Part 36 offers are a must these days for all credit professionals who want to apply pressure on their debtors at an early stage in legal proceedings. This article focusses on how this particular type of offer works well for credit professionals, and why making an early offer can really put you in a strong position.
About Part 36 offers
The first thing to note is that this type of offer is often referred to as a “creature of statute”. This means it operates differently to all other types of traditional offers which are based on standard principles of contract law. The biggest difference is that a second or subsequent Part 36 offer does not extinguish a previous offer. So unless your Part 36 offer is cancelled it remains on the table; live and ready to be accepted at any time by an opponent. Our first tip is to be wary of this and keep each offer under review.
In April 2013 the rules governing this type of offer were amended. The amends introduced the most significant change in at least five years – a new 10% bonus if your offer is not accepted and you beat it at Trial. We view this sanction as a significant addition to the litigator’s arsenal of weapons; especially for lower-value claims.
The beauty of this type of offer is that there are huge benefits if you make an early Part 36 offer. In our experience, if credit professionals establish a standard procedure for all their outstanding debts and if they are willing to settle for slightly less than the amount you are entitled to recover, then you could stand to recover outstanding debts plus additional money which could go towards any legal bills incurred.
How Part 36 offers work in practice
To understand why this is the case you need to begin to understand how this type of offer works in practice. Below is an example of a tactical Part 36 offer and how the rules apply in practice:
A claim is issued for £100k based on £100k’s worth of invoices. There is no argument regarding the amount owed. As Claimant, you therefore make a tactical Part 36 offer for £99,999.99. If the offer is accepted then you would be paid £99,999.99 in 14 days with a sum paid in addition for your reasonable legal costs. If your opponent does not accept then there are three possible outcomes:
- You go to Trial and lose. Here, your costs are unlikely to be paid by your opponent because you have lost your case. The Part 36 offer is irrelevant and has no bearing on the outcome of the case.
- You go to Trial and win but only secure £98k. Unfortunately you failed to beat your Part 36 offer and therefore the consequences do not ‘bite.’ The offer again has no bearing on the outcome of the case. You are still likely to get your reasonable legal costs paid but not at the higher rate awarded under Part 36.
- You go to Trial and win securing Judgment for £100k. Here, the Judge should allow the offer to ‘bite’ because they have decided that your case was worth more than your offer. This means Judgment is drawn for £110k (£100k plus your 10% bonus) plus costs and interest at better rates than normal.
The benefit of this type of offer is that it aligns well with what a credit professional’s ultimate aim is, which is to achieve a quick and cost-effective cash positive outcome. However, a lot of professionals are still choosing not to use them. Many do not understand how they work in practice and others believe this is something just for use at Trial. In our experience Part 36 offers made early to try and achieve a commercial settlement, can actually be put to good use when using some of the other court rules. Rules which come into play long before parties reach the court steps.
Planning and timing to maximise the ‘bite’
The key thing to remember is that Part 36 offers are not just designed to ‘bite’ at Trial. The rules state that Part 36 offers ‘bite’ when you obtain ‘Judgment’ which is for a sum greater than the offer. Judgment can of course be obtained in a number of different ways before you get to Trial.
It means that with the right timing and planning a Part 36 offer can ‘bite’ at many other points in proceedings. All of a sudden, with this strategy in mind, a credit controller is given the power to potentially make some money from their debtors which will help pay for the cost of a business’s credit function. It seems that, for the first time in the history of the rules, creditors have a tool which if deployed strategically and with the right emphasis, will bring an opponent’s perception of the situation into sharp focus much quicker than it might have done before. This is primarily because the result hits the debtor in the pocket! Many of these debtors use legal proceedings to obtain a longer line of credit and moving forward, the 10% sanction is likely to reduce the number of debtors doing this. That should hopefully maximise cashflow.
We have clients who have embraced our strategy and are now instructing us to make Part 36 offers much sooner across their book of debt. We are not saying it works all the time (the 10% is still discretionary and there is talk by the Rules Committee that they might review the rule) but early indications suggest that this tactic for the right client can have a cash-positive effect and act as a powerful deterrent - especially where there is a chance of securing a Summary Judgment.
Our advice is to review your strategy to see whether Part 36 offers could have a quick and positive effect on your cash collections. If you wish to discuss the content of this article, please contact a member of our team using the contact details below.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.