23 August 2022
23 August 2022
This guide provides an overview of Part 36, highlighting the issues that can arise in practice and how to deal with them.
A Part 36 offer is a settlement offer made without prejudice save as to costs. Like other forms of settlement it can be used to settle all or any part of a claim, monetary or otherwise. It can also be used to settle counterclaims and additional claims, and Part 36 offers can be made solely in relation to liability, leaving quantum to be argued over.2
However, for an offer to fall within Part 36 it has to be:
A Part 36 offer can be made at any time, including before the commencement of proceedings.3 However, although an early offer can provide substantial cost benefits and costs protection, a party may not be in a position to make an informed offer until proceedings have been commenced. If not made at the outset, Part 36 should be reconsidered throughout the case. Part 36 offers can also be made in appeal proceedings4 and in relation to claims for costs in detailed assessment proceedings.
The rules on making a Part 36 offer are the same for both claimant and defendant offers, whether made pre-action or after proceedings have commenced. Particular provisions apply to offers made within 21 days of trial but these are not covered in this guide. Part 36 offers have to be made in writing and must state a period of 21 days or more within which the defendant will be liable for the claimant's costs.5 This is known as the relevant period.
The relevant period is an important date for the purposes of:
Other terms frequently used are offeror and offeree. The offeror makes the offer and the offeree is the recipient of the offer.
The easiest way to look at how Part 36 operates is by way of an example.6
In this example, if the claimant (C) accepts the offer within the relevant period, C will recover its costs up to acceptance. If the offer is accepted after the 21 days, C is entitled to its costs up to 21 March, but the defendant (D), as offeror, will be entitled to payment of its costs from that date (unless considered unjust in the circumstances – see below). If the offer had been made by C and accepted late by D, C would have been entitled to its costs up to the date of acceptance.
But what if the offer is not accepted and the case goes to trial? This is where the costs consequences of Part 36 have real impact.
The costs consequences are different depending on whether the offer was made by the claimant or defendant. In addition, they do not apply to offers that have been withdrawn, or offers that have been revised to be less advantageous and the less advantageous offer is beaten.7
A defendant will reap the benefit of its Part 36 offer if the claimant fails to obtain a judgment that is "more advantageous" than the offer (see the box: When is a judgment more advantageous?). In other words, has the claimant recovered a sum that is less than or equal to the offer? In those circumstances, the defendant will recover from the claimant:
If the claim is dismissed or the claimant recovers nothing, the Part 36 offer has not improved the defendant's position on costs – the defendant would have been entitled to its costs anyway.8 However, if the claimant recovers something, just not enough to "beat" the offer, Part 36 effectively reverses the costs rule and the defendant is treated as the "successful party" from the date of expiry of the relevant period.
The costs consequences of a claimant Part 36 offer apply where the claimant obtains a judgment which is "equal to or more advantageous" than the offer. In those circumstances, the court will order the defendant to pay:
At first glance Part 36 appears quite generous. However, given that the claimant would have recovered its ordinary costs anyway, the CPR had to provide additional incentives to encourage claimants to settle.
The benefit of Part 36 is that costs consequences are automatic. However, they will not be applied if, in the circumstances, the court considers that it would be unjust to do so. In considering whether it would be unjust, the court will take into account "all the circumstances of the case". 12 Potentially relevant circumstances which it must take into account include:
The court may also take into account any other settlement offers made and the conduct of the parties generally.13 If the court decides that it would be unjust to make the usual order under Part 36, it has wide powers when exercising its discretion as to costs under CPR 44.2.
When Part 36 was revised in April 2007, the test for determining whether a claimant had beaten an offer was changed. For both monetary and non-monetary claims the court had to determine whether the judgment was "more advantageous" than the offer. Prior to this, courts had decided whether a claimant had beaten offers in monetary claims by applying a strict financial comparison. In other words, had the claimant been awarded more or the same as the sum offered? However, the change in wording was interpreted by the Court of Appeal as requiring a change of approach so that the courts could also take into account other circumstances, including the conduct of the parties, in deciding whether an offer had been beaten.14
However, the Court of Appeal decision was controversial. Following the decision there was less certainty in relation to when the costs consequences of Part 36 would apply. The Civil Procedure Rules Committee consequently changed the Rules as of 1 October 2011,15 so that where the offer is for a sum of money, a strict financial comparison will be made in order to calculate whether the offer has been beaten.16
Going back to the example above, in that case, C is claiming £100. C offers to settle for £75 plus costs.
D accepts - whether within or outside the relevant period
C gets costs up to the date of acceptance
D doesn't accept and C recovers £75 or more
C has "beaten" its offer and gets:
C recovers less than £75
Normal costs rules apply
Normal costs rules apply
Same example, but this time D offers to settle for £75 plus costs.
C gets costs up to the date of acceptance if within the relevant period – D recovers costs from expiry (21.3.15) until acceptance
C doesn't accept and recovers £75 or less
C has failed to "beat" the offer. D gets:
C has to pay its own costs from 21.3.15
C recovers more than £75
Normal costs rules apply
Normal costs rules apply
Part 36 is attractive because the costs consequences are automatic. It is particularly attractive to claimants with all or nothing claims where either the claimant will recover in full or not recover at all. Provided the offer is genuine (i.e. not tactical – see below for a discussion on how to set the level) it can put the defendant in a difficult position.
However, Part 36 is just one way of settling litigation. It is open to parties to use other forms of settlement, e.g. Calderbank letters (offers made without prejudice save as to costs). Although Part 36 consequences will not follow, the court's discretion on costs under CPR 44.2 will still be available. There will often be circumstances where a Part 36 offer is inappropriate or another form of settlement offer is more attractive. The following are examples:
Whereas Part 36 is attractive to claimants in all or nothing cases, there is little to be gained by a defendant making a Part 36 offer. If the claimant wins, the offer is beaten and the defendant must pay the claimant's costs. If the claim is dismissed, the defendant is paid its costs in any event (although the position on interest on costs may be more attractive under Part 36). However, that should not deter a defendant from making some form of settlement offer. If coupled with attempts to mediate or negotiate settlement, and it can be shown that the claimant unreasonably refused to mediate or engage in settlement negotiations, a defendant may be able to use an offer to argue that a successful claimant is not entitled to all of its costs. The fact of the offer may also help a successful defendant defeat any argument that it should not be entitled to all of its costs, or may assist in securing indemnity costs.
When an offer is accepted within the relevant period, a defendant will automatically be liable for the claimant's costs up to the date of acceptance. Part 36 will therefore not be appropriate where a defendant seeks a "drop hands" settlement or only wants to pay a proportion of the claimant's costs.
Part 36 offers cannot be made inclusive of costs. A defendant will therefore not want to make a Part 36 offer in circumstances where it wants to know in advance how much it has to pay. For example, the defendant wants a full and final settlement of £100,000. Do you make a Part 36 offer in the region of £90,000 and hope that the claimant's costs do not exceed £10,000? The other side's solicitors could be asked for their costs to date (on a without prejudice basis). However, the claimant will be entitled to all costs reasonably and proportionately incurred up to the end of the relevant period. If further substantial work is carried out in order to evaluate the merits of the offer, the defendant will be liable for those costs as well.
Difficulties arise with Part 36 where there are multiple defendants, particularly if not all of them want to settle. In those circumstances a Calderbank offer may be more attractive.
Part 36 does not provide for settlements on commercial terms, e.g. by offering future business. This will usually arise in the context of wider settlement costs negotiations. However, where settlement is not achieved and a party wants to make an offer for costs protection purposes, a Calderbank offer is recommended.
Part 36 is very strict with regard to when and how the defendant has to make payment. Payments have to be made in a lump sum within 14 days of acceptance – payment by instalments is not provided for. Defendants wanting to settle but unable to satisfy these requirements cannot use Part 36 and will instead need to make a Calderbank offer.
For a Part 36 offer to attract Part 36 costs consequences it has to comply with the provisions of Part 36, in particular CPR 36.5, CPR 36.6 and PD 36A.1. The offer must be in writing and can be made in the form of a letter or in Form N242A. It must be clear that it is made pursuant to Part 36.17
This will always be a difficult exercise as you need to ensure that the offer is realistic enough to place the other side under pressure. You also need to ensure that the offer is genuine. This can cause difficulties if you consider that you have a watertight claim or defence: what level of discount do you have to give in order to satisfy this Part 36 requirement? Judicial guidance is not that helpful: the offer has to be more than a tactical step in order to secure the benefit of the Part 36 incentives – there must be some "offer to settle in the ordinary sense of the word".18 But what does that mean in practice?
There is no hard and fast rule. There have been cases where discounts of 1.15%19 and 0.3%20 were considered sufficient to attract Part 36 costs consequences. But in another case, a 5 per cent reduction was found to be merely tactical given: (1) the late stage at which the claimant's offer was made (three weeks before trial) and (2) the nature of the case. 21
What is genuine will always be dependent on the circumstances and, in particular, the strength of the parties' arguments. A claimant with a cast iron debt claim is in a different position to a claimant with an all-or-nothing claim where the arguments are finely balanced. This is always going to be a difficult decision and requires careful thought.
Prior to the April 2015 revisions, an offer that was specified to be open for acceptance for a certain period only could not be a Part 36 offer.22 However, as from 6 April 2015, a Part 36 offer can include a "sunset clause", i.e. one that states that the offer will automatically expire if not accepted by a certain date (provided that date falls after the relevant period). In such circumstances, once expired, the offer will be regarded as withdrawn.
Part 36 was changed to permit automatic expiry in order to avoid parties inadvertently falling foul of the strict Part 36 requirements by making their offers time-limited. Given that offers could be withdrawn after the relevant period in any event, it was considered sensible to remove this technical hurdle. However, careful thought should be given before including a "sunset provision". It may be preferable to leave an offeror's options open as, once withdrawn, the offer cannot attract Part 36 consequences.
The relevant period has to be for a period of not less than 21 days. It is therefore open to the offeror to give the offeree more time in which to consider the offer. However, it will rarely be in a defendant's interests to extend the relevant period as it will also extend:
The scheme of Part 36, and the automatic costs consequences that flow from Part 36, mean that a Part 36 offer cannot be inclusive of costs. In addition, it would be difficult for a court to determine whether the offer is beaten at trial. Any costs-inclusive offer cannot therefore be a Part 36 offer and the effect of such an offer will depend on the court's general discretion on costs.
The sum offered should be inclusive of interest up to the date on which the relevant period expires. In addition, any claimant making an offer should consider providing for future interest. Otherwise, the claimant could lose any entitlement to interest on the offered sum after expiry of the relevant period as, on acceptance of the offer, the defendant is agreeing to pay a fixed sum in settlement which does not take into account any interest that has accrued in the meantime. Although not expressly permitted by Part 36, the Court of Appeal has confirmed that the inclusion of a term as to interest after the end of the relevant period does not render the offer defective.23
The converse is true for defendants: they have nothing to gain by providing for interest after the relevant period and the omission of any future interest mechanism will not make the offer non-compliant. It also encourages the claimant to accept the offer sooner if the value of the offer is diminishing in real terms.
There are different ways of dealing with the counterclaim in a Part 36 offer. Claimants will usually want an offer to take into account any counterclaim. That way, the claimant retains the costs benefit of the offer being a claimant offer and the defendant will not be entitled to any of its costs incurred in relation to the counterclaim.
However, what if the size of the counterclaim is such that dealing with the two together results in a payment to the defendant? In those circumstances, a defendant would be perfectly within its rights to make a claimant Part 36 offer and claim entitlement to the costs arising from both the claim and the counterclaim.24
Or what if the claim and counterclaim are completely separate and it is easy to distinguish the costs arising in respect of the claim and the counterclaim? In those circumstances, a defendant would be justified in making separate offers, i.e. a defendant offer for the claim and a claimant offer for the counterclaim. This runs the risk that one is settled while the other continues to trial. However, the costs consequences may justify it, particularly if the offer is made after substantial legal costs have been generated.
Which approach is adopted will depend on the circumstances; in particular, the nature of the counterclaim and the extent of the legal costs on both sides. The key point to note is to make the basis on which the offer is being made clear. So, if intending the offer to take effect as a claimant offer, say so.
If you receive a Part 36 offer, you should be asking yourself the following questions:
The relevant period will start once the offer is served on the offeree.25 The actual timing will depend on how the offer is served. So, for example, if the offer is posted first class, the deemed day of service is the second day after it was posted, provided that day is a business day or, if not, the next business day. If the offer is faxed or e-mailed before 4.30 p.m. on a business day, the deemed day of service is that day, otherwise it is the next business day.26
If, having received a Part 36 offer, you do not have sufficient information to properly consider it, you can ask the offeror to clarify the offer.27 The request should be in writing and made within seven days of receipt of the offer. If the clarification requested is not provided, the offeree can ask the court to order it.
Clarification can be important as, when deciding whether it would be unjust to apply Part 36 consequences, the court will take into account the information available to the offeree at the time the offer was made. Clarification requests are therefore often used tactically, for example to extract information at the pre-action stage, or as a means of extending the relevant period as you can argue that the date the additional information is provided is the date the relevant period begins.
A Part 36 offer can be accepted at any time unless the offer has been withdrawn.28 That means that, even if originally rejected or a counter-offer is made, the offer is still open for acceptance until it is withdrawn.
These are set out above. It is essential that these are fully considered before accepting any offer. If the offer is accepted within the relevant period, the judge has no discretion to make a different costs order – the claimant will automatically be entitled to reasonable and proportionate costs up to the date of acceptance.
There will often be circumstances where an offeree wants to settle but is put off by the automatic costs consequences. For example, a defendant that does not consider that the claimant should recover all its costs in light of its handling of the matter. Or a claimant who, having made an early Part 36 offer, is offered a later offer on better terms by the defendant. If accepted, the claimant will only be entitled to standard costs despite having beaten its earlier offer.
In those circumstances, consider carefully before accepting within the relevant period. It may be better to use the Part 36 offer to re-open negotiations, or accept the offer but on different terms as to costs (so in effect you are making a counter-offer rather than accepting the Part 36 offer).29 Alternatively, accept the offer after expiry of the relevant period as then there will be more scope to argue that the automatic costs rules should not apply, but you will need to establish that the usual costs award would be unjust in the circumstances.30
You accept by serving notice of acceptance on the offeror. The CPR are silent on timing but the rules on service that apply to making Part 36 offers should apply to acceptance. You should also file a copy of the acceptance with the court. There are no formal requirements as to format: a letter identifying the Part 36 offer to which it relates (and the claim number and title if proceedings are underway) will be sufficient. Generally, the court's permission will not be required but there are some circumstances (for example, where there is more than one defendant or the trial has started) where permission will need to be sought for acceptance to be effective.31
Once accepted, any proceedings are stayed in the sense that the case is effectively over except for the assessment of costs and any subsequent enforcement.
An offer cannot be withdrawn or varied once accepted. Subject to that, it can be withdrawn or varied but permission of the court may be required. Permission of the court will be required if, during the relevant period, the offeror serves notice of withdrawal or revision (and revision here means revising a Part 36 offer so that it is less advantageous to the offeree) and, after notice of withdrawal/revision has been served, the offeree then tries to accept it before expiry of the relevant period. A court is unlikely to grant permission unless the offeror can show a sufficient change of circumstances so that it is in the interests of justice to grant permission, such as the discovery of new evidence which puts a wholly different complexion on the case.32 Once the relevant period has expired, an offer can be withdrawn or revised without permission.33
An offer can be withdrawn either on its terms (which provide for automatic expiry after a certain date), or by the offeror serving a written notice of withdrawal on the offeree.34 A letter clearly referring to the Part 36 offer (by including a reference to the date and the terms of the relevant offer), making it clear that the offer has been withdrawn, will be sufficient.35 As with Part 36 offers in general, if the offeree is legally represented, the notice must be served on the legal representative.
As a result, it is particularly important to keep Part 36 offers under review at all times.
A Part 36 offer remains open until withdrawn. Even if the offeree rejects the offer, or makes a counter-offer, this does not mean that the offer cannot be accepted at a later date.
If a Part 36 offer is withdrawn, it will not have the usual Part 36 costs consequences. However, the court will still be able to consider the offer when exercising its costs discretion.
The Rules suggest that if an offer does not comply with the strict requirements of Part 36, the court will have no discretion and the Part 36 offer will be invalid.36 However, the formal requirements are less prescriptive as a result of the April 2015 revision so, provided the offer is clearly intended to be a Part 36 offer, and it does not include a defect that takes it outside Part 36, it is likely to be regarded as Part 36 compliant.
Defendants who just want to remind a claimant that an offer is still open for acceptance need to ensure that the offer cannot be interpreted as being a new Part 36 offer. To do that, a defendant should make it clear that the original offer still stands and should set out the costs consequences of accepting that offer. In other words, tell the claimant that if the offer is now accepted, the claimant will be liable for all legal costs incurred by both parties since the end of the relevant period. Although not strictly required under Part 36, parties have been criticised in the past for not making the costs consequences clear, particularly where the claimant is a litigant in person.37
This will depend on what the offers are and what the judge orders. Each offer will be considered separately. So, for example, a claimant makes a Part 36 offer for £100,000 and the defendant makes a Part 36 offer for £50,000. Judgment is given in the claimant's favour for a sum falling between the two offers, e.g. £75,000. In those circumstances both offers fall away as neither has been beaten and normal costs considerations will apply.
Whether you want to change the terms so that they are more advantageous or less advantageous to the offeree, it is important not to withdraw the original offer.
If a more advantageous offer is made, CPR Part 36 treats it as a new offer which gives rise to a new relevant period. So, if a defendant increases its offer, the claimant has another 21 days to consider it and if accepted within that period, is entitled to its reasonable and proportionate costs up to the date of acceptance. However, if both offers are not accepted and prove effective at trial, (i.e. neither are beaten), then as the original offer has not been withdrawn, the defendant remains entitled to seek Part 36 consequences from the date of expiry of the relevant period of the first offer.38
It is even more important to ensure that the original offer is not withdrawn where a defendant makes a subsequent offer on terms that are less advantageous to the claimant. Otherwise, if the offer is withdrawn and a second offer made, that will be regarded as a new offer which will give rise to a new relevant period. If accepted within that period, the claimant will automatically be entitled to its costs up to acceptance. That may result in the claimant recovering more than if it had accepted the original offer late (as the claimant would ordinarily have been penalised in costs for late acceptance). Instead, the defendant should make it clear that the intention is to revise the original offer so that the offer is now only available for acceptance on the revised, less advantageous terms. As such, if it is accepted, costs consequences are likely to be applied from the end of the original relevant period.39 If not accepted, and the claimant fails to beat both offers, any costs consequences can be applied from the end of that original relevant period. If the claimant does go on to beat the less advantageous offer, Part 36 costs consequences will not apply.40
One of the issues addressed by the April 2015 revision was the confusion over how Part 36 operated in split-trials. The rules now provide that where an offer relates only to parts of the claim or issues that have already been decided (e.g. where the offer is on liability alone), then once that part of the case has been decided, the offer can no longer be accepted. However, where the offer is a global offer, once a judgment has been given, the offer can only be accepted after a period of seven days. In other words, the offeror has seven days in which to consider whether to withdraw the offer.41 As regards disclosure of Part 36 offers in a split-trial, if the offer only relates to that particular aspect of the case that has been decided, the offer can be disclosed. If it is a global offer, the judge can be told of the fact of the offer but not its terms.42
As part of the April 2015 revision new rules were added to deal with cases where a party's costs had been limited to court fees only. Those drafting the revised rules wanted to make sure that there remained an incentive for that party to make a Part 36 offer. The rules therefore now make it clear that in those circumstances, for the purposes of Part 36 costs consequences, "costs" mean 50 per cent of the costs that would have been ordered but for the limitation, plus any other recoverable costs.