Come in Part 36 your time is up!

In this issue...

• Come in Part 36 your time is up!
• Who is the real winner under new ‘open-textured’ test?
• The race to either withdraw or accept old Part 36 offers in light of new developments
• Costs, costs and more costs
• • Some parties are more equal than others under Part 36
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  Come in Part 36 your time is up!

  Following a Ministry of Justice consultation and review by the Civil Procedure Rules Committee a decision was made to amend the rules for making offers or payments into Court under Part 36 with effect from 6 April 2007.  The new rules apply to all existing cases but not retrospectively and this article debates whether Defendants should cease making offers under this rule. 

  Given that the main driver was judgments dispensing with the need for certain categories of Defendants (principally the NHS and government departments) to tie up public funds in Court when making payments in under Part 36 it is not surprising that the majority of the amendments codifying the case law were greeted with little by way of comment or concern.  The cases referred to included Crouch –v- King’s Healthcare NHS Trust and Murray –v- Blackburn Hyndburn & Ribble Valley Healthcare NHS Trust [2004] and the NHSLA involvement in achieving this important amendment was acknowledged in the consultation.

  However, the Rules Committee did not resist tinkering with other aspects of Part 36.  Arguably the rules as amended are only good for Claimants (or the professional indemnity market) with no real advantage to Defendants over other forms of offer.  This article focuses on two new problems that we did not have before, namely arguments over who was the real winner and the ‘race’ to either withdraw or accept old Part 36 offers in light of new developments.  Either of these could have serious implications for the parties and professional indemnity issues for the advisers.

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  Who is the real winner under new ‘open-textured’ test?

  Firstly, how it used to be under the old Part 36:

  Prior to the amendments this was easy and capable of being determined simply by mathematical comparison of the offer and award.  See 36.20(1) where at trial a Claimant lost if it:

  (a) fails to better a Part 36 payment; or.

  … and vice versa a Claimant won if it bettered its own Part 36 Offer (ie £1 more was better). 

  Unless it was considered 'unjust' to do so, failure would mean Claimant costs were withheld from 21 days after the Defendant’s Part 36 Offer was made if it was not beaten and the Descendant would recover it's ordinary costs from that point, whereas the successful Claimant would enjoy all its costs plus extra costs and interest rewards (see Rewards below) if it beat its Part 36 Offer.  It was a simple system that had the benefit of certainty even if there were some harsh results.  The decision in Matthews –v- Metal Improvements Co. Inc [2007] is an example of a case where the Claimant was forced to accept a Part 36 Offer late only because new evidence that was not anticipated by either party wiped out a portion of the expected life expectancy and hence the value of the claim.  Nevertheless the word 'unjust' would be construed very narrowly and the costs sanctions for late acceptance still applied.

  But see now under the new Part 36:

  It is no longer a simple mathematical comparison and the parties are required to consider the broader question of whether the judgment was worth the fight.  See 36.14(1) where a Claimant loses if it:

  (a) fails to obtain a judgment more advantageous than a Defendant’s Part 36 Offer;

  And wins where:

  (b) judgment against the Defendant is at least as advantageous to the Claimant as the proposals contained in a Claimant’s Part 36 Offer.

  It is possible to have an award which is not more advantageous than a Defendant’s Part 36 offer and yet at the same time at least as advantageous (because it is the same).  There will be many more cases where an offer has been beaten by a relatively marginal amount after months or years of litigation, begging the obvious question ’was it worth the fight?’.  The recent case that best illustrates the ‘open-textured’ test is Carver –v- BAA [2008] where the Claimant’s judgment of £4,686.26 was just £51 more than the Defendant’s Part 36 Offer long ago (compared to a lowest offer by the Claimant of £12,500) and was held not to be more advantageous.  The Court of Appeal upheld a first instance decision penalising the Claimant’s conduct with a costs order and promoting the view that ‘compromise is better than a contest’:

  “Litigation is time consuming and it comes at a cost, emotional as well as financial. Those are, therefore, appropriate factors to take into account in deciding whether the battle was worth it. Money is not the sole governing factor” per Ward LJ

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  The race to either withdraw or accept old Part 36 Offers in light of new developments

  The requirement under the old rules to obtain Court permission before accepting Part 36 Offers after 21 days has been swept away.  Under the new CPR 36.9(2) a party can now accept a Part 36 Offer by serving written notice of the acceptance without permission and at any time, subject to a deemed costs order from the end of that 21 day period.  A counteroffer does not alter this position and it does not even matter if the same Part 36 Offer has earlier been rejected. 

  The only exception is where the offer has been withdrawn in writing (which will rob it of Part 36 costs protection as if it had never been made) or reduced (only the reduced figure will apply to the more advantageous test set out above) so parties will not withdraw Part 36 Offers lightly.  A Part 36 Offer can only be withdrawn or reduced after 21 days in any event.  But is this sufficient protection where a Part 36 Offer has been on the table for an extended period and/or there has been a material change in circumstances?

  Imagine a Defendant making a very reasonable offer for the full value of a particular claim that is not accepted by a Claimant who is holding out for an unreasonable amount.  I was in this very situation in 1999, fortunately for me under the old Part 36 rules.  Just before my case came to trial on quantum the House of Lords delivered a surprise judgment in a Scottish case (McFarlane –v- Tameside).  The case had attracted little attention in England, but the law was changed dramatically for public policy reasons with immediate effect and the case was now worth a fraction of the conventional amount I had paid into Court under the old Part 36.  Fortunately I read the Lawtel report of the McFarlane at my desk the following morning and I took prompt instructions on withdrawing about 90% of my offer with the permission of the Court, protected by the fact that any application to accept the offer out of time would also need Court permission.  The Court granted my application, the Claimant gambled on going to trial anyway and lost.  What if I had not been reading Lawtel that morning, or the Claimant’s lawyer had done so first, or in any event the offer had been accepted in writing before instructions could be obtained to withdraw it?  Under the new Part 36 if the Claimant’s had beat me to his fax machine by 30 seconds before it could be withdrawn would my professional indemnity insurer have had to make up the difference on the over-settlement?  Other more mundane examples are not difficult to imagine.

  It may be that the Rules Committee did not have the interests of Defendants or the blood pressures of those like me advising them foremost in mind when amending this aspect of Part 36 but are Claimants any better off by it?  Imagine instead a sensible offer made by a Claimant but the value of the claim suddenly increases, say because he loses his job because of the injury or his condition deteriorates.  A canny Defendant aware of the Part 36 Offer would then be racing the Claimant to give written notice of acceptance at an under-value before it is withdrawn and the penalty on costs would be a small price to pay.  The Claimant lawyer would probably be sued. Neither example can really have been intended by the rule changes.

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  Costs, costs and more costs

  Any Claimant lawyer reading the recent news about legal costs in clinical negligence litigation might be grateful that the scandal on MP’s expenses claims is now dominating the headlines giving this profession temporary respite.  Part 36 was intended to provide an incentive for both parties to make and accept sensible offers to help conserve legal costs but is it working?

  A significant limitation under the old rule was always the inability to make a costs inclusive offer under Part 36 or even to include different terms as to costs such as a cap (even a cap on the level of success fee included if a CFA funded case). Moreover, the old rules said that an offer had to be made in accordance with Part 36 to have the specified costs sanctions and whilst other forms of offer were not prohibited (the Court had the power to make orders on costs in any event) there was a tendency to disregard Part 36 offers that were not backed by a payment in (see Crouch and Murray cases above) and Calderbank offers, or at least not to afford them the same degree of costs protection.  But there are cases where a party will quite reasonably want to make an offer outside of Part 36, for instance due to concerns about the level of costs incurred by the other party or to include additional terms.  For instance, the value of a case might be such that costs would normally be limited upon allocation under the Small Claims jurisdiction or Fast Track, save that by making a Part 36 Offer a Defendant is giving a Claimant an opportunity to avoid these limitations on recovery?  It is not uncommon to have costs estimates (for instance with Allocation or Listing Questionnaires) revealing that the Claimant’s solicitors have incurred costs 2 times, 5 or 10 times the value of the damages dwarfing defence costs for the same case beyond any sense of proportionate comparison.  Many  cases are settled for a fraction of the full value due to the risks of litigation alone and yet Part 36 would entitle the Claimant to recover all of his costs despite the fact that on a broader analysis 90% of the full claim may have failed.  Worse still, under the new Part 36 rules if the damages are not paid within 14 days of written notice of acceptance (a challenge for many public authorities) then the new Part 36 also gives the Claimant a right to obtain judgment for the full amount and claim judgment rate interest from that date.  It is with some regret that I admit that many defence lawyers have little or no confidence in the current detailed assessment process administered by Costs Judges to reduce Claimant costs claims to a more proportionate level.  With CFA funded claims there is arguably no motivation for them to do so for policy reasons because the gradual decline of legal aid funding has led to a fear that CFAs are the only means of less affluent Claimants getting access to justice and the Claimant lawyers have us all over a barrel. 

  The wording of the new Part 36 is arguably more friendly to other types of offer and emphases the requirement under CPR Part 44.3 for the court to consider any offer to settle in deciding what order to make about costs.  The Courts too have been willing to acknowledge that Part 36 Offers may not be suitable in some cases.  See for instance Hall –v- Stone [2007] EWCA Civ. 1354 at para 36.  I have settled a number of claims by refusing to make Part 36 Offers and instead insisting on Calderbank terms that included a fairer reflection of the true degree of success or failure on costs. 

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  Some parties are more equal than others under Part 36

  Under the old Part 36 where a successful Claimant bettered its own Part 36 Offer at trial the Court was required, unless unjust to do so, to order that the claimant was entitled to

  • interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired
  • his costs on the indemnity basis from the date on which the relevant period expired
  • interest on those costs at a rate not exceeding 10% above base rate.

  This was and is a powerful tool, especially when Claimant lawyers may have incurred more than double the defence costs already with up to a further 100% success fee if CFA funded.  There was no comparable reward for Defendants who simply recovered ordinary costs from 21 days after the successful Part 36 Offer was made.  The Ministry of Justice put this very point out to consultation and review by the Civil Procedure Rules Committee, but when the new CPR Part 36.14(3) was published the position was unchanged.  It was the only time a majority response to the consultation was ignored by the Rules Committee; a majority (including the majority of Claimant lawyers) having responded in favour of equal treatment for Part 36 Offers whether made by Claimant or Defendant but the response from the judiciary was preferred.

  So if Part 36 Offers made by Defendants are to be treated no more favourably than Calderbank offers, the open-textured test for success or failure is uncertain, they can be accepted at any time unless withdrawn regardless of permission, rejection or counteroffers, they cannot be withdrawn within the first 21 days and after that will be treated as if never made, will lead to judgment with reputational issues for the Defendant and judgment rate interest if not paid out within 14 days and if Part 36 Offers are not flexible enough under the current rules to allow for different terms on costs or CFA success fees what is the logical conclusion?  My own reluctant conclusion is that Part 36 has had its day as far as Defendants are concerned and that Defendants are better making Calderbank offers in future.  Such offers ought to be marked ‘Without prejudice save as to costs’, clarify that they are made outside of the Part 36 regime relying on CPR 44.3 instead, with careful thought about the terms to be included for expiry or late acceptance, interest or any counterclaim, CRU, costs and payment terms, if accepted.  Not all of the limitations referred to above are attributable to the last amendments with effect from 6 April 2007 but it is certainly ironic that the successes achieved by the NHSLA in Crouch and in Murray that avoided the need to tie up public money by making payments into Court triggered this review and led to arguably the final nail in the coffin.

  As ever, there is a final caveat.  Lord Justice Jackson was asked to undertake a complete review of costs in civil litigation and his preliminary report has been published  http://www.judiciary.gov.uk/about_judiciary/cost-review/preliminary-report.htm. With a view to curing one of the worst aspects of high costs claims, (expensive and disproportionate After The Event insurance under CFA funded claims), LJ Jackson is plainly very interested in the possibility of one way costs shifting as is the case with legal aid funded cases, whereby a successful Claimant recovers its costs from the Defendant but a successful Defendant cannot recover its costs from a Claimant.  There are concerns about fairness generally, but LJ Jackson suggests the costs recovered by successful Defendants in CFA funded cases is far outweighed by having to pay the ATE premiums on cases that are settled or won by the Claimant at trial.  However, another concern is that the absence of any risk on costs under Part 36 or some other mechanism may encourage Claimants to bring more frivolous claims and/or water down the incentive for Claimants to accept sensible offers.  Where all this will leave the regime under Part 36 is anybody’s guess and LJ Jackson has requested further views by 31 July 2009. 

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