When can the court not apply the cost consequences of Part 36 offers?

When can the court not apply the cost consequences of Part 36 offers

The background

The claimants, Invista Textiles UK Ltd & Anor (Invista), are part of one of the world’s largest textile groups – specifically making polymers, chemical intermediates and fibres including nylon. Most notably, Invista is known for the brand LYCRA.

Between March and October 2016, a number of employees within Invista’s Sustainability Group (the Defendants) gave notice of their resignations and, shortly after, set up a new venture. In February 2017, Invista issued proceedings against the Defendants after discovering various files relating to the new venture on a Defendant’s work computer. The proceedings were based on allegations of breach of contract or breach of equitable obligations, predominantly in relation to misuse of confidential information and inducing a third party breach of contact.

Main proceedings

In January 2019, Birss J handed down judgment in favour of the Defendants.  In his judgment, Birss J considered various issues related to the employment agreements, including, but not limited to, the following:

• Misuse of confidential information – the wording of the confidentiality obligations was too wide to be enforceable against a former employee.
• Non-compete clauses – the non-compete clause, which was for three-months, was an unreasonable restraint of trade as it was not linked to any genuine need to preserve confidential information.
• Non-solicitation – one of the Defendants had breached their non-solicitation clause by seeking to recruit the other Defendants to their new business during the non-solicitation period.

In summary, Birss J held that the contractual position went far beyond what was necessary to protect Invista’s legitimate interests and handed down judgment in favour of the Defendants.

Costs proceedings and Part 36 offer

Invista obtained limited relief at first instance against the Defendants as a result of the breach of the non-solicitation provisions, however Birss J held that the “real winners” were the Defendants as the predominant claim for misuse of confidence was “dismissed altogether” .

In assessing overall costs, Birss J was obliged to take into account a Part 36 offer made by Invista in June 2018. The Part 36 offer requested that the Defendants “agree to the delivery up or deletion of documents in a schedule” and pay Invista’s costs on the standard basis.  As a brief reminder, Part 36 offers are a tactical procedural step aimed at encouraging parties to settle a dispute pre-trial and are designed to “put the cost risk on the offeree if they fail to accept the offer”.

Following the first costs judgment, Birss J held that Invista had in fact obtained “a more advantageous position in terms of the relief actually sought” despite the value being “inherently unquantifiable” .However, Birss J analysed the Part 36 offer by Invista as really being “an admission of defeat” as Invista’s case was far wider than the forensic deletion of documents as it included serious allegations of breach of confidence and misuse of confidential information. 

The decision

Ultimately, the Part 36 offer was an offer which the Defendants could not accept as they “would have to pay all the costs to the case up to that date”, not just the costs relating to documents. As a result, Birss J concluded that it would be “unjust” to enforce the consequences of the Part 36 offer as:

“…the Part 36 offer itself was not a genuine offer to settle. In fact, if anything, I think the offer has proved to be a barrier to settlement of this dispute because since the offer was made and not accepted and then the admissions were made, the claimants seem to have been approaching this case as if they were entirely protected as to costs.”

Birss J concluded that Invista should pay 71% of the Defendants’ costs assessed on a standard basis. The 29% reduction in the percentage of costs awarded was to take into account that Invista had limited success in relation to documents in the main proceedings.

Why is this important? 

This case provides a useful reminder of the importance of Part 36 offers in settlement negotiations and the potential costs consequences associated with these offers.  Regardless of whether a party has obtained relief, there continues to be significant weight given to whether or not the offeree accepted the Part 36 offer.

Any practical tips?

Parties must ensure that all Part 36 offers are a genuine offer to settle and that the court will not order costs where it considers it unjust to do so, for example where a Part 36 offer is a barrier to settlement.

In addition, this case highlights how it may be difficult for an employer to impose restrictions on former employees post-termination. Companies may therefore wish to review their non-compete clauses in employment contracts and obtain advice as to whether any revisions are necessary.