COURT OF APPEAL DECISION ON CONSTRUCTION OF PART 36: IT IS NOT A PART 36 OFFER JUST BECAUSE THE PARTIES SAY SO: OFFERS CAN ONLY BE ASSESSED BY REFERENCE TO THE PLEADINGS

In Hertel & Anor v Saunders & Anor [2018] EWCA Civ 1831 the Court of Appeal upheld a decision that an offer made was not a valid Part 36 offer.  It was held that a Part 36 offer had to be construed in relation to the case set out in the statements of case.

“… the parties cannot agree that an offer or an acceptance is in accordance with Part 36 if, on analysis, it is not. In particular, if the offer letter fails to comply with a mandatory requirement of Part 36, it will not be construed as complying with the rule, whatever heading it bears and whatever the objective intention”

“The next question is whether, in a case where proceedings are ongoing, the words ‘claim’, ‘a part of a claim’ or ‘an issue’ should be construed as meaning claims, parts of claims or issues which can be identified in or which arise from the pleadings, or whether they would also include claims, parts of claims or issues which have not been pleaded but which, for example, may have been mentioned in correspondence or in an informal conversation between solicitors…  this question only has to be posed for the answer to become immediately apparent. In civil proceedings, claims/parts/issues can only properly be defined by reference to the pleadings. Indeed, that is the principal purpose of pleadings. It would introduce unnecessary and unwelcome uncertainty if claims/parts/issues were given a wide definition that did not seek to anchor them to the pleadings which the parties have exchanged.”

THE CASE

The claimant sued a number of parties alleging that certain individuals were involved in a partnership and claiming sums due from certain companies.  The claimant applied for permission to amend the Particulars of Claim. Prior to the Particulars being amended the defendants’ solicitors wrote a letter of settlement to the claimant, stating that it was made under CPR 36.  That offer stated that the claim, as pleaded, was bound to fail against the indvidual claimants. However the offer was made on the basis of the proposed amendments.  The claimant accepted that offer.

The matter went before a Master where both parties agreed that this was a Part 36 offer. The Master held that, in accordance with the provisions of Part 36, the defendants should pay the claimants’ costs.

ON APPEAL TO THE HIGH COURT JUDGE

On appeal to the High Court judge , Tim-Alexander Gunther Nikolaus Hertel -v- Artemis International Sarl [2015] EWHC 2848 (Ch) the defendants argued that this was never a Part 36 offer (contrary to their stated position before the Master).  The judge accepted this.  Part 36 could not be construed so as to cover a case that had not, in fact, yet been pleaded or formulated in an existing action.

The judge also considered whether the offer complied with Part 36 in relation to giving 21 days and held, on balance, that it did.

THE RESULT OF THE DECISION IN THE HIGH COURT

The order that the defendants pay the claimants’ costs was (largely) overturned with an order that the claimants pay the defendants’ costs.

THE DECISION IN THE COURT OF APPEAL: THIS WAS NOT A PART 36 OFFER

The Court of Appeal upheld the decision of the High Court judge.

THE COURT OF APPEAL JUDGMENT

 The Court of Appeal set out the facts and reviewed the authorities.
“The Authorities
    1. It has been repeatedly said that Part 36 is a carefully structured, highly prescriptive and self-contained code: see, for example, Gibbon v Manchester City Council [2010] 1 WLR 2081.
    2. If a party makes an offer which is intended to be an effective Part 36 offer, and a point arises as to the construction of the language of the offer, and if one possible interpretation would result in an effective Part 36 offer, and another possible interpretation would mean that the offer was not an effective Part 36 offer, then the former interpretation is to be preferred: see C v D [2012] 1 WLR 1962. At paragraph 55 of his judgment in that case, Rix LJ said:

“Another principle or maxim of construction which is applicable in the present circumstances is that words should be understood in such a way that the matter is effective rather than ineffective (verba ita sunt intelligenda ut res magis valeat quam pereat). If the words “open for 21 days” are given the meaning for which the respondent contends, then the offer, intended to take effect as a Part 36 offer, fails as such. If, however, the words are given the meaning for which the appellant contends, then the intention of making a Part 36 offer is fulfilled. There are numerous instances of the application of this maxim. This is how Chitty on Contracts, 30th ed, 2008, Vol 1, at para 12-081 refers to this rule:

‘If the words used in an agreement are susceptible of two meanings, one of which would validate the instrument or the particular clause in the instrument, and the other render it void, ineffective or meaningless, the former sense is to be adopted…'”

    1. However, the parties cannot agree that an offer or an acceptance is in accordance with Part 36 if, on analysis, it is not. In particular, if the offer letter fails to comply with a mandatory requirement of Part 36, it will not be construed as complying with the rule, whatever heading it bears and whatever the objective intention: see Rimer LJ in C v D at paragraph 75, and Carillion JM Limited v PHI Group Limited [2012] EWCA Civ 588, [2012] CP Rep.37.
    2. There is no specific authority dealing with the superseded r.36.10(2) and the indication that a claimant can recover the costs of the proceedings “unless the court orders otherwise”. However, the notes in the White Book 2014 indicate that under this rule the court has a complete discretion to deal with what it calls the costs at large. The discretion relates to the costs of the whole action: see E. Ivor Hughes Educational Foundation v Leach[2005] EWHC 1317 (Ch). Furthermore, the ‘steer’ provided by the wording of r.36.10(2) might be regarded as relatively gentle; it is, for example, to be contrasted with the much firmer guidance in existing r.36.17(3) and (4), which requires the court to order costs in favour of the defendant and the claimant respectively, “unless it considers it unjust to do so”.
Was the offer of 17 February 2015 in accordance with Part 36?
    1. I have not found this issue entirely clear-cut; indeed, my initial view was that, by concentrating simply on what was formally within the pleadings, Morgan J may have adopted an overly technical approach to the meaning of ‘claim’ for the purposes of r.36.2(2)(d). But I have concluded that, on analysis, Morgan J was right to decide that the offer was not in accordance with Part 36. My reasons are set out below.
    2. Mr Smith’s best point in support of his submission that ‘claim’, ‘part of a claim’ or ‘issue’ should not be defined too narrowly, was that, pursuant to r.36.3(2) (current r.36.7(1)), a Part 36 offer can be made at any time, including before the commencement of the proceedings. At that point, of course, the claim/part/issue could not be defined by reference to any pleadings because there would not be any. So, the argument goes, ‘claim’, ‘part of a claim’ or ‘issue’ should not be construed by reference to the pleadings after commencement either.
    3. I consider that there are two flaws in that argument. First, the position pre-commencement is inevitably different to that which exists after commencement of proceedings. Once proceedings have started, there are pleadings and procedural rules designed to regulate the proceedings in a fair and efficient way. In a dispute like this, about the application of Part 36 after commencement, it would be wrong in principle to construe the rules in a way that ignored the certainty and clarity which they provide, and to approach the words in r.36.10(2) as if the proceedings had not yet begun. In effect, the claimants’ argument assumes that there may be no or little clarity pre-commencement, so that at that stage a claim/part/issue might be referable to any kind of communication, and then seeks to say that the same must apply after commencement as well. In this way, any certainty and clarity imposed post-commencement by the CPR (particularly by the pleadings) would be lost. In my view, that cannot be right as a matter of principle.
    4. Secondly, I do not accept the assumption (that there will be a lack of clarity pre-commencement about the claims being made) in any event. These days, in respect of most kinds of claim, the pre-commencement period will be taken up with the Pre-Action Protocol (“PAP”) process. Depending on the precise nature of the claim, the relevant PAP insists on the provision of a detailed claim letter and even the supply of supporting evidence. Even where there is no PAP applicable to a particular claim, the parties must comply with the Practice Direction – Pre-Action Conduct and Protocols (page 2577 of volume 1 of the White Book 2018). In this way, claims/parts/issues are therefore not nearly so difficult to identify before commencement of proceedings as the submission presupposed.
    5. Accordingly, I do not think that the fact that r.36.2(2)(d) can also apply pre-commencement should affect the proper interpretation of the words ‘a claim’, ‘a part of a claim’ or ‘an issue’ in a situation like this, when the offer was made some time after the commencement of proceedings.
    6. The next question is whether, in a case where proceedings are ongoing, the words ‘claim’, ‘a part of a claim’ or ‘an issue’ should be construed as meaning claims, parts of claims or issues which can be identified in or which arise from the pleadings, or whether they would also include claims, parts of claims or issues which have not been pleaded but which, for example, may have been mentioned in correspondence or in an informal conversation between solicitors.
    7. In my view, this question only has to be posed for the answer to become immediately apparent. In civil proceedings, claims/parts/issues can only properly be defined by reference to the pleadings. Indeed, that is the principal purpose of pleadings. It would introduce unnecessary and unwelcome uncertainty if claims/parts/issues were given a wide definition that did not seek to anchor them to the pleadings which the parties have exchanged.
    8. To take an extreme example, Mr Smith suggested in his oral submissions that, if the claimant’s solicitor introduced a possible new claim in a letter to his opponent, then that would be caught by the words of the rule, even if it had not been the subject of any formal amendment, and even if it had not been the subject of any kind of response by the defendant. I consider that such an interpretation would lead to uncertainty and confusion; it may even encourage the potential abuse of the Part 36 regime.
    9. Accordingly, like Morgan J, I would construe the words ‘claim’, ‘part of a claim’; and ‘issue’ as referring to pleaded claims, parts of claims or issues, and not other claims or issues which may have been intimated in some way but never pleaded. Once proceedings have started, the certainty required for Part 36 to operate properly can only be achieved by this interpretation. A new claim which has been intimated, but which is not part of the pleadings, is not therefore caught by r.36.2(2)(d) (current r.36.5(2)(d)).
    10. Does it make a difference that, in this case, the new claim had been the subject of a proposed amendment and/or that the defendants’ solicitors had indicated that they would not oppose that amendment. On analysis, I do not think it does.
    11. The fact that the new claim was the subject of a proposed amendment makes no difference. That simply demonstrated that there was a new claim based on the direct agreement which, if and when permission to amend was granted, would become one of the claims in the proceedings. It could not be a claim within the rule until the amendment was allowed: that was doubtless part of the reason why the claimants were seeking to amend the particulars of claim in the first place.
    12. As to the point about the defendants’ lack of opposition to the amendment, Morgan J demonstrated that the defendants’ solicitors had had the opportunity to consent to the amendment (in which case a consent order could have been provided to the court and the new claim would have become formally part of the proceedings) but declined to take it. They indicated that they would not oppose the application, but they said (in accordance with the original order of Master Teverson) that there would have to be an application to amend and a court hearing to determine the matter. If, at that hearing, there had been some reason why the court had refused to allow the amendment, the defendants would have been perfectly entitled to rely on that refusal, and the proposed new claim would never have become part of the proceedings. There is plainly a difference between consenting to an amendment, on the one hand, and indicating a future intention not to oppose an application to amend, on the other.
    13. More widely, it seems to me that this approach to interpretation is consistent with the particular status of Part 36. It is a prescriptive regime which can have draconian consequences for those who fail to comply with it. That tends to suggest that the court should be wary of liberally construing the rules within Part 36 simply to achieve what might appear, at first glance, to be a pragmatic answer on the facts of a particular case. For similar reasons, this court has very recently eschewed what might be called a liberal interpretation of other parts of Part 36 (Hislop v Purde [2018] EWCA Civ 1726), and adopted a similar approach when dealing with the related section of Part 44 dealing with qualified one way costs shifting (Cartwright v Venduct Engineering Ltd [2018] EWCA Civ 1654).
    14. The Part 36 regime is also relevant to Mr Smith’s other substantive argument, which was to the effect that it would be illogical for Part 36 to operate in proceedings prior to the intimation of a new claim, only to be then effectively suspended for a period until after permission to make the amendment introducing the new claim had been granted. In my view, that is not a correct characterisation of the position. In the circumstances he postulated, Part 36 would not be suspended; it would be operative throughout the proceedings, but only ever in relation to the pleaded claims. That is a perfectly coherent outcome and, as I have said, it provides the necessary certainty for both parties.
    15. Of course, it must be acknowledged that this conclusion is contrary to the original views of the parties. They both considered that this was a Part 36 offer, and maintained that understanding before Deputy Master Lloyd. It was only when the defendants lost, and were faced with what the Deputy Master considered were the consequences of r.36.10(2) that they sought to argue that the offer was not in accordance with Part 36. It may well be that, in those circumstances, the claimants should have objected to the point being raised before Morgan J. But they did not, and it is too late for that procedural argument to be revisited now.
    16. As to the substance of the point that both parties originally accepted that the offer was a valid offer under Part 36, the answer can be found in C v Dand Carillion (paragraph 23 above). If an offer was not, on analysis, a Part 36 offer, then it cannot be made one simply because that was how it was originally labelled.
    17. For all these reasons, therefore, I consider that Morgan J was right to conclude that the offer was not in accordance with Part 36, and that therefore r.36.10(2) did not apply. That in turn means that this appeal should be dismissed.
What was the right costs order?
    1. However, on the assumption that Morgan J was wrong, and the offer had been in accordance with r.36.2(2)(d) (current r.36.5(2)(d)), Part 44.2 would have been inapplicable, and this court would have had to exercise its discretion afresh under r.36.10(2). But in my view, that would have made no difference to the outcome.
    2. Under r.36.10(2), there is a gentle steer that the appellants should recover their costs of the proceedings but, as noted at paragraph 24 above, the court had a wide discretion to order otherwise. In my view, the reasoning set out by Morgan J at [54] – [62], in which he explains in detail why the defendants are the successful party, is unassailable. It applies whether or not the Part 36 offer was legitimate. They are therefore the reasons why the court would “order otherwise” under superseded r.36.10(2).
    3. Furthermore, Mr Smith seemed to accept that proposition, at least in part, during his oral submissions. Although he had originally indicated that he wanted Deputy Master Lloyd’s order re-instated, in answer to questions from the court, he accepted that (even if he was right about Part 36) he could not argue that the claimants were entitled to recover their costs of the abandoned claims from the defendants. And yet, that was what Deputy Master Lloyd had ordered, before his order was overturned by Morgan J.
    4. In the light of that realistic concession, the only remaining part of the appeal concerned whether the claimants should pay the defendants’ costs of the abandoned claims. Morgan J said they should because the defendants were the successful party. As I have explained, I agree with that outcome.
    5. In this way, even if the offer was a valid Part 36 offer, Deputy Master Lloyd was wrong to order that the defendants should pay the claimants’ costs of the abandoned claims, and Morgan J was right to order that the claimants should pay the defendants’ costs of those claims.
Conclusions
  1. For the reasons set out above, I consider that Morgan J was right to conclude that the offer was not a legitimate Part 36 offer. But even if he was wrong about that, on a proper consideration of the merits under either superseded r.36.10(2), or under Part 44.2, the inescapable conclusion is that the defendants were the successful party and were therefore entitled to their costs of the proceedings.”