PART 36 OFFER DID NOT ENCOMPASS PAYMENT ON ACCOUNT: COSTS ON THE INDEMNITY BASIS: A BAD DAY AT THE OFFICE
The Court of Appeal decision yesterday in Littlestone -v- Macleish  EWCA Civ 127 deals with important elements of Part 36 offers. Not least the importance of stating, with absolute clarity, whether an offer is exclusive or inclusive of previous interim payments.
“Thus identified, the issue continued to fester away, bedevilling attempts to settle, so that the proceedings went to a full 5-day trial in January 2014, by which time the parties had, as so often occurs in hard fought disputes about relatively modest amounts, incurred costs out of all proportion to the value of the underlying issue”
- A payment on account did not mean that the defendants had beaten their own Part 36 offer.
- Under the terms of the lease the defendants were liable to pay the claimant’s costs on an indemnity basis.
- The claimant brought an action as landlord against his colleagues [or perhaps former colleagues] in a solicitors’partnership as tenants following termination of a lease of office premises. The claim was for breach of the defendants’ repairing obligations and totalled £74,820.93 plus interest.
- After a full trial the judge awarded the claimant damages of £48,409.40 together with interest and agreed service charges. The defendants were ordered to pay the claimant’s costs on the standard basis.
- Both sides appealed.
- The defendants argued that the claimant failed to do better than their Part 36 offer. The claimant
- The claimant argued that he was entitled to indemnity costs pursuant to a clause in the lease.
THE PART 36 ISSUE
- The defendants offered to pay £35,000 on the 13th February 2013.
- In a defence filed on the 1st March 2013 the defendants agreed liability in the sum of £17,504.
- That £17,504 was paid to the claimant
- The claimant made an offer to accept £54,000 inclusive of interest and VAT but less the £17,504 already paid on account.
- The defendants responded that the parties were only £1,496 apart. “It being implicit in the response that the £35,000 thereby offered had been available for acceptance in full, without the claimant having to give credit for the £17,504 already paid by the defendants pursuant to their admissions.”
- The case proceeded to a five day trial where the parties “as so often happens in hard fought disputes about relatively modest amounts, incurred costs out of all proportion to the underlying issues.”
- The judge gave judgment for £55,463.11.
- The judge rejected the argument that the Part 36 offer should be aggregated with the £17,504 payment following admissions.
- It was common ground, on appeal, that if the Part 36 offer and payment of £17,504 were aggregated then the claimant’s judgment did not beat defendants’ Part 36 offer.
THE CLAIMANT’S OFFER
The Court of Appeal rejected the argument that the defendants had beaten their own offer.
- The defendants’ offer was “from start to finish” an offer to settle the entirety of the claimant’s claim for £35,000 no more and no less”.
- The admissions payment was accepted on the basis that it was a payment on account.
- If the claimant had accepted after the relevant date the net sum due payable would only have been £17,497.
THE “CRITICAL FLAW” AND “ABSURDITY” OF THE CLAIMANTS’ ARGUMENTS
- The critical flaw in the defendants’ case is that it failed to address the “obvious reality” that an admitted payment on account of a claim, following a Part 36 offer in a higher amount must, in the absence of any agreement to the contrary, be taken as much as on account of the Part 36 offer to settle the claim as it is made on account of the claim itself.
- The construction contended for by the defendants represented an “absurdity”.
Lord Justice Briggs observedL
I consider that the critical flaw in the defendants’ primary case is that it fails to address the obvious reality that an admitted payment on account of a claim, following a Part 36 offer in a higher amount must, in the absence of any agreement to the contrary, be taken as being made as much on account of the Part 36 offer to settle the claim as it is made on account of the claim itself. During argument I put to Mr Pepperall the example of a claim for £40,000 followed by a defendant’s Part 36 offer of £35,000, then followed by a defendant’s payment after admissions of £30,000. Would the claimant, upon acceptance of the Part 36 offer, obtain a net £5,000, or £65,000, on account of the £40,000 claim? Mr Pepperall boldly submitted that the defendant would be obliged to pay £65,000, after which he would no doubt sue his solicitors for placing him in that absurd predicament. In my view, the absurdity derives from the submission that Part 36 produces that result on those facts.
The absurdity is, in my view, by no means confined to a case where aggregating the Part 36 offer and the admissions payment would produce a sum larger than the claim. It arises from the fact that the admissions payment is made on account. By that I do not mean that it is an “interim payment on account” within the meaning of the Civil Procedure Rules, which is a payment which may be ordered, or made voluntarily, without prejudice to the payer’s case, rather than following an admission that the amount of the payment is due: see generally Part 25.1(k), 25.6, 25.8 and 25.9. The admissions payment was not that kind of interim payment, but it was plainly a payment on account of the claimant’s claim. This is the express basis upon which the claimant insisted, in his letter of 7 March, and the money was then paid by the defendants without demur, following receipt of that letter. I would have reached the same conclusion about the nature of the payment, even if no such letter had been written.
It is not in my view merely a question of absurdity. The general thrust of the CPR, and of Part 36 in particular, is both to encourage parties to make sensible offers to settle the claim and also to take sensible steps to limit the issues between them. These are separate objectives. Part 36 serves the first, while admissions serve the second. Payment following admissions may stop interest running, and will avoid the cost of the claimant having to obtain interim judgment on the admissions.
There is nothing inconsistent in a defendant both wishing to encourage settlement by making an offer to settle the whole claim, then making one or more smaller payments outright pursuant to admissions, while leaving the Part 36 offer open for acceptance throughout. The continuing offer encourages settlement while the admissions payment narrows the issues. There is no reason why the admissions payment should be intended to improve the value of the offer to settle the whole claim. It is made for a different purpose. If Mr Pepperall’s analysis were correct the defendant would have to withdraw the Part 36 offer to prevent it being aggregated with the admissions payment. As the Rules then stood, such a withdrawal could only be made within the relevant period with the permission of the court: see Part 36.3(5). The present position is more complicated: see Part 36.10, but no more amenable to the making of an early admissions payment during the relevant period.
COSTS ON THE INDEMNITY BASIS
The lease provided that the defendant pay “all costs and expenses (including legal costs).” The Court held that this phrase corresponded more closely with assessment on the indemnity basis than upon the standard basis. This is because of the obligation to pay “all costs and expenses” was more akin to the indemnity basis because the contract was not concerned with proportionality.
RELATED POSTS ON PART 36
- Fixed costs and Part 36: the judgment in the Court of Appeal.
- Lord Chancellor gets a bonus: the powerful results of a claimant’s Part 36 offer.
- Not a racing certainty: but indemnity costs follow claimant’s Part 36 offer.
- Part 36: when the normal costs penalties may not apply
- Is this a claimant’s or defendant’s offer? Another important decision on Part 36
- Clarification of a Part 36 offer has a major effect on costs.
- Costs where a claimant accepts a Part 36 offer late: two cases where the claimant came to grief
- Another case where there was an invalid Part 36 offer
- Is this a Part 36 offer I see before me? That’s an important question
- How relevant are Part 36 offers to issue based orders?
- Knowing the risks and advantages for the claimant in the new Part 36.
- The costs consequences of Part 36 offers: do they always apply? The cases in detail.
- Costs consequences of Part 36 offers: some interesting examples
- Costs, conduct, Part 36 and the “Winning Party”.
- Interest and costs when a claimant beats their own Part 36 offer.
- Costs of £7 million: Part 36 bites hard on claimants who cleared a first hurdle but fell at the second.
- Claimant beats own Part 36 offer and receives an additional £75,000 in damages.
- The dangers of a Part 36 offer: Claimant pays three times more in costs than he receives in damages.
- Another example of a successful defendant not recovering all of its costs (and of the advantages of a Part 36 offer).
- Percentage costs orders after a claimant beats their own Part 36 offer: a High Court decision.
- Very important decision on Part 36 offers, assessment of costs and additional amounts when offers not beaten.
- Increased interest and costs after claimant beats its own Part 36 offer.
- Part 36 offer does not override the need to serve the claim form.