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Part 36 changes: What you need to know

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01/04/2015

Of the 88 parts to the CPR, Part 36, involving offers to settle, is one of the most crucial. No business wants to waste time and money dealing with a dispute if that can be avoided and Part 36 gives parties both procedure and incentive to compromise where possible. The provisions of Part 36 are highly technical and are changing on 6 April 2015. Specialist commercial litigators Gwendoline Davies and Sue Harris explain the imminent changes to these important provisions.

Part 36 incentives to settle

Where a Part 36 offer is validly made and is not accepted, and where the offering party then equals or does better than its offer at trial, then the party who failed to accept faces the automatic sanction of having to pay the offering party’s costs of the litigation from the time of the offer onwards.

If the offering party is the claimant, Part 36 affords additional incentives to encourage the making of a Part 36 settlement offer. Defendants have to pay claimants’ costs on the indemnity basis (i.e. a larger proportion of the costs, as they are not subject to or limited by reasonableness), as a ‘punishment’ for refusal to accept a sensible offer. Since the Jackson Reforms came into effect on 1 April 2013, there has also been the further sanction of an enhanced recovery for claimants: in a monetary claim claimants can see their damages enhanced by 10% on awards of up to £500,000, and by 5% above that, up to a maximum enhancement of £75,000; and in a non monetary claim, the sum awarded by the court against the defendant for costs can be enhanced by 10% up to a maximum of £75,000.

Part 36 offers must follow certain formalities if they are to be validly made and so it is vital that anyone involved in dispute management is aware of the strict provisions of Part 36 and the up-coming changes.

What you need to know

  • Key change: As from 6 April you no longer need to state on the face of your offer that it is intended to have the consequences of Section 1 of Part 36 [1].
  • Key change: New 36.2 (3) clarifies that, where counterclaims or other additional claims are brought, the person bringing the counterclaim etc. (who might elsewhere in the proceedings be named as a defendant or other party) can make an offer that will be treated as a claimant’s offer for the purposes of Part 36 costs consequences.
  • Currently, offers which are open for acceptance for a time-limited period only and which are stated to be automatically withdrawn thereafter are not valid Part 36 offers. A separate written notice of withdrawal is required if the offer is to be taken off the table. Key change: Time-limited offers can be valid Part 36 offers [2].
  • Key change: New 36.9 (5) clarifies that where an offeror varies an offer to make it more advantageous to the offeree, the variation is not treated as a withdrawal of the original offer. This reflects case law [3] and highlights that offers can be ‘stacked’ so as to retain the potential costs benefits of earlier offers.
  • Currently a Part 36 offer cannot be accepted after trial but before judgment unless the parties agree. Key change: Post 6 April 2015 the court’s permission is required for acceptance of an offer between trial and judgment [4].
  • Split trials I: Key change: New 36.12 provides that on a split trial you cannot accept a Part 36 offer in respect of an issue that has already been decided and you cannot accept any other Part 36 offer until 7 clear days after judgment has been handed down on decided issues.
  • Split trials II: Under existing rules, the fact that a Part 36 offer has been made cannot be communicated to a trial judge until the case has been decided. This causes problems with split trials, where the court may have to make a costs order following a trial of preliminary issues without knowing whether a Part 36 offer has been made. Key change: New 36.16 allows the existence but not the terms of a Part 36 offer to be disclosed to the judge on a split trial (or, where the Part 36 relates only to issues that have been decided, the terms too can be disclosed).
  • Under existing 36.11, where a defendant makes an offer to pay a sum and then the sum is not paid within 14 days of acceptance, the claimant is entitled to enter judgment for that amount. Key change: New 36.14 rectifies a drafting lacuna so that claimants will now also be able to enter judgment where payment is not made following acceptance of their own offer.
  • Requirement for a genuine element of concession. As currently drafted, Part 36 theoretically allows costs consequences and sanctions to apply where a claimant makes an offer to settle for the full amount of its claim (or thereabouts) and then succeeds in full. Key change: One of the most interesting and important changes is that new 36.17 (5) (e) seeks to address this potential abuse of Part 36 by requiring the court to assess whether the offer in question is a genuine attempt to settle. This is, however, an incredibly subjective question and the sub-committee of the Civil Procedure Rules Committee which has been responsible for the drafting of the new Part 36 has indicated that this change is not intended to prevent claimants with very strong cases from making high offers. It remains to be seen what tools or guidance (if any) will be available to help the court in exercising its discretion.
  • One of the major reforms to civil litigation imposed by the Jackson Reforms in April 2013 was the requirement to file a costs budget. The operation of CPR 3.14 effectively provides that, where a costs budget is not filed on time, the defaulting party’s recoverable costs are limited to court fees only. This can leave little incentive to settle for a party whose costs risk has been rendered minimal. Key change: New 36.23 seeks to impose a balance between the wrongdoer not being able to sidestep the CPR 3.14 costs budget sanction but nevertheless having some incentive to settle; and the other party not regarding itself as having a blank cheque to litigate. It therefore provides that, for the purposes of Part 36, the defaulting party’s costs will be 50% of the costs that would otherwise be recoverable.

WM Comment

Part 36 has broadly been amended to incorporate and codify case law and to clarify or correct drafting issues within the existing regime. The rules remain, however, technical, binding and exacting – perhaps, as a result, even more so now than ever before. Seeking legal advice before making or accepting any settlement offers ensures that the Part 36 settlement framework enables you to resolve disputes to your best cost advantage. Please contact Gwendoline Davies or Sue Harris for any further information or advice.

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[1] New 36.5. However note that you do still need to make clear that the offer is made pursuant to Part 36.
[2] New 36.9 (4) (b).  This is welcome as it brings to an end risks associated with forgotten, unwithdrawn offers, but note that Part 36 costs consequences do not apply when an offer is withdrawn.
[3] Gibbon v Manchester City Council [2010] EWCA Civ 726
[4] New 36.11 (3) (d).

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