

The Court of Appeal overturned this decision and awarded the claimant additional interest on both damages and costs at 3.5% above base rate, which amounted to approximately £900,000. The Court confirmed that the margin by which a claimant beats its own offer is irrelevant to the exercise of discretion; CPR 36.17(1)(b) entitles the successful claimant "to receive each of the four enhancements and there is no suggestion that the award of one in any way undermines or lessens entitlement to the others".

Counterclaiming defendant entitled to claimant benefits

The claimant benefits of making a successful Part 36 offer are also available to defendants with a counterclaim (CPR 36.2(3)(a)). This is often forgotten by defendants. Huntsworth Wine Company Ltd v London City Bond Ltd (LCB) illustrates the benefits of framing a Part 36 offer in respect of a counterclaim as a claimant claim. Huntsworth (the claimant) brought a claim for £125,000 in losses following the theft of wine stored at LCB's warehouse. LCB's counterclaim was for unpaid excise duty. Before proceedings were issued, Huntsworth made a Part 36 offer. LCB subsequently made its own Part 36 offer, naming Huntsworth as the defendant, and offering to accept £2,000 by way of settlement of both its and Huntsworth's claims.

At trial, the judge awarded Huntsworth £1,000 plus interest and LBC £3,622.34 plus interest. There was therefore a net sum due to LCB of £2,837.53. As LCB's Part 36 offer was framed as a claimant offer, the judge awarded LCB indemnity costs, interest on both damages and costs at 4.5% above base rate from the end of the relevant offer period until judgment, and an additional 10% of the damages awarded. The High Court confirmed that "the emphasis is to be laid not on a particular party's title within the litigation but rather on their role in making the offer".

A minimal reduction may still be considered a genuine offer to settle

While the question of whether an offer is a genuine offer to settle will always be fact specific, recent cases have confirmed that the discount offered does not have to be large for parties to reap the benefits of Part 36. In Rawbank S.A. v Travelex Banknotes Ltd, a claimant's offer to accept a sum merely 0.3% lower than the total amount claimed was considered a "genuine attempt to settle".

Likewise, in Omya UK Ltd v Andrews Excavations Ltd & Anor, a claimant's offer of a sum 1.15% lower than the sum awarded was considered enough. The judge did not consider it a "cynical attempt to manipulate a scheme designed to encourage settlement" but rather "an entirely sensible course for a commercial enterprise… which had no interest in the proceedings being dragged out and faced risks that important witnesses might not appear at trial".

Cautionary tales

Although there are clear benefits to making Part 36 offers, there are several cases that demonstrate the risks of misunderstanding the rules governing Part 36 offers.

Part 36 provides a strict procedural code for the operation of Part 36 offers and the costs consequences that follow from them. A party making an offer should ensure that any offer is compliant with, and is not inconsistent with, the terms of Part 36. Otherwise, they may find themselves in the position of the defendants in James v James, where they made a claimant's Part 36 offer to settle the claim against them and their counterclaim. While the Court accepted that a defendant can make such an offer, it held that the offer was invalid because it included terms relating to the costs consequences of accepting the offer, which were inconsistent with Part 36. Specifically, they stated that, on acceptance of the offer, their opponent would be liable to pay their costs of the claim and the counterclaim “up to the end of the Relevant Period or, if later, the date of service of notice of acceptance of this Offer”, rather than costs only up to the date of acceptance if accepted within the relevant period. This inconsistency with the strict Part 36 rules on costs consequences meant that the offer was not a valid Part 36 offer.

Another example is the case of Gamal v Synergy Lifestyle Ltd, in which the Court of Appeal confirmed that, unless stated otherwise, a payment on account of a claim will reduce the amount of a Part 36 offer. In this case, the defendant made a Part 36 offer of £15,000 and then, subsequently, made a payment on account of £10,000. The Judge took into account the defendant's £10,000 payment in awarding damages which came to £14,275.

On appeal, the defendant (as appellant) argued that as the judgment sum was now less than her Part 36 offer, the judge should amend his costs order pursuant to CPR 36. However, the appeal was dismissed on the basis that a payment on account, which reduced the defendant's liability for the claim as a whole, would also reduce the Part 36 offer. As such, the offer was reduced to £5,000 and therefore the judgment sum of £14,275 was more advantageous than the offer and the defendant was unable to reap the Part 36 benefits. The judge clarified that to avoid this outcome, a paying party should state "expressly at the time the payment is made that it is not intended also to reduce the amount of the earlier Part 36 offer or to provide clarification to that effect promptly after the payment was made".

Practical tips

Part 36 will not be appropriate in every case but, given the potential upsides and the tactical pressure it places on the other side to negotiate, it should be considered in every case.

Our top three tips when making a Part 36 offer are as follows:

1. Comply with the strict formalities: the offer must be in writing and must make clear that it is made pursuant to Part 36.
2. Ensure that the offer is genuine (as opposed to a tactical offer): although Part 36 offers have been allowed even where a small discount is offered, each case turns on its own facts and the strength of the parties' arguments.
3. Consider whether or not it would be helpful to make a Part 36 offer throughout your case – not just at the early stages.

For more information on Part 36 Offers, please see our quickguide.

Authors: Catrin Southgate, Associate; Adéla Mackie, Trainee

Cases referred to:

• Telefonica UK Ltd v The Office of Communications [2020] EWCA 1374
• Huntsworth Wine Company Ltd v London City Bond Ltd [2022] EWHC 97 (Comm)
• James v James [2018] EWHC 242 (Ch)
• Rawbank S.A. v Travelex Banknotes Ltd [2020] EWHC 1619 (Ch)
• Omya UK Ltd v Andrews Excavations Ltd & Anor [2022] EWHC 1882 (TCC)
• Gamal v Synergy Lifestyle Ltd [2018] EWCA Civ 210