Settlement strategies: the benefits to the defendant of making a Part 36 offer weighed against the option of making a Part 44 offer
Part 36 offers
Before litigation starts the parties are encouraged to negotiate and attempt to settle the claim. Part 36 of the Civil Procedure Rules recognises this and further incentivises such offers by incorporating penalties. However, the rules are very prescriptive.
Essentially, if a party fails to accept a realistic offer made by the other side, it is at risk of being penalised in costs and interest at the end of the case. Part 36 offers therefore provide costs protection. In the event that the offeror’s Part 36 offer is not beaten at trial, then the offeree will have to pay a proportion of the offeror’s costs from the date on which the relevant period expired.
However, where an offeror’s Part 36 offer is accepted by the offeree within the relevant period (a date stipulated in the offer of not less than 21 days), the offeree is entitled to all of his costs of the proceedings up to the date on which the notice of acceptance is served on the offeror. There is no basis for the court to make a costs order other than the usual costs order, and, as discussed above, this can be particularly onerous where the costs are disproportionate to the offer on the claim.
Part 44 offers
Where a Part 44 offer is made, there are no prescriptive rules such as the automatic cost order in favour of the offeree where the offer is accepted. As such the position on an accepted Part 44 offer is absolutely certain and also more favourable to the offeror than the Part 36 offer.
Where the offer is not accepted, Rule 44.2(4)(c) provides the Court with the power to take into account other admissible offers which are not Part 36 offers. An offer made “without prejudice save as to costs” would be regarded as admissible for these purposes. As such the so-called Part 44 offer allows the judge to take into account the defendant’s representations regarding disproportionate costs and can potentially reverse the principle that the loser pays the winner’s costs. In effect this would operate in a similar way to a Part 36 offer, though there would always be the potential for some argument about whether the offeree should have accepted the offer. With a Part 36 the question of whether the offer has been beaten is simple, whereas with a Part 44 offer it is always open to the offeree to claim that the amount offered as costs was not sufficient as at the time the offer was made.
Where a Part 36 offer is accepted, the defendant cannot challenge the automatic costs award and although it will have a chance to contest costs at a costs hearing later, this will be on the basis of reasonableness, which may not take into account proportionality. Where the Part 36 is not accepted however, if it is not beaten, the defendant will be afforded some costs protection.
Alternatively Part 44 offers provide a defendant with more certainty should the offer be accepted and can also provide some costs protection if the offer is not accepted. However this is entirely at the Court’s discretion.
Brit Inns Ltd & Anor v BDW Trading Ltd (2012)
The main action (“Action 1”) concerned a subrogated claim by the claimant company in liquidation and its directors against the defendants for insured losses arising from material damage to its premises and loss of profits caused by the defendants admitted negligence. The company's directors and its liquidator brought a separate claim against the defendants to recover uninsured losses (“Action 2”).
The claimants pleaded the claim in Action 1 at approximately £660,000.00 and the Court awarded £157,467.89; a recovery of approximately 25%. The claimants pleaded the claim in Action 2 at approximately £520,000.00 and the Court awarded £16,403.24; a recovery of approximately 3%. The claimants had incurred costs of approximately £530,000.00 in achieving a total outcome of approximately £174,000.00 (against a total pleaded claim of approximately £1.2 million).
The claimants made two Part 36 offers of £550,000.00 and £300,000.00. The defendants made one Part 36 offer of £139,000.00. The defendants’ offer was only £35,000.00 short of the judgment. None of these offers were accepted by either party. The Part 36 offers did not impact upon the costs awarded.
The defendants made two “Part 44” offers; one for £267,046.00 on the claim and £85,000.00 for costs which expired on 30 May 2012 and one on the eve of trial for £200,000.00 on the claim and £100,000.00 for costs.
The Court concluded that:
- The claimants should be awarded 60% of their costs up to 30 May 2012
- The defendants should be awarded the entirety of their costs from 30 May 2012 as the Court concluded the position changed at this point. The defendants’ offer expired at this point and the claimants failed to better that position thereafter.
The Court’s findings as to the costs order in the claimant’s favour arose from the Part 44 offers. The starting point was the cost principle (i.e. the loser pays the winner’s costs) but then the Court applied appropriate reductions to reflect the facts of the case to include a reversal of the direction of the costs order where a protective offer is made.
As can be seen from this case, a Part 44 offer can be in respect of anything including damages, costs or both. The importance is in making an offer which is protective. The first offer, with specific reference to damages, was the offer that reversed the position as to costs. The costs aspect of the offer played little part as costs had not been determined at that point. However, it was significant that the offer separated the damages from costs otherwise it would have been difficult to demonstrate whether the offer had been bettered or not.
Part 36 offers
- If a defendant’s Part 36 offer is accepted within the relevant period, there is no provision for the defendant to challenge the disproportionate costs.
- The Court of Appeal has stressed the importance of making Part 36 offers. Most recently they have said that offers which were expressly made under Part 44 should not be treated as having the same effect as offers under Part 36 (F&C Alternative Investments (Holdings) Ltd and Others v Barthelemy and Another  EWCA Civ 843).
- Part 36 offers provide certainty in specific situations i.e. acceptance of a Part 36 offer in time or a failure to beat a Part 36 offer at trial, whereas Part 44 offers, once not accepted, are entirely at the Court’s discretion.
Part 44 offers
- Part 44 offers must specify if they are against the claim or costs. A Court dealing with the substantive claim will only compare like with like.
- If the factors set out at Rule 44.2 can be applied to the facts of the case then at the Court’s discretion the Court can depart from the cost principle by making an appropriate and proportionate costs order. This could include awarding only a proportion of costs to the claimants up to the expiry of any offer, shifting the direction of costs entirely after expiry or considering the appropriate direction and proportion of costs where an offer is accepted within the relevant period.
- Such an offer would still need to be protective; i.e. be one that the claimant did not beat, or accept out of time, to seek to reverse the direction of costs.
- Alternatively, in the absence of an offer being protective, there is still scope for the claimants’ costs to be reduced if the Court can be persuaded to depart in accordance with Rule 44.2.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.