No prizes in part 36 for a 'near miss'

For a year now, part 36 of the Civil Procedure Rules (CPR) has declared itself a 'self-contained procedural code', echoing the words of Lord Justice Moore-Bick in Gibbon v Manchester City Council [2010] EWCA Civ 726.

At first glance, the meaning of these words seems pretty clear: they warn us that part 36 has its own logic that has little to do with part 44, which governs costs generally, or with the contractual principles of offer and acceptance that govern settlement offers generally.

So, when a party fails to beat an opponent's part 36 offer, for example, the court has no general discretion regarding costs, as it would have under CPR 44.2, but is obliged to impose heavy penalties on the offeree unless they are 'unjust' - a high hurdle for the offeree to overcome (CPR 36.17(5)).

Similarly, part 36 offers remain on the table unless they are withdrawn automatically or by formal notice, unlike contractual offers, which can be extinguished by rejection or a counteroffer, or simply lapse with time. It is as if part 36 offers and normal settlement offers exist in two separate worlds.

Separate worlds?

Look a little closer, though, and the two worlds appear less separate than they might be. Defective part 36 offers clearly have to be treated as normal contractual ones, provided they are validly formed and so on.

But what about 'failed' or 'ineffective' part 36 offers? These are offers that comply with part 36 but are never accepted or withdrawn, and are ultimately not beaten when the case reaches summary judgment or trial. It is sometimes assumed offers of this kind have no effect on costs at all, but that would
be taking the idea of a 'self-contained procedural code'
too far. CPR 44.2(4) makes it clear that when exercising its discretion, the court 'will have regard to all the circumstances, including… any admissible offer to settle… which is not an offer to which costs consequences under part 36 apply'. CPR 36.2(2) underlines the point. Occasionally, however, the courts err in the opposite direction, and make orders under the general costs rules that echo part 36, even though the offer in question has been beaten or is defective under part 36 in some way.

Sugar Hut decision

This is what seems to have happened in November 2014 when the Commercial Court decided that a defendant should receive its post-offer costs - the main reward for making a successful defendant's part 36 offer - despite the fact that its offer had been beaten and it had lost the litigation as a whole (Sugar Hut Group Ltd and others v A J Insurance Service [2016] EWCA Civ 46). The court rationalised its decision by saying the claimant's refusal to accept the offer was relevant to costs, given that the case was 'a paradigm example of one where the overall claim and certain individual components were much exaggerated'.

However, in a decision handed down in February 2016, the Court of Appeal disagreed. On the trial judge's findings, the claim was not 'exaggerated' in the sense of having 'exceeded the bounds of permissible optimism', and so it did not amount to misconduct under the general costs rules and justify, for that reason, a departure from the general rule that the loser pays the winner's costs (CPR 44.2(4) - (5)).

So much for well-meaning attempts to blur the distinction between parts 36 and 44. The problem, of course, is not just that courts which err in this way sow general confusion about how the costs rules are meant to work. They also blunt the effectiveness of part 36 as a system of sticks and carrots designed to incentivise parties to settle.

Sugar Hut is a reminder that, although the courts may stray from time to time, the basic distinction between successful part 36 offers and other offers to settle is one they are obliged to uphold. Specifically:

• Courts will 'have regard to' any beaten (or defective) part 36 offer when applying the general costs rules, but only as part of the bigger picture (CPR 44.2(4));

• It is unlikely that a court will be justified in imposing part 36-style penalties where a part 36 offer is defective or has been beaten by an opponent; and

• There are no prizes in part 36 for a 'near miss', at least in money claims (CPR 36.17(2)). SJ

Nicholas Heaton, pictured, is a London Solicitors Litigation Association (LSLA) committee member and a commercial litigation partner at Hogan Lovells International. Giles Hutt is a litigation professional support lawyer at Hogan Lovells