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Beware Part 36

Citation: PHI Group Ltd v Robert West Consulting Ltd [2012] EWCA Civ 588

Although the heading to this article ought to be unnecessary, it is plain from recent judgments both in the High Court and the Court of Appeal that insufficient attention is being paid to the Part 36 regime by parties wishing to settle their differences.

Although clear on its face, and to the extent there was any doubt, at very least since Gibbon v Manchester City Council [2010] EWCA Civ 726, Part 36 “contains a carefully structured and highly prescriptive set of rules dealing with formal offers to settle proceedings which have specific consequences in relation to costs.... parties aren’t bound to [use it] but if they wish to take advantage of the particular consequences...they must follow its requirements.”  Despite this clarity of purpose, there have until recently been areas where divergence from those rules was not fatal.  The extent to which this remains the case is debateable.  The overall position is that what was intended as an overarching provision to encourage parties to take realistic views as to the merits of their positions, has become both restricted in its use and a technical hurdle of no small difficulty.

In Thewlis v Groupama Insurance Co Ltd. [2012] EWHC 3 (TCC), HHJ Behrens, sitting as a deputy High Court Judge, C had made an offer to settle (headed Offer made pursuant to CPR Part 36 and stating ‘this offer remains open for a period of 21 days, from your receipt of this offer letter’) which had been rejected pre-issue.  A year later and six months into the action, D accepted the offer and sought a declaration that the proceedings had been stayed pursuant to that acceptance.  Part 36 was reviewed on the basis that it had been substantially amended with effect from April 2007.

HHJ Behrens noted that in C v D [2011] EWCA Civ 646, Rix LJ had made clear that under the revised (and present) Part 36, an offer cannot be time limited.  An offer is either a part 36 offer or it is a time limited offer.  In that case, an offer “open for 21 days” simply meant that there would be no attempt to withdraw the offer within that 21 day period.   HHJ Behrens then noted the first instance decision in Carillion v PHI Group [2011] EWHC 1581 (TCC).  He noted that C took two points against its own part 36 offer:

"i) That it failed to comply with part 36(2)(b) in that it did not say on its face that it was intended to have the consequences of part 36; and

ii) That it was inconsistent with part 36 because after 21 days it could only be accepted “if we agree the liability for costs or the court gives permission
.”

The Judge concluded that there was force in both these points.  Although the defects were technical, part 36.2 uses the word "must".  Despite the statement that the offer was intended to have the consequences of part 36, that intention had to be considered in the light of the fact that the final sentence ((ii) above) was inconsistent with part 36.  As to (ii) he found that there was no reason why a claimant couldn’t include that provision in an offer.  He simply couldn’t do so in Part 36 offer.  Thus, despite its original attempt to make a Part 36 offer, the Claimant was able to resile from it by reason of its own failure to comply with the technicalities.  Although this is an unusual case on its facts, and perhaps one that will fail to find favour with future Courts, it points up the need for offerees to be careful that any offer they receive is in fact part 36 compliant.

In Carillion, C was the main contractor for the design and construction of train service depot.  PHI was the specialist design and build contractor for the "soil nailing work".  RWC was the consulting engineer for the overall project.  C sued Phi for damages for negligence.  Phi notified RWC of a contribution claim.  In February 2010 Phi made an offer to settle the contribution claim which was not accepted.  Carillion’s claim against Phi was settled shortly before trial but after the issue of Part 20 proceedings against RWC.  RWC had counterclaimed for an indemnity or contribution from Phi in respect of any liability it might have to Carillion.  In November 2010, Phi made a further offer to RWC which was not accepted.  At trial, Carillion sought judgment for the balance of its claim against RWC.  The Judge found RWC to have been negligent; awarded Carillion £6.7million; and held that Phi and RWC were 60% and 40% responsible respectively.  A costs order was agreed between C and RWC.  The Judge then ordered Phi to pay 20% of C’s costs which RWC had been ordered to pay.  He then ordered Phi to pay 30% of RWC’s contribution proceedings and made no order as to the costs of Phi’s contribution proceedings.

At first instance, Akenhead J decided that Phi‘s February offer was not a Part 36 offer as it did not specify a period of not less than 21 days, or any period, in compliance with Part 36.2(2)(c).  He also concluded that it should not be given the same consequences as if it had been Part 36 compliant; that the first offer lapsed upon the making of the second; and that he needed to take this into account when exercising his discretion in relation to costs.

In the Court of Appeal [2012] EWCA Civ 588, Nigel Jones QC of Hardwicke appeared for the successful appellant. Lloyd LJ gave the lead judgment.  He agreed with the Judge that the failure to specify a time period in compliance with part (c) was fatal.  The February offer was not a Part 36 offer.  He also agreed that an offer which failed to comply with part 36 could not be treated as and be given the same effect as if compliant.  The basis of any such order could only be under the Court’s general discretion pursuant to CPR 44.  However, he disagreed with the Judge in relation to the withdrawal of the first offer.  The fact that the offers were inconsistent was not a reason to presume that the first was necessarily withdrawn on the making of the second. Given that the offers were still open and Phi had achieved a result significantly better than the first, it was appropriate to order (under the Courts general jurisdiction) that RWC should pay Phi’s costs of the contribution proceedings and bear all of its own.

So what flows from this?  There are a number of matters which litigators must be aware of.  They are:

  1. It is also now clear that there is no jurisdiction to treat as a part 36 offer one which fails technically to qualify as such under the rules.  To that end, it seems to the authors that part 36.2.1 of the 2012 White Book requires revision and is potentially misleading.
  2. Although both Rix LJ and Stanley Burnton LJ were clear in C v D. that any ambiguity in a part 36 offer should be construed so far as reasonably practicable as complying with part 36, it is important to note that the Courts are keen to limit the impact of decisions such as ICS v West Bromwich Building Society, Attorney General of Belize v Belize Telecom and the like on the interpretation of contracts. 
  3. However, post-Carillion, there are still gaps where it is unclear as to the extent to which the Courts will tolerate technical non-compliance with part 36.  For example, if an offer letter specifies a period of 21 days for acceptance but then fails to follow the wording of the CPR 336.2(2)(c) setting out that the period is one within which the defendant will be liable for the claimant’s costs if the offer is accepted,  Lloyd LJ stated that “it doesn’t seem to me clear that this would suffice for the purposes of rule 36.2(2)(c).”  Obviously, the safe course is either to follow the wording expressly in the offer letter or to make specific reference to rule 36.2(2)(c) when referring to the period of 21 days.
  4. A small but vital point is that it must not be forgotten that there are significant differences between a claimant’s part 36 offer and one made by a defendant (see parts 36.4, 36.10 and 36.11).  This will be particular important in cases where there are contribution proceedings on foot and one party may be both a claimant and a defendant.
  5. The consequences that flow from the failure of a party to make an offer which complied with Part 36.  Once deemed non-compliant, the rules which provide that a Part 36 offer can only be withdrawn by written notice fall away.  Thus it is that a failed part 36 offer may survive as a common law offer notwithstanding a later inconsistent offer (whether part 36 or otherwise).  In Carillion, the fact that the second offer was inconsistent with the first did not mean that the first letter should be deemed withdrawn.  Lloyd LJ stated “There is no inherent reason why a party should not make two different offers to the opposing party to settle litigation, either of them being capable of acceptance, though not both.  It is not uncommon to see a party put forward alternative offers in the same letter, as between which the opponent may choose which to accept.  Normally, of course, with offers made at the same time the economic substance of the two is likely to be the same or comparable.  But if two different offers, inconsistent with each other in that both could not be accepted, can be made in one document, there is no reason in principle why one party should not make different offers successively, leaving it open to the opposing party to choose which (if either) to accept”.  He later pointed out that it is open to the offeree to seek clarification to enquire whether the earlier offer was still available.  This leaves open a litigation difficulty.  If the effect of the enquiry might be to precipitate the rapid withdrawal of an offer which the offeree might wish to accept, the offeree is left with the option of accepting (and precipitating a difficult satellite argument about whether the offer had in fact been withdrawn) or seeking clarification and watching the offer be withdrawn in response.