Consequences of beating a Part 36 offer may be varied by the Court

Senior Courts Costs Office extends the principle in JLE v Warrington & Hamilton Hospitals NHS Foundation Trust [2018] EWHC B18 (Costs).

In JLE  Master McCLoud held that where a Part 36 offer is beaten at a hearing, the Court has the power to consider the justness of each of the consequences of CPR 36.17 individually. In that case, the Court held that whilst it would not be unjust to allow costs on the indemnity basis or interest at the rate of 10% over base rate, it would be unjust to allow the uplift of 10% (often known as the “penalty payment”) given the amount by which the offer was beaten.

Following judgment in Andrews & Anor -v- Retro Computers & Anor [2019] EWHC B2 (Costs), there was a hearing to determine consequential orders on 5th March 2019.

Prior to the Oral Assessment of the Claimants’ costs, the Claimants had made Part 36 offers in the sum of £40,000. The bill of costs was ultimately assessed in the sum of a little more that £43,000 (inclusive of interest). Accordingly the Claimants submitted that they were entitled to the full range of orders under CPR 36.17. After finding that the Claimants should be entitled to additional interest and costs on the indemnity basis, Maser Friston considered whether or not to allow the “penalty payment” of 10% of the amount of the bill as assessed.

The Deputy Master pointed out that the Claimants had beaten the amount of the assessed bill by “only” 7.5%, and therefore considered that the uplift of 10% would be too high and therefore was minded to disallow the uplift under CPR 36.17(4)(d) on the basis that to do so would be unjust.

The Claimants submitted that pursuant to JLE the court had the power to “deconstruct” CPR 36.17 and to consider the unjustness or otherwise of each consequence individually, and that Master McCloud had held that the consequences of CPR 36.17 were not “all or nothing”. Therefore, they argued, that the Court had a general discretion not only to allow or disallow the penalty uplift, but where it considers that an uplift of 10% would be unjust, the Court may reduce the amount of the penalty uplift to a just level. The Court is therefore not constrained to disallow the penalty uplift in full if it considers that 10% is too high.

Following these submissions, Deputy Master Friston allowed an uplift of 7.5%, commensurate with the proportion by which the Claimants had beaten their offer.

Summary

The Court has the power to vary the percentage level of the uplift proscribed at CPR 36.17(4)(d). The proscribed rate is therefore a cap, not an entitlement, but if the Court finds that to allow the entirety of the 10% uplift would be unjust it is not bound to disallow the uplift entirely.

Every case will be decided on its own merits, but it seems reasonable that where a Claimant has beaten its own offer by less than 10%, the uplift should in principle be allowed in proportion to which the offer has been beaten.

The Claimants were represented by Richard Wilcock of Exchange Chambers, assisted by Matthew Rose of Clarion Solicitors.

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The effect of Payments on Account on Part 36 and Judgment

The case of Gamal -v- Synergy Lifestyle [2018] EWCA Civ 210 has reinforced the position that a payment on account does not “increase” the value of a paying party’s Part 36 offer when considering whether the offer has been “beaten” for the purpose of CPR 36.17.

Case Summary

The original action between Synergy Lifestyle (the Claimant / Respondent), and Ms Nivin Gamal (the Defendant / Appellant) related to a claim for unpaid invoices. For ease of reading, the parties are referred to throughout as the Claimant and Defendant respectively. There were various issues relating to the fraudulent nature of the invoices, applicability of VAT, payment or a carpet in October 2013, and the level of costs payable as a result, however these have been omitted for the sake of simplicity and ease of reading.

29 October 2013 – Defendant paid the Respondent £6,600

October 2014 – Claim issued for £151,000

24 August 2015 – Defendant’s CPR 36 offer of £15,000

8 February 2016 – Defendant pays £10,000 to the Claimant

10 May 2016 – Judgment for the Claimant in the sum of £14,275.49 (assessed at £30,275.49 less £16,600 already paid by the Defendant in respect of that work) and the Defendant pay the Claimant’s costs.

The Defendant appealed on the basis that she had beaten the CPR 36 offer of £15,000 and that the judge had failed to properly apply CPR 36.17.

Judgment on Appeal

Giving Judgment, Flaux LJ placed great reliance upon the earlier authority of MacLeish -v- Littlestone [2016] EWCA Civ 127. In that case, Briggs LJ had held that a Part 36 offer was made to settle the entirety of the claim, and that admissions made by a defendant do not have the effect of modifying the Part 36 offer such that it applied only to those parts of the claim which remained in dispute (i.e. a Part 36 offer made in respect of the whole of the claim relates to the whole of the claim, whether or not part of that claim is subsequently admitted).

In Gamal, the court extended this principle to apply not only where a payment had been made following admissions but to any payment on account whether or not an admission had been made. The effect of the payment on account was to reduce the amount which the Defendant could ultimately be ordered to pay, and therefore to a corresponding reduction to the Part 36 offer. As such, the Court dismissed the appeal, held that the Part 36 offer had not been beaten, and upheld the award of costs.

Summary

In summary, the judgment reinforces what many would consider to be the “common sense” position. A payment on account is just that; a payment in anticipation of a future liability. It therefore does not have the effect of making a defendant’s offer more attractive or a claimant’s offer less attractive.

The discussion regarding a “reduction” to the Part 36 offer in the judgment may be somewhat confusing, however this is simply because there are two ways of looking at the issue:-

1. The court gave judgment for £23,675.49[1], distinct from the balance of £14,275.49 payable once credit was given for the payments applicable payments on account (i.e. those made after the date of the offer). Looked at in this way,  the Defendant had obviously not beaten her own offer.

2. The court gave judgment for £14,275.49 (as a result of the payments on account), however just as the payment on account reduced the judgment sum, it also reduced the level of the Defendant’s Part 36 offer (i.e. the offer of £15,000 became £5,000 once the payment on account was applied). This is the approach the court adopted.

Both of the approaches above arrive at the same conclusion though by different methods.

All practitioners should note that whether a payment is “on account” is open to judicial interpretation however the general presumption is that payments made during the currency of a claim are payments on account unless specifically stated otherwise.

Matthew Rose is a Solicitor and Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him on 0113 222 3248 or by email at matthew.rose@clarionsolicitors.com.

[1] In fact, the court assessed the value of the work at £30,275.49, which was necessary as the Claimant admitted that the invoices it had submitted were part of a fraud between it and the Defendant. However, the Claimant had already paid £6,600 towards this work in satisfaction of invoices prior to the commencement of proceedings. Therefore, the total value of the work done was found to be £30,275.49 but the total value of the claim against the Defendant was £23,675.49.

Part 36 – a Technical Guide

A reflection on the proper construction of CPR 36 offers, changes to the rules, and service

Pursuant to the judgment in Gibbon v Manchester City Council[i]  and Carillion v PHI Group[ii], an offer which does not comply with the form requirements of CPR 36.5 will not have the automatic costs consequences of a CPR 36 offer. The court will, of course, be able to take into account the fact of the offer when determining the appropriate costs order to make, however the very purpose of making a CPR 36 offer is to obtain the benefit of the automatic costs consequences which it provides. Furthermore it is doubtful that, upon finding that an offer did not comply with CPR 36, the court could award the costs consequences of CPR 36 ‘in any event’ as there is no other statutory mechanism by which a court could award, for example, an uplift on damages or costs as prescribed by CPR 36.17.

It is therefore of critical importance that offers comply with the form requirements of CPR 36.5.

Changes to the Rules after April 2013

Under the old rules, an offer which was intended to have the costs consequences of CPR 36 needed to provide that the defendant (or paying party) would be liable to pay the claimant’s (or receiving party’s) costs pursuant to CPR 36.10.

It is important to note that this has now changed, and CPR 36.5(1)(c) states that the offer must state that the defendant will be liable for costs in accordance with rule 36.13 (or 36.20 in the case of claims which no longer continue under the RTA or EL/PL protocols).

It is therefore extremely important that firms check their precedent documents to ensure that they are updated to refer to the new rule. The consequence of failing to do so could be that the court will find that the offer is not a valid CPR 36 offer and therefore does not have the intended consequences.

The Relevant Period

CPR 36.5(1)(c) also states that a CPR 36 offer must specify a period of not less than 21 days (‘the Relevant Period’) within which the defendant would be liable to pay the claimant’s costs.

As the rules of service apply to CPR 36 offers[iii], the 21 day period can begin only on the date on which the offer is served. An offer which states that the Relevant Period will expire ’21 days from the date of this letter’, or ’21 days from your receipt of this letter’ [iv] will be held to be defective. Furthermore, when calculating the Relevant Period it is necessary to consider the ‘clear day’ rule[v], and thus the 21 day period cannot include the date of service of the offer itself.

For example, an offer letter sent by 1st class post on 1st June 2015 (a Monday) would be deemed served on 2nd June 2015 (a Tuesday)[vi], the first day of the Relevant Period will therefore be on 3rd June 2015 (a Wednesday) and the last day will be on 24th June 2015 (a Wednesday). The party in receipt of the CPR 36 offer will therefore be able to accept the offer within the Relevant Period so long as Notice of Acceptance is deemed served on or before 24th June 2015.

Methods of Service

Both a CPR 36 offer and Notice of Acceptance must be served by one of the methods set out in CPR 6.20. An important point to note, therefore, is that a CPR 36 offer cannot be made or accepted by email unless the party to whom the offer or acceptance is being sent has agreed to accept service by that method in accordance with CPR 6 PD 4.1(1), in other words that that party has given written notice that it will accept service by that method.

Matthew Rose is a Solicitor in the Costs and Litigation Funding department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com, or the Clarion Costs Team on 0113 2460622.

[i] [2010] EWCA Civ 726

[ii] [2011] EWHC 1581 (TCC)

[iii] CPR 36.7(2)

[iv] Thewlis v Groupama Insurance Co Ltd. [2012] EWHC 3 (TCC)

[v] CPR 2.8(3)

[vi] CPR 6.20

CPR 36: duelling with a double edged sword

A detailed look at the use of CPR 36 offers, and the consequences of withdrawal.

In a recent case in which I was acting for the paying party, I had drafted points of dispute and was advising in relation to making an open offer[i]. For reasons which are unimportant here I advised the client to make an open offer of their ‘best case’, in other words the amount that the bill would be reduced to if the paying party received all of the reductions it was asking for. I also advised my client to make a Part 36 offer, which was higher than the open offer, but still significantly less than the total claimed. The solicitor who instructed me asked me:-

“Is this a tactical offer which we will withdraw after 21 days?”

In short, my answer was no.

I am surprised how often I am asked whether a Part 36 offer should be withdrawn after the ‘relevant period’[ii] has expired.

A Part 36 offer may be withdrawn without the permission of the court at any time following the expiry of the relevant period, so long as it has not been accepted[iii], by serving notice of withdrawal under CPR 36.9(1).

It is of critical importance to note, however, the wording of CPR 36.17(7)(a) which provides that the costs consequences of beating a Part 36 offer do not apply where a CPR 36 offer has been withdrawn. This means that a party which makes a Part 36 offer and subsequently withdraws it will not be automatically entitled to their costs if they beat the offer at judgment or assessment.

Until April 2015 a Part 36 offer could not be automatically withdrawn[iv], and offers made before April 2015 which contain a provision for automatic withdrawal are not valid Part 36 offers. From April 2015 a Part 36 offer may contain a provision whereby it is automatically withdrawn[v].

It seems that this change is something that a lot of people have wanted for a long time, but it is unclear why.

As a Part 36 offer which is withdrawn does not have the automatic costs consequences of CPR 36.13, a Part 36 offer which contains a provision that it will be automatically withdrawn is robbed of any force. I envision the negotiation going something like this:-

Defendant Solicitor: ‘I make you an offer under Part 36.’

Claimant Solicitor: ‘Well, I had better seriously consider your offer because if I don’t accept it and then I’m awarded less I may have to pay your costs.’

D: ‘Also, if you don’t accept my Part 36 offer within 21 days it will be withdrawn, so you won’t be able to accept it after that, so you had better respond quickly!’

C: ‘Right. But if I don’t accept it and it’s automatically withdrawn then I won’t have to pay your costs if I’m awarded less than your offer. So you’re offering me all the benefits of a Part 36 offer, but with none of the risk?’

D: ‘Oh’.

This example is of course farcical, but it highlights the fundamental flaw in withdrawal of a Part 36 offer; the offer only has any force if it is left open until the conclusion of the trial or costs assessment hearing. I consider the tactical aspects of Part 36 offers further in my blog post on the tactical use of offers, however it is worth reiterating the point that a Part 36 offer should be the very best offer you intend to make in litigation and, in an ideal world, you would only ever make one.

The case of Gulati & Ors v MGN Ltd [2015] EWHC 1805 (Ch) in which the court refused an application by a claimant for costs on the indemnity basis because the claimant had withdrawn its Part 36 offer, illustrates this point well. Of course the effect to a successful claimant will be less than the effect to a defendant who beats a Part 36; to the claimant it means a difference in how costs are assessed, to the defendant it means it will not only not recover its costs but will also have to pay its opponent’s costs for that period.

Of course, there may be circumstances where it is appropriate to withdraw a Part 36 offer. An example might be where new evidence comes to light during litigation which affects quantum or prospects of success, and in those circumstances the Part 36 offer should be withdrawn as quickly as possible. If what the claimant is claiming drops below a defendant Part 36, the defendant does not want to leave it open to the claimant to accept the offer and obtain a higher amount than it could possibly be awarded at a hearing!

What should be remembered is that the ability to withdraw a Part 36 is there as a ‘get out clause’ if the landscape of litigation changes, and should be viewed as a useful provision to have but one that is rarely used.

I would point out that it is always open to a party that has made a Part 36 offer which is withdrawn (or, indeed, held not to be a valid Part 36 offer) and which it subsequently goes on to beat, to argue that the general rule that the unsuccessful party should pay the successful party’s costs[vi] should not apply, and ask the court to make another order on the basis of the Part 36 offer. However the costs consequences of CPR 36.13 are automatic; a party which beats its own Part 36 offer must be awarded its costs[vii], the only exception being if it is unjust to do so[viii].

It is trite to say that it is better to be entitled to your costs under the Civil Procedure Rules, than to have the opportunity to argue that you should get your costs before a judge. Many of you will know from bitter experience that judicial discretion can be a fickle master.

Matthew Rose is a Solicitor in the Costs and Litigation Funding department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com, or the Clarion Costs Team on 0113 2460622.

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[i] CPR 47 PD 8.3 requires a paying party to make an offer in open correspondence when serving the points of dispute. The tactical aspects of this are, however, a topic for another time.

[ii] CPR 36.3(g) defines the relevant period as the period specified in CPR 36.5(1)(c), in other words, a period the offeror chooses during which the defendant (or paying party) will pay the claimant’s (or receiving party’s) costs, but that period cannot be less than 21 days. Consequently it is usually 21 days.

[iii] It should be noted that an Part 36 offer is accepted by service of written notice of acceptance (CPR  36.11). Thus acceptance follows the rule of service. Theoretically an offeree could serve notice of acceptance by first class post, with email confirmation, and the offeror could serve notice of withdrawal by fax before the notice of acceptance was deemed served.

[iv] C v D [2011] EWCA Civ 646

[v] CPR 36.9(4)(b)

[vi] CPR 44.2(2)(a) and (b)

[vii] CPR 36.17(3)

[viii] In practice this happens very rarely, if ever.