In the event that you find yourself engaged in litigation against another party, an important aspect is the negotiation of any settlement. A particularly important strategic tool is found under Part 36 of the Civil Procedure Rules (“CPR
”). This article explores Part 36 Offers generally, the strategic and financial benefits they provide, and the pitfalls to avoid.
A Part 36 Offer is a formal settlement offer that can be made prior to or during proceedings that falls under the purview of Part 36 of the CPR, hence the shorthand term, “Part 36 offer(s)”. Ultimately, a Part 36 Offer is a formal offer of settlement that provides the other side 21 days (at a minimum) to agree to a full and final settlement of the claim, usually by way of a monetary contribution.
Part 36 Offers can:
- be persuasive in achieving a resolution of a dispute before legal costs snowball; and
- carry significant costs, interest and damages benefits to the party making the offer if the offer is not accepted by the opponent and certain parameters under Part 36 are met, at judgment.
In short, it can be an important strategic step in resolving a dispute or it can be a significant tool, if successful in the proceedings, in driving home that success with significant financial uplift.
Construction of a Part 36 Offer
At the time of the making of the Part 36 Offer, the party making the offer should outline its best-case position or, in other words, the worst-case scenario for the opposing party.
Specifically, it is recommended that the party making the offer provides:
- An up-to-date claim value, as at the date of the letter (“Claim Value”). This Claim Value should include interest from:
- The date of the act that the claim arises from; or
- The date of the first legal demand.
- An estimate of the claim calculated to the conclusion of trial (Final Claim Value). This should include:
- The principal amount of the claim;
- Standard statutory interest on the principal from the date of the claim
- Interest at a rate of 10% above base rate accruing on the principal from the date of the expiry of the Part 36 Offer;
- Legal fees assessed on a reasonable (60 to 70% of the costs actually incurred) basis up to the expiry of the Part 36 Offer, with standard statutory interest accruing from the date of issue of each particular invoice;
- Legal fees assessed on an indemnity (100% of the costs actually incurred) basis from the expiry of the Part 36 Letter;
- Interest at the rate of 10% above base rate accruing on the legal fees incurred after the expiry of the Part 36 Letter, accruing from when the legal fees are paid; and
- A reference and estimation to the Court’s discretion to award an additional amount of damages not exceeding £75,000. An amount of 10% of the claim is a reasonable starting point.
Part 36 Pressure Point
The Final Claim Value highlights the additional financial risk that the other party may incur in the event that the matter proceeds to trial and they lose, or fail to better the Part 36 Offer, in the final outcome. The Final Claim Value may well be three times the current Part 36 Offer when the potential interest and costs uplifts are factored in.
The stark difference between the Part 36 Offer, the Claim Value and the Final Claim Value should incentivise the opposing party to strongly consider the offer or face the potential of a large financial liability further down the track.
Rejected Part 36 Offer
If the offer is not accepted, significant costs consequences occur if the unaccepted offer is ultimately less favourable than the outcome that the opposing party receives at trial. Specifically:
- Indemnity costs from the date of the expiry of the offer;
- Interest at a rate of 10% on those indemnity costs, from the date of issuing of each specific invoice;
- Interest at a rate of 10% on the quantum ordered, accruing from the date of the expiry of the offer;
- Costs assessed on a reasonable basis from the period up to the expiry of the offer, with interest accruing on those costs at a normal rate; and
- Additional discretional damages by the Court.
Accordingly, the difference in the overall pecuniary sum (including any additional damages) awarded, if successful, will be significantly higher if an effective Part 36 Offer has been made prior to or during the proceedings. If a Part 36 Offer is not made then indemnity costs and increased interest rates are unlikely to be awarded by the Court (outside of extraordinary circumstances), even in the event of a successful judgment at trial.
Accepted Part 36 Offer
If the offer is accepted then a party will be entitled to the offer amount and its costs being paid by the other party up to date of acceptance of the offer, assessed on a reasonable basis.
Costs Recovery Following Part 36 Offer Acceptance
Part 36 Offers are typically made on the basis that they exclude costs from the settlement figure “on the table”.
The best way to ensure that such post-acceptance costs are not ignored, i.e. the accepting party incorrectly assuming that the settlement figure includes costs, is:
- by way of an immediate letter upon receipt of acceptance of the offer, setting out a party’s position with respect to costs payable; or
- Incorporating a component of the offer letter to include a position as to costs.
Option a) above may be preferrable, to capture the entirety of the costs spent on the file.
Various important requirements exist for a Part 36 Offer to be compliant with the CPR, if challenged. If the following conditions are not met, then the Court has discretion to not uphold the Part 36 consequences, resulting in a significantly less favourable financial outcome, i.e. the party missing out on a significant uplift in the final judgment sum.
- A Part 36 Offer may be made using the Form N242A. Alternatively, a Part 36 Offer can be made in a letter. Making a Part 36 Offer in an email would also constitute an offer in writing, although not advised.
- In practice, the easiest way to ensure that this requirement has been complied with is to specify in the offer that the offer is made pursuant to Part 36 CPR.
- Specify a period of not less than 21 days within which the defendant will be liable for the claimant's costs of the offer is accepted, unless the offer is made less than 21 days before the start of the trial, in which case this should be clearly stated in the letter.
- State whether it relates to the whole of the claim, to part of it or to an issue that arises in it and, if so, to which part or issue. In the event a counterclaim has been foreshadowed or filed, the letter should clarify whether the counterclaim has been taken into account.
- When considering whether to make the usual costs orders after non-acceptance of a Part 36 offer, the court will consider all the circumstances of the case, including, importantly, whether the offer was a genuine attempt to settle the proceedings. Accordingly, consideration should be given to:
- the amount of the offer – as a general rule, it should be no more than 75% of the Claim Value at the time of the offer; and
- whether the offer should be 75% of the principal only (ie excluding the interest component).
Whilst not completely determinative, a minor discount in a Part 36 Offer in the amount of 5 to 10% of the Claim Value, for example, is unlikely to see the Court awarding indemnity costs and additional interest as described above, on the final award.
Carefully deployed, a Part 36 Offer can apply strategic pressure on an opposing party to settle a dispute early on, or, in the event the dispute does not settle, carry significant financial uplift to a successful final judgment.
Please don’t hesitate to contact the Dispute Resolution team
at DMH Stallard if you would like to hear more about Part 36 Offers, or litigation strategy on strengthening negotiation positions, and maximising ultimate financial outcomes, generally.