Many business disputes will be resolved by agreement between the parties. This can be after proceedings have already been issued in court, or before court action has started. There are several ways of making an offer to settle, each of which has differing consequences in regard to costs incurred by each party. One commonly used method, by both a claimant or defendant, is to make a formal offer to settle, called a ‘Part 36 offer’.
‘It is usually preferable for a commercial dispute to be settled rather than leaving it to be decided by a court, particularly as a settlement can be confidential, which can be very attractive to all parties,’ says Kiran Solanki.
‘A Part 36 offer has particular costs consequences for the parties, and can be a good way to put pressure on the other side to settle, while providing some protection to the offer or on their costs position.’
Achieving resolution via a settlement can usually be achieved quickly, whereas court action or even methods of alternative dispute resolution can take longer to resolve.
Kiran Solanki looks at how a Part 36 offer is used, when it is used, and what it means for both parties – illustrating this with a brief case study.
What is a Part 36 offer?
Each side of a dispute will have a view about the risk of whether the likely financial outcome will justify the potential legal costs incurred in getting to that point.
The term ‘Part 36’ refers to a section of the Civil Procedure Rules (CPR) which covers this type of offer. It is a formal way of making an offer to settle that has specific consequences on the parties (positive and negative) in regard to the legal costs, and is therefore often used as a tactic to put pressure on the other side to reach a realistic settlement and avoid trial and the associated costs.
Under Part 36, a defendant may suggest they will settle a claim at a certain figure. The claimant may refuse to accept that figure and push for the matter to be decided by a court. If the judge orders the defendant to pay less than they had offered to settle for, under Part 36, the claimant is likely to be ordered to pay the defendant’s costs from the date they refused the offer, including interest. These costs will be allocated to the claimant, even if ultimately the claimant ‘wins’ their case.
Conversely, if the defendant is ordered at trial to pay more than their earlier Part 36 offer, the claimant may be awarded enhanced interest and possibly damages, to reflect the fact that the defendant was unrealistic in their offer, forcing the parties to trial.
For this reason, a Part 36 offer can be a key tool in the armoury of either party in contemplation of litigation, or during the course of litigation to settle a dispute. It is often used very effectively to put pressure on the other side to settle a case.
When is it used?
It can be used at any time, both before and after a claim is issued in court, up to trial.
Who can use it?
It can be used by either party in a dispute.
What is the effect of a Part 36 offer?
A Part 36 offer is made ‘without prejudice’, which means that it cannot be disclosed to the court during the course of proceedings as a way of proving that liability has been admitted. However, if the offer is not improved upon in court following a trial, the offer can then be shown to the judge when they are deciding what costs should be ordered.
How do you make a Part 36 offer?
A Part 36 offer has to be a genuine offer to settle, and must comply with the strict conditions of Part 36 of the Civil Procedure Rules. It must be made in writing and be headed ‘without prejudice save as to costs’.
It should give a reasonable period for the offer to be accepted, which cannot be less than 21 days. If accepted within that time, then the usual costs rules will apply.
The offer has to be very specific on what it is covering, so if it relates to only a part of a claim, it must say this. Similarly, if it includes the terms of a counterclaim, it must state this clearly.
How do you accept a part 36 offer?
A Part 36 offer should be accepted in writing, which must be sent to the party making the offer and filed in court if proceedings have already been issued in court.
Can you negotiate a Part 36 offer, and what are the consequences of doing this?
You could make a counteroffer, also under Part 36. However, a counteroffer does not automatically invalidate the original Part 36 offer, which will still stand until it is withdrawn or unless it was limited in time originally and the time limit has expired.
Case study illustration
To illustrate a typical Part 36 offer, and costs consequences, we can consider the dispute between Smith Engineering Ltd and Jones Build Construction PLC.
Smith Engineering supplied bespoke components to Jones Build for a large infrastructure project. Jones Build failed to pay the final instalment and claimed defects and delays with the supplied components.
The amount claimed by Smith is £250,000, but Jones Build counterclaims for £100,000 for their alleged losses due to defective parts and delays. Smith issued their claim in court for £250,000 plus interest and costs. Jones Build filed a defence, and issued a counterclaim for £100,000.
Just before witness statements were exchanged, Jones Build made a Part 36 offer that: ‘Without prejudice save as to costs, the defendant offers to settle the claim and counterclaim on the basis that the defendant will pay the claimant £160,000 inclusive of interest and costs, and both sides will withdraw their claims and counterclaims.’
The offer was open for 21 days. Smith Engineering rejected the offer saying it was too low.
The case then proceeded to trial, where the judge found in favour of Smith, awarding £155,000 on the original claim, but also accepting the counterclaim for £30,000. Therefore, the net award for Smith’s is £125,000 (£155,000 less £30,000).
As Smith recovered £125,000 at trial, a sum which was less favourable than Jones Build’s Part 36 offer of £160,000, there will be consequences to the allocation of costs.
Therefore, Smith Engineering were entitled to receive their standard costs only up to the expiration of 21 days after the Part 36 offer. However, the court held that Smith must pay Jones Build’s legal costs from the expiry of the offer period to trial.
Do all settlement offers have to be made as Part 36 offers, or are there alternatives?
A settlement offer does not have to be made under Part 36. It is possible to make an offer, formal or otherwise, at any time, which does not have the same costs consequences.
How we can help
Due to the serious cost-related consequences of a Part 36 offer, it has to be used at the right time, and in the right way, and be realistic. Our solicitors will work with you to decide when such an offer should be made, or whether an offer should be accepted to ensure it is going to work for you.
For further information and assistance, please contact Crane and Walton Solicitors LLP in Coalville on 01530 834466. Crane and Walton LLP also has offices in Ashby, Leicester and Melbourne.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
