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Navigating the hazards of Part 36 offers Part I

28 September 2021. Published by Gavin Reese, Partner and Jonathan Drake, Senior Associate

Most claims seek money from other people. Although such claims might be for money owed for goods and services, or compensation for loss caused by breach of contract, or compensation for injury or damage to property or for defamation, the fundamental point of the claim is that the Claimant wants to be paid, and will agree to
settle if sufficient money is offered.

The fundamental purpose of Part 36 of the Civil Procedure Rules is to facilitate settlement of claims by making provision for the payment of the legal costs incurred in making the claim. The Rules provide costs protection for those making reasonable settlement offers which are not accepted and penalise those who do not accept reasonable offers.

This apparently simple process has proved to be not straightforward. This is partly because an offer can be made to settle part of a claim rather than all of it, and sometimes the terms of an offer can be so unclear that the person making the offer either does not understand the effect that accepting the offer will have. Some offers are incapable of acceptance and appear to be made solely for tactical costs purposes rather than to secure early settlement of a claim.

Several recently reported cases address these issues and provide guidance on how to identify and deal with problematic offers. This article is the first of two which looks at some of the issues the courts have considered recently.

Settlement offers in multi-party claims

One of the stand-out failings of Part 36 is its non-suitability for multi-party claims. In disease claims where historic exposure to activity causing the alleged injury is alleged, it is common for a Claimant to make the same Part 36 offer to all Defendants simultaneously. Requests for clarification are sometimes met with silence. Whilst CPR 36.8 allows the recipient of a Part 36 offer to apply to the court to compel clarification, offers are commonly made before issue of proceedings and the economics of securing clarification by making an application before issue of proceedings can be questionable.

However, following the decision in Waterfield v Dentality which is discussed below, the person seeking clarification might be in a better costs position than someone seeking clarification after proceedings have been issued.

 A further problem is that when a Part 36 offer is made to one of several Defendants, if one Defendant accepts the offer (possibly because this is perceived to be the most economic exit from the litigation – compromise and early settlement being one of the reasons for the existence of Part 36) and the other Defendants do not, then Part 36 makes the Defendant who accepted the offer liable to pay at least some of the Claimant’s costs incurred against all Defendants. Particularly in claims where the legal costs of bringing the claim are far higher than the sum in dispute (for example for Noise-induced Hearing Loss) the effects of QOCS is that a Claimant may discontinue the claim against all those Defendants who have not accepted a Part 36 offer (usually without costs penalty) Whilst the reward for the Defendant who settled is a higher costs liability. 

Whilst Part 36 offers are commonly made separately to each individual former employer In disease claims, a further complexity was considered in Re IT Protect Ltd (in liquidation) [2020] EWHC 3001 (Ch) (14 October 2020). In that case, the Part 36 offer was made jointly to two Defendants. The Claimant beat his offer against one Defendant but not against the other. 

The judge was “far from convinced that the provisions of CPR 36.17(4) are engaged in the case of an offer made jointly (but not severally) to two respondents which is beaten in respect of one respondent but not in respect of the other” but proceeded to deal with the dispute on the basis that Part 36 costs provisions applied but then should be disapplied because it would be unjust not to do so. The terms of the offer meant that it could have been accepted only of both Defendants agreed. As the offer against one of the Defendants was very weak (and eventually failed) it was reasonable not to accept it.

It appears that the judge was driven to the conclusion that the offer was a valid Part 36 offer because the rules do not address this kind of situation. However, in taking the decision to disapply the costs consequences of Part 36 rather than decide that the offer was not a valid offer under Part 36 because it was incapable of being accepted on the terms offered, an opportunity to require offers to be specific to a particular Defendant or just better worded has been lost. Such offers are likely to continue to be made with the onus placed upon the recipient of the offer to argue for costs consequences to be disapplied.

Fundamentally, if an offer purportedly made on a Part 36 basis is incapable of being accepted by a Defendant unless a co-Defendant also agrees to accept it, or could only be accepted with what amounts to accepting penal costs terms, it is questionable whether the offer could be regarded as a valid Part 36 offer.

It is likely that one of the reasons why these issues arise is because the Claimant does not always use Form N242A to make the Part 36 offer but instead makes the offer by letter. In multi-party disease claims an offer letter is sometimes expressed in identical terms to every Defendant with an offer to settle at the same sum regardless of differing lengths of employment in an Employers’ Liability claim, or the perceived strength or weakness of the claim against each Defendant. A typical response to a request for clarification is that apportionment is a matter for the Defendants to agree because the Claimant is not able to assess this (though such an argument lacks merit – it is the Claimant who is making the allegations and therefore he must know his own case). Similar issues then arise to those considered by the judge in Re IT Protect Ltd.

Form N242A contains tick boxes that require the offeror to state whether the offer is to settle all, or part of, or certain issues in the claim against a particular Defendant. If use of the prescribed form was a prerequisite for Part 36 consequences to be applied, then the situation that arose in Re IT Protect Ltd or arguments that a Claimant is unable to assess his claim against each Defendant might have been avoided. Required use of the form would compel the Claimant to say what he would accept from each Defendant in settlement.

Even such use of Form N242A addresses only part of the problem. There remains the costs issue created by CPR36.13 which states that when 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. Accepting the offer still exposes a Defendant accepting the offer to the risk of having to pay disproportionately high legal costs where not all Defendants accept the offer.

One potential option for a Defendant is to make its own Part 36 settlement offer to the Claimant. CPR 35.15(3) states that if the Defendants have several liability (as in most disease claims) then the Claimant may accept the offer and continue with the claims against the other Defendants if entitled to do so. CPR 35.15(4) states that in all other cases the Claimant must apply to the court for permission to accept the Part 36 offer. The “all other cases” provision appears to compel a Claimant to either continue the claims against the remaining Defendants or seek the court’s permission to accept the offer if it wants to discontinue the claim against the co-Defendants. There is no provision for circumstances where a Claimant accepts the offer, then continues the claim against the co-Defendants for a while (sometimes a long while) and then discontinues some or all of the remaining claims. Even in cases where the remaining claims are pursued to trial, if those claims are dismissed the Claimant would arguably be entitled to claim the entire “common” costs of the litigation from the Defendant which settled, up to the time of settlement.

All these issues mean that settling multi- party claims though Part 36 is fraught with unpredictable dangers but use of non- specific Part 36 offers, particularly before issue of proceedings in multi-party disease claims, is common. Calderbank offers can be used in response because they avoid the automatic costs provisions which are inextricably bonded to Part 36 offers.

Offers with unusual or conditional provisions

You know that something has gone seriously wrong when a trial judge decides that Part 36 offers made by a Claimant should be disregarded because they were not serious offers to settle; then on appeal a High Court judge decides that the offers were valid but the Defendant rather than the Claimant had beaten the offers at trial; then the Court of Appeal gives its own interpretation.

These events happened in Seabrook v Adam [2021] EWCA Civ 382 (18 March 2021). After the Defendant conceded liability but not causation in his Defence, the Claimant made two Part 36 offers on the same day. The wording of each offer was slightly different. The first offer was:

To accept on condition that liability is admitted by the offeree, 90% of the claim for damages and interest, to be assessed.

Bearing in mind that liability had already been conceded in the Defence, the offered reduction of 10% on the claim for damages on condition that liability was conceded appeared odd.

The second offer was:
“To agree the issue of liability on the basis that the Claimant will accept 90% of the claim for damages and interest, to be assessed.”

The most obvious question is why a Claimant should make an offer conditional upon the Defendant admitting liability in circumstances where liability had already been admitted in the Defence. This is closely followed by wondering why a Claimant is making these offers at the same time. What is the difference?

The Court of Appeal decided that these offers amounted to much the same thing but that, guided by the tick boxes in Form N242A, the first version offered to settle the whole claim and the second version offered to settle liability.

However, the real issue here was causation. The Claimant claimed damages for injury to his neck and back. At trial he established causation for his neck injury only and was awarded damages for that injury. The Claimant argued that he had beaten his Part 36 offers because he had been awarded 100% of his assessed damages. The Defendant argued that as the Claimant had been awarded nothing for his claimed back injury, the Claimant’s offer had been beaten.

Counsel for the Claimant argued before the Court of Appeal that the offers could have been accepted without prejudicing the Defendant’s entitlement to challenge causation. The Court of Appeal rejected this interpretation. The wording of the offer was framed in relation to the claim for damages, which included the claim for injury to the Claimant’s back. The effect of accepting the offers would have been that the Defendant was admitting liability for both the neck and the back injuries and would have prevented the Defendant from later arguing that he had not caused the back injury. Because the Claimant failed to establish causation for his back injury, the Defendant had beaten the Claimant’s offers.

There were serious problems with these offers. The conditional nature of both offers to agree a quantum concession if liability was admitted made no sense when liability had already been admitted in the Defence. At face value this meant that the Defendant did not have to make any additional concession to obtain a 10% reduction on the damages award, but the key point was that both offers amounted to offers to accept a reduction in relation to the sum claimed for damages – whether or not the claimed losses were justified - in return for the Defendant dropping all causation arguments.

Whilst the offers were regarded by both Appeal courts as being valid Part 36 offers, there was no consensus between the parties what the consequence of accepting them would be. A request for clarification of the intended consequence of accepting the offers in relation to the causation issues might have resolved this.

Seeking clarification of Part 36 offers

Some of the more questionable Part 36 offers could be clarified, thus avoiding some of the issues discussed above. If clarification is needed to allow the recipient of the offer to determine what is actually being offered but the offeror ignores the request or provides inadequate clarification, then CPR Part 36.8 permits the recipient to apply to the court whether or not proceedings have been issued.

In Waterfield v Dentality (t/a Dentality@ Hoddeston) [2020] 11 WLUK 223 (13 November 2020) the County Court judge decided that “Proceedings” for the purposes of CPR r.44.13 started when the court issued a claim form on the request of a claimant. Accordingly, the qualified one-way costs shifting rules did not apply to pre-issue applications, including a pre-issue group litigation order application.

It follows that if a pre-action application to the court for clarification of a Part 36 offer is necessary because the person making the offer has not provided clarification in correspondence, if the court decides that clarification is necessary to allow the recipient to consider the offer, the court may make a costs order against the person making the offer which will not be subject to qualified one way costs shifting.

This was a County Court decision and so is not binding in other cases. However, the analysis of the Civil Procure Rules by the judge as to when qualified one way costs shifting starts to be applied (when the claim is issued) provides a foundation for this point to be presented in other cases. If the analysis of the judge is adopted in other applications made before issue of proceedings, then the person seeking clarification will likely be in a better costs position than after proceedings have been issued.

Whether an offer is an enforceable offer under Part 36

In Anup Shah & Alpa Shah v Ketan Shah & Deepika Shah (21 June 2021) the High Court considered an Appeal from the County Court in which the trial judge had decided that the Claimant was entitled to the usual Part 36 costs consequences following the award of £10 nominal damages.

The Claimants had claimed £30,000 compensation. They had made a Part 36 offer on 21 April 2020 to settle the claim at £1. By that time, the Claimants had incurred more than £200,000 in legal costs. 

Among other things, the Defendants argued that the Claimant’s offer was a sham; an acknowledgment that the claim was worth nothing; an attempt to use the Part 36 settlement procedure to oppress another party with an excessive costs bill; and was a late offer seeking a last-minute exit from a weak case.

Whist accepting that the effect of the part 36 settlement process can be brutal, the Appeal judge agreed with the trial judge that in this case the real issue between the parties was liability, and that the Claimants had won on this issue. The trial judge had then awarded only nominal damages because the quantum case presented to the court was flawed and largely unsupported by evidence, but the claim was worth something. The Claimants had accordingly both won the liability argument and also beaten their offer to settle for £1.

The Appeal judge considered the caselaw (in paragraphs 53 and 54 of his judgment) which gave guidance on the difference between enforceable and unenforceable Part 36 offers. His conclusion was that the courts accept that all Part 36 offers are tactical but that there are important policy reasons why they should be enforceable (particularly because this leads to certainty). The courts have not lightly refused to accept an offer as being enforceable. Consideration of whether an offer is enforceable is fact-sensitive in each case, but the case law referred to by the judge where offers were held to be unenforceable included those where the offer was considered to be a “lightly disguised request for total capitulation” or for submission to the entirety of the relief sought so as to attach Part 36 costs consequences to a successful claim. The character of an enforceable Part 36 offer was that it must give as well as take, and not be derisory.

The sweep-up provision – applying the normal consequences would be unjust

Part 36.17(5) gives the court discretion to disapply the provision of Part 36 costs consequences if it considers the application of those provisions to be unjust. The court must take all the circumstances into account, including the terms of any Part 36 offer and the stage in the proceedings when any Part 36 offer was made.

“This is an important provision, particularly in circumstances where the court has decided that a Part 36 offer that is incapable of acceptance (as in Re IT Protect Ltd) is a valid Part 36 offer. It is surely asking too much of trial judges to make decisions on the validity of Part 36 offers that are so vague that the help of the Court of Appeal is needed. Any offer made in terms that would likely lead to dispute about what is actually being offered should, if not clarified, arguably be regarded either as not being a serious settlement offer, or a situation where the court will exercise its discretion to disapply Part 36 consequences.”

Litigation is a dynamic process where evidence is disclosed over time. Our next article will look at some of the issues that can arise when evidence or court procedure changes the perception of costs risk in relation to an existing settlement offer.