The effect of a withdrawn Part 36 offer

Deciding whether or not to withdraw a Part 36 offer that is looking too favourable to the other side can be a delicate task. Lack of clarity about the costs consequences the court is able to give a withdrawn Part 36 offer has not helped. There is good news, however, as two recent decisions - Lloyds v McBains Cooper and Thakkar v Patel - shed more light on the costs protection that can be secured by a withdrawn offer and the factors likely to influence the court. We take a look at the case law and offer some practical guidance.

Status of a withdrawn Part 36 offer

Part 36 states expressly that a withdrawn Part 36 offer cannot carry the Part 36 automatic costs consequences applying to both claimant and defendant offers (see CPR 36.17(7)(a) for offers made since 6 April 2015 and CPR 36.14(6)(a) for those made previously). These include for a defendant, costs from the date the relevant period expired and interest on those costs, and for a claimant, interest on the claim at base rate plus up to 10 per cent, a full indemnity for their costs with increased interest on those costs, and an additional amount of 10 per cent of the damages awarded (or the costs awarded in a non-monetary claim) up to a maximum sum of £75,000.

One of the new rules introduced in the April 2015 version of Part 36 was CPR 36.9(4)(b) which states that “an offer may be automatically withdrawn in accordance with its terms”. This mechanism enables a party to make a time-limited Part 36 offer but hasn’t helped parties greatly as it leaves open the important question about what costs protection can follow where the offer does not remain open for acceptance until trial.

Costs consequences under CPR 44.3

Although the automatic costs consequences under Part 36 cannot be claimed where a well-pitched offer is withdrawn, the court must take all offers into account when exercising its general costs discretion under CPR 44.3. All aspects of a party’s conduct are relevant, including discourteous failures to respond to settlement offers and offers to mediate (Thinc Group Ltd v Kingdom and PGF II SA v OMFS Co Ltd).

The issue in practice will be whether the court can allow a defendant’s withdrawn Part 36 offer to provide full costs protection if it is unbeaten at trial and, where the claimant has made the successful offer, whether the court can award the claimant indemnity costs, one element of the automatic costs consequences that would have followed had the offer not been withdrawn.

Muddled case law

The costs protection afforded by Part 36 offers that are later withdrawn has been unclear. This is largely because of the uncertain status of the Court of Appeal decision of Trustees of Stokes Pension Fund v Western Power Distribution South West Plc (Stokes) which said that a defendant’s withdrawn offer can give costs protection if the claimant should have accepted it within 21 days. In French v Groupama, the Court of Appeal suggested that the decision should be confined to the pre-2007 version of Part 36.

Stokes was followed by the Court of Appeal in Rehill v Rider Holdings Ltd but unfortunately French v Groupama was not referred to. This unsatisfactory situation has now been acknowledged in Lloyds v McBains Cooper.

Claimants’ offers

The position appears to be fairly straightforward for claimants, if perhaps unfairly so. The courts have consistently held that they cannot award a claimant indemnity costs where they beat their own subsequently withdrawn Part 36 offer, irrespective of how long it remained open, unless the defendant’s conduct merits an order for indemnity costs independently of Part 36. Lloyds v McBains Cooper follows this approach - the judge refused to give effect to the claimant’s withdrawn Part 36 offer save to take it into account as part of all the circumstances relevant to his exercise of discretion under CPR 44.3.

In the earlier decision in Gulati v MGN Ltd, Mann J noted the unfairness to a successful claimant in this situation since they will be getting all their costs anyway. He wanted to award the claimant indemnity costs so as to give weight to her withdrawn Part 36 offer but concluded that he was unable to do so in the absence of sufficiently unreasonable conduct on the part of the defendant.

Conduct and indemnity costs

By itself, a refusal to accept a reasonable offer to settle will rarely constitute conduct sufficiently unreasonable to justify an award of indemnity costs under CPR 44.3 (F&C Alternative Investments (Holdings) Ltd v Barthelemy). If, on the other hand, it forms part of a pattern of unreasonable behaviour by the defendant, indemnity costs may be justified. In Walter Lilly & Company Ltd v MacKay, the defendant had not engaged in the settlement process and had discourteously rejected a Part 36 offer (on the table for more than four months and withdrawn shortly before trial) and later costs-inclusive Calderbank offers, without making any effective or commercially sensible counter-offers. The claimant was awarded its costs on the indemnity basis from a date 21 days after it made its Part 36 offer.

Defendants’ offers

The other recent case on this topic is Thakkar v Patel (Court of Appeal unreported 26 January 2017) which concerns a withdrawn Part 36 offer made by the defendants. The judgment is not yet available but the summary provided by Lawtel indicates that the Court of Appeal upheld the judge’s decision not to give the defendants their costs of the claim despite the fact that the claimants had just failed to beat the defendants’ Part 36 offer. The offer had been withdrawn after 21 days.

Referring to Stokes, the Court of Appeal said that the issue was whether the claimants had acted unreasonably in rejecting the offer. The judge had decided that the offer had not been one that was easy for the claimants to accept since it was made before disclosure and the exchange of witness and expert evidence. He had implicitly held that the claimants had acted reasonably in rejecting the offer. It was also material that the judge had concluded that most of the blame for the failure to mediate lay with the defendants – this was reflected in his decision to order the defendants to pay 75 per cent of the claimants' costs of their claim (the claimants were ordered to pay the costs of the counterclaim).

Conclusion

The recent decisions in Lloyds v McBains Cooper and Thakkar v Patel offer helpful guidance about how the courts will approach withdrawn Part 36 offers. If the offer is a claimant’s offer, it cannot entitle the claimant to indemnity costs (or any of the other benefits conferred by CPR 36.17) irrespective of how long it has remained open for acceptance and by how much the claimant has beaten its own offer at trial. Indemnity costs can only be awarded if the general test is met - this requires exceptionally unreasonable conduct on the part of the defendant.

On the other hand, where a defendant has beaten its withdrawn Part 36 offer at trial, it now seems to be accepted by the Court of Appeal that Stokes is still a relevant authority and such an offer can entitle the defendant to its costs despite the fact that the offer was withdrawn. The absence of any reference to the comments in French v Groupama in both Rehill v Rider Holdings Ltd and in Thakkar indicates that they can now be ignored, at least so far as defendants’ offers are concerned.

Thakkar illustrates the wide discretion the court has under CPR 44.3 to take into account all the factors at play throughout the dispute and the conduct of both sides. There it was reasonable for the claimants not to accept the defendants’ Part 36 offer at a relatively early stage in the proceedings. In contrast, in Rehill v Rider Holdings Ltd the claimant had no significant uncertainty about his orthopaedic injuries at the date the offer was made and should have accepted it instead of continuing to pursue a dishonestly inflated claim.

The length of time the withdrawn offer is available for acceptance, the information available to the claimant during that period about the merits of the claim, the generosity of the sum offered in comparison to what is finally recovered by the claimant and the conduct of both sides in making other offers and pursuing mediation appropriately will all be material to the court’s decision whether or not to award the defendant full costs protection.