Withdrawing Part 36 offers

What costs consequences can the court give a Part 36 offer that has been withdrawn? We’ve been debating this issue for the past decade but it has recently resurfaced with the introduction of a new version of Part 36 six months ago and the decision in Gulati v MGN Ltd. We take a look at the confusing case law on this point and offer some practical guidance.

Automatic withdrawal under new version of Part 36

One of the changes introduced in the April 2015 rewrite of Part 36 was the ability to make a time-limited offer or, as the new CPR 36.9(4)(b) puts it, “an offer may be automatically withdrawn in accordance with its terms”. This gives the impression that being able to withdraw an offer in this way is desirable but this is misleading. The important question is what costs protection can be conferred by a Part 36 offer that does not remain open for acceptance until trial. There is little point in bothering to make a Part 36 offer whose terms provide for its withdrawal at a future date if it offers no more costs protection than a non-Part 36 (Calderbank) time-limited offer.

A party, particularly a claimant, may well come to regret withdrawing a Part 36 offer because of the court’s inability to give Part 36 automatic consequences to a withdrawn offer, irrespective of how long it was open for acceptance (see CPR 36.17(7)(a) for offers made since 6 April 2015 and CPR 36.14(6)(a) for those made previously). The Court of Appeal has repeatedly rejected arguments attempting to circumvent this rule in cases such as Epsom College v Pierse Contracting Southern Limited and French v Groupama Insurance Company Ltd.

However, the court must take all offers, including Calderbank offers and withdrawn Part 36 offers, into account when exercising its general costs discretion under CPR 44.3. The issue here is whether such an offer can provide full costs protection if it is unbeaten at trial and, where the claimant has made the successful offer, whether the court can award indemnity costs, one element of the automatic costs consequences that would have followed had the offer not been withdrawn. We review the case law below.

Defendants’ withdrawn offers

It is possible for the court to award a defendant its costs under CPR 44.3 on the basis of a withdrawn Part 36 or Calderbank offer. The effect of a defendant’s withdrawn offer was considered by the Court of Appeal in relation to the pre-2007 version of CPR 36 in Trustees of Stokes Pension Fund v Western Power Distribution South West Plc. Dyson LJ said:

“If a claimant should have accepted an offer within 21 days then on the face of it the consequence should be that he is entitled to his costs up to the date when the offer should ordinarily have been accepted and the defendant is entitled to his costs thereafter. Usually the mere fact that an offer is withdrawn after the date when it should have been accepted should not lead to a different result.”

This authority was followed last year by the Court of Appeal in Rehill v Rider Holdings Ltd although the court had wondered previously in French v Groupama Insurance Company Ltd whether Stokes should be seen as applying only to the pre-2007 regime. (French was not referred to in Rehill.) It has been followed at first instance in Owners of the Samco Europe v Owners of the MSC Prestige and Pankhurst v White.

Claimants’ withdrawn offers and Gulati

The position is rather different for claimants, as illustrated recently in Gulati v MGN Ltd. Mann J held that he was unable to award one of the claimants any part of the automatic costs consequences in exercising his costs discretion under CPR 44.3 (she asked for indemnity costs but not enhanced interest or an additional payment) because her successful Part 36 offer had been withdrawn after 21 days.

The judge noted the imbalance whereby the incidence of costs can still be altered by a defendant’s non-Part 36 offer (whether a Calderbank or withdrawn Part 36 offer) whereas a successful claimant in this situation will be getting all its costs anyway. He confessed that he could not see why he should not be able to award the claimant indemnity costs so as to give weight to her withdrawn Part 36 offer but concluded that he was prevented from doing so by the Part 36 regime and authority.

Indemnity costs

Mann J in Gulati held that he was unable to award the claimant indemnity costs outside the Part 36 regime because the defendant’s conduct had not been seriously unreasonable or unreasonable sufficiently beyond the norm in litigation.

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). There are some cases, though, where refusing to accept reasonable offers and continuing to the bitter end in denial of the realities of the party’s position can lead to an indemnity costs order. The Court of Appeal in Epsom College referred to two cases where indemnity costs had been awarded to defendants from a certain date in special circumstances where an offer which ought to have been accepted was not – Southwark LBC v IBM UK Ltd (drop hands offer) and Barr v Biffa Waste Services Ltd (Part 36 offer). And in Walter Lilly & Company Ltd v Mackay the claimant was awarded indemnity costs in respect of a Part 36 offer withdrawn shortly before trial.

Practice points

• Think long and hard about drafting a Part 36 offer with an inbuilt withdrawal. The loss of the CPR 36.17 costs consequences could be particularly damaging for a claimant.
• Check at each stage of the matter whether Part 36 offers already made should stay on the table so that they can be accepted at a later date. You will need to weigh up the benefit of withdrawing an overgenerous offer against the loss of the automatic costs consequences under CPR 36.17.
• If a defendant wants to reduce an overgenerous offer, they should vary its terms so as to maintain entitlement to costs from 21 days after the offer was first made (Burrett v Mencap Ltd).
• Calderbank and withdrawn Part 36 offers can offer defendants full costs protection in some circumstances (Walker Construction (UK) Ltd v Quayside Homes Ltd and Rehill v Rider Holdings Ltd).
• Potentially conflicting case law leaves the court room for manoeuvre 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 offers (Thinc Group Ltd v Kingdom).