Part 36 – Widening the Net

 

Part 36 is a powerful weapon in the armory of any litigator which has been honed and reforged many times over the years. One of the most recent amendments, the requirement for an offer to be a genuine attempt at settlement, has narrowed the definition of what constitutes a valid Part 36 offer whilst relaxing the burden on litigants to accept cynical offers. However, the High Court in Jockey Club Racecourse Limited v Willmott Dixon Construction Limited [2016] EWHC 167 (TCC) has widened the parameters of the new rule and offers a relatively generous definition of “genuineness” in this context.

 

Background

 

From its inception, Part 36 has characterised both carrot and stick for those involved in litigation. So long as they comply with the strict procedural requirements, a party that makes its Part 36 offer is entitled to have its costs assessed on the indemnity basis. It therefore both encourages offers of settlement and forces parties to seriously consider those offers or risk suffering painful costs consequences.

 

It was substantially revised by the Civil Procedure (Amendment No 8) Rules 2014, the relevant sections of which came into force on 6th April 2015. A significant amendment was the removal of the requirement that the offer must state on its face that it is intended to have the consequences of Section 1 of Part 36.  

 

Another interesting new arrival was r.36.17(5)(e) which states that for an offer to carry indemnity costs consequences, it must be a “genuine attempt to settle the proceedings”. No definition of “genuineness” was provided, however what seemed clear was that the rule prevented parties from benefiting unfairly from cynical offers and stayed costs sanctions on those who rejected such offers.

 

Although the removal of the need to specify that an offer is made under Part 36 indicates further discouragement of litigation, by condoning the rejection of  offers which are not genuine attempts to settle, the rules represent a slight departure from this policy, offering some protection for those willing to take their chances before the courts.

 

All take and no give?

 

The decision of the High Court inJockey Club offers a liberal interpretation of what can be considered a genuine offer to settle.

 

The case arose from a dispute over the design and construction of a new grandstand at Epsom racecourse. Defects had arisen which meant that the roof was damaged by strong winds on two occasions. It was a case where a split on liability was not possible, as either the defects were caused by negligent design or they were not. An offer was made by the claimant to settle “the issue of liability for losses arising out of the defects in the roof” on the basis that the defendant would “accept liability to pay 95% of [the claimant’s] claim for damages to be assessed.” The defendant did not respond to the offer, which expired after 21 days. The defendant subsequently conceded liability in full. At a case management hearing, the claimant applied to have its costs assessed on the indemnity basis as it claimed it had beaten a Part 36 offer.

 

The defendant invited the Judge, Edwards Stuart J., to dismiss the application arguing that (1) the offer did not qualify under Part 36; (2) the offer was made before the claimant’s claim was fully pleaded; and (3) the claimant could only better its offer if 95% of the roof had to be replaced.

 

The judge rejected the second submission as the offer related to liability only and therefore it was irrelevant that the claim had yet to be fully quantified. This finding also crippled the third submission which the judge held mischaracterised the nature of the offer. However, he did consider that the issue of whether the case had been fully pleaded at the time the offer was made could impact on the fairness of imposing indemnity costs from the date of expiry of the offer.

 

Three questions were posed by the judge which he considered relevant to whether the claimant’s costs in relation to liability should be assessed on an indemnity basis. First, was the offer a valid Part 36 offer? Second, if so, was it a genuine attempt to settle liability? Third, if the answers to the first and second questions are yes, would it be unjust to make an order reflecting some or all of the incentives in Part 36?

 

Dealing with the first query, the judge endorsed Henderson J’s decision in AB v CD [2011] EWHC 602 (Ch) that a Part 36 offer to settle must involve some “genuine element of concession” on the part of the offeror, to which a “significant value can be attached” and should not be a “lightly disguised request for total capitulation”. So far, this interpretation tallied with a strict interpretation of r.36.17(5)(e).

 

He went on to consider the Court of Appeal’s decision in Huck v Robson [2003] 1 WLR 1340 and agreed that it was irrelevant that the offer, in both cases a split of liability on 95:5 basis, was not a likely outcome at trial. 

 

On this basis, the judge answered his first two questions in the affirmative, considering that the 5% discount was sufficient to merit the offer being a “genuine attempt to settle proceedings”. The judge considered that, although the discount offered was “very modest”, it was by no means derisory. He went on to assess costs on the indemnity basis from the first point by which the defendant could have made an informed decision of the strengths of the claim on liability, which he found to be four months from the date of the offer. Notably, the question of penalty interest was left for a future hearing after the resolution of the claim for quantum.

 

Summary

 

In Jockey Club is was not said that the offer letter stated on its face that it was intended to carry the consequences of Section 1 of Part 36, presumably because this requirement was dispensed with by the April 2015 amendments. It is doubtful, therefore, that, had it been made under the old regime, this offer would have qualified as a valid Part 36 offer.

 

Furthermore, despite r.36.17(5)(e) narrowing the definition of what can and cannot be a valid part 36 offer, this decision seems to widen that definition significantly. If all that is required is that an offer be more than “derisory”, the bar is set extremely low and if a concession of as little as 5% can be considered a genuine concession of significant value, this begs the question of how cynical an offer must be for it to fall short of the “derisory” threshold.

 

Although it was accepted by counsel for the claimant that a concession of 2% might be too low to be a genuine offer to settle, the judge made no finding on this. What is and is not a genuine attempt to settle will always be fact sensitive and so, in the right case, a concession as little as 2% or even 1% might well be significant enough to satisfy this test of genuineness.

 

This decision somewhat enfeebles r.36.17(5)(e), creating an easily discharged burden on offerors. When coupled with the dilution of the strict requirements of the form and content of Part 36 offers, this decision embodies the courts’ practice of discouraging litigation and encouraging parties to settle.

 

For the full judgment please see click here.