Compromised position

After wrestling with interpretations of offers to settle under two linked cases, the Court of Appeal's headline message is clear: CPR part 36 was drafted and operates as a self-contained code to be read and understood according to its own terms. Rules derived from the general law of offer and acceptance are not to be imported into part 36 negotiations unless explicitly provided for.

The court's judgment in Gibbon v Manchester City Council: LG Blower v Reeves [2010] EWCA Civ 726 highlights the problems that the amended part 36 provisions can cause for solicitors. The disputes that brought about these appeals arose as a result of the amendments to part 36 made in April 2007. Under the old regime, a party had 21 days to accept a part 36 offer from the date of its receipt. After that time, the offer effectively expired and could only be accepted with the permission of the court or if liability for costs was agreed.

The amendments made a significant change; although in some specified cases the court's permission will still be needed to accept a part 36 offer, the general rule is that a part 36 offer may now be accepted at any time unless the offeror serves written notice of withdrawal on the offeree.

So, if offers are made and not withdrawn following, for example, a significant change in medical evidence in a PI claim, there is nothing to stop one party capitalising on the other's omission and accepting the offer. The problem applies to claimants and defendants and could easily lead to proceedings in professional negligence by clients against representatives for allowing claims to be settled at an under (or over) value. Accordingly, in the course of negotiations, as further part 36 offers are made (or the circumstances of a claim change), old offers may need to be formally withdrawn.

Take it or leave it

In Gibbon, the parties to a personal injury claim made a series of offers and counter-offers on a part 36 basis. The defendant's initial offer of £1,150 was rejected and the claimant made a counter-offer of £2,500. The defendant rejected that offer and offered £1,500 before finally making an offer of £2,500 itself. The claimant rejected both offers.

The defendant then formally accepted the claimant's offer of £2,500, which had not been formally withdrawn in the meantime. At that point the claimant purported to withdraw the offer and the defendant applied to the court, which held that the offer had remained open for acceptance.

The claimant's arguments on appeal were: (i) the defendant had rejected the £2,500 offer initially, making it incapable of acceptance; and (ii) the claimant's rejection of the defendant's £2,500 offer was an implicit withdrawal of her own £2,500 offer.

Moore-Bick LJ, with whom the rest of the Court of Appeal agreed, rejected the claimant's arguments and dismissed the appeal. The 'freestanding' scheme of part 36 did not impliedly incorporate rules derived from the general law of offer and acceptance: the only mechanism for preventing acceptance of a previously made offer was formal withdrawal '“ not the passage of time, not the making of a different offer and not even rejection of the offer by the offeree.

Moore-Bick LJ went on to give guidance on the proper form of withdrawal of a part 36 offer: there must be express notice in writing making clear that the offer has been withdrawn. The written notice must include an express reference to the date of the offer and its terms. If the notice of withdrawal is not made in these explicit terms, a court may decide that it is invalid.

Making your mind up

In Blower, defendants had made a number of different part 36 offers at different stages of the litigation and in different amounts. At one point all offers but one, the lowest, were expressly withdrawn. The defendant then made another, slightly higher offer, which was not in the form of a part 36 offer. At trial the award made to the claimant was lower than one of the withdrawn part 36 offers and not significantly greater than the one remaining 'live' part 36 offer or the subsequent non-part 36 offer. In assessing costs, the district judge put to one side the remaining 'live' part 36 offer and the subsequent non-part 36 offer, both of which were, on the face of it, lower in amount than the award made. The judge marked the claimant's failure to accept the greater part 36 offer before it was withdrawn by allowing the claimant only half of its costs from the date of that withdrawal.

On appeal to a circuit judge, the defendants argued that the claimant had not obtained an award materially more advantageous than the remaining part 36 offer. The circuit judge complicated things further by dismissing the appeal on the basis that the part 36 offer had been 'superseded' by the making of the subsequent non-part 36 offer.

Adopting the reasoning already explained in dealing with the Gibbon appeal, Moore-Bick LJ said that the circuit judge had erred in his approach: part 36 provides expressly for the manner in which offers may be withdrawn and displaces the ordinary rules of common law '“ the offer remained 'live'.

The court went on to explain, obiter, that under part 36 a party can make several offers in different terms, all of which may at any one time be capable of acceptance: subsequent offers to not vary or revoke existing offers. Consequently, because the costs consequences of a part 36 offer are linked to the date on which it is made, the financial implications vary as the proceedings progress. For example, an offer of £10,000 made at an early stage may be more valuable than an offer of £12,000 made at a later stage, depending on the amount of costs that have been incurred in the meantime and prevailing rates of interest.

Carving out solutions

The court dealt with the appeal by stripping out the interest element of the existing part 36 offer '“ CPR 36.3(3) provides that offers are to be treated as inclusive of interest '“ and comparing the 'principal amount' with the award made, net of interest. On the facts, the appeal was dismissed, but not before the court joined in with the swell of criticism for the earlier decision of the Court of Appeal in Carver v BAA [2008] EWCA Civ 412 (most recently attacked by Jackson LJ in his review of civil litigation costs).

Carver established a principle which extended the scope of the part 36 scheme and diluted the certainty of its application. In considering whether a judgment was 'more advantageous' for the purpose of part 36.14, the court should take into account all aspects of the case, including emotional stress and financial factors '“ such as the incurring of unrecoverable costs.

Moore-Bick LJ was bound by Carver but sought to render that judgment largely impotent by saying that the weight to be attached to the various factors was a matter for the judge in each case and that judges undertaking the balancing process should normally regard judgment for more than what was offered as success. The Court of Appeal has, therefore, sought to reintroduce into part 36 negotiations a great deal of the certainty that Carver removed.

Moore-Bick LJ's stated aim was for a party faced with a part 36 offer to be able to evaluate it by reference to a rational assessment of his own case rather than to have to consider what the court might think of 'emotional' factors and the like that are inherently difficult to value. Accordingly, he concludes: 'In most cases obtaining judgment for an amount greater than the offer is likely to outweigh all other factors.'

Staying alive

Because part 36 plays an important role in the majority of cases and can cause significant costs consequences, the judgment is a must-read for all litigators. Although much of the court's interpretation of the wording of part 36 itself is straightforward, the application of part 36 to the exclusion of common law rules on offer and acceptance is an important step. Subsequent offers by an offeror or rejection of an offer by the offeree may cause an offer to lapse at common law, but not under part 36.

The facts of Gibbon provide a good example of the problems that unwary solicitors may face in this regard. A careful review of existing part 36 offers will be needed as a case progresses and old offers may need to be withdrawn when a new offer is made (or when there is a shift in the evidence). In the same way, solicitors must be alive to any existing offer from the other party that becomes more appealing as trial approaches and remains capable of acceptance if it has not been withdrawn.

It is also important to remember that when contemplating acceptance of an offer an attempt must be made to identify and strip out the element of interest because after trial the court will only be concerned with a comparison of the 'principal amounts' involved.

A welcome development is that much of the uncertainty created by Carver has been removed with an indication that the courts should not place too much weight on 'other factors' when determining whether a judgment is more advantageous than an offer.