AN OFFER THAT IMPOSES A CONDITION AS TO COSTS IS NOT A VALID PART 36 OFFER: MERE FAILURE TO ACCEPT REASONABLE OFFER DOES NOT LEAD TO INDEMNITY COSTS

June 17, 2019 · by · in Applications, Civil Procedure, Costs, Part 36

In Knight & Anor v Knight & Ors (Costs) [2019] EWHC 1545 (Ch)  HHJ Paul Matthews (sitting as a High Court Judge) held that an offer that attempted to limit costs was not a valid Part 36 offer.   The judge also rejected the claimants’ argument that the defendants’ failure to accept a reasonable offer, made outside the ambit of Part 36, should lead to the claimants being awarded indemnity costs.

“A mere failure to accept a reasonable offer is not enough. That happens every day of the week, with both parties acting reasonably and in accordance with the advice that they are receiving from their professional advisers. So if the matter is to be taken “out of the norm” there must be something more, something which prompts the court to visit the paying party with a special mark of condemnation. I see nothing of that kind here.”

THE CASE

The judge was considering the incidence of costs after delivering a judgment. One matter that arise was whether an offer made by the claimants’ solicitors was a valid Part 36 offer.

THE OFFER

The judge set out the terms of the letter relied on.
    1. The letter of 27 July 2017 is headed “Part 36 Offer: Without Prejudice Save As to Costs”. The substance of the letter reads as follows:
“Following Monday’s failed mediation (in respect of which privilege is not waived) we are instructed to make the following offer.
The offer is made pursuant to CPR Part 36. As such, if it is not accepted within the relevant period (see below) but is (without having been withdrawn) later accepted then your client will be liable to our clients’ costs. If Administrators succeed in obtaining a greater sum at trial then your clients will be liable to our clients costs on the indemnity basis and with interest thereon at a rate not exceeding 10% above base rate together with the additional sum set out in CPR 36.17(4)(d).
The offer is to pay, from the net proceeds of sale of Close Court, the sum of £35,000. This sum is inclusive of your clients’ costs, which we understand to be under £20,000. The offer also excludes any payment by your client of our clients’ costs, which as you also know are around £30,000.
The remainder of the net proceeds will be paid to our client as the administrators of Steven Knight’s estate.
Pursuant to CPR Part 36:
  • The relevant period means a period of not less than 21 days from the date of this offer.
  • The offer is made in respect of the whole claim over the net proceeds of Close Court
This offer will remain open until it is expressly withdrawn but the court’s permission will be required to accept it where any of 36.11(3) applies.”

THE JUDGE’S DECISION: THIS WAS NOT A VALID PART 36 OFFER

The judgment here is important because it considers, and rejects, an argument that a High Court decision on Part 36 was binding on the court.
    1. Mr Troup, on behalf of the defendants, submits that the letter of 27 July 2017 does not amount to a Part 36 offer, because it contains terms as to costs. He relies on the decisions of the Court of Appeal in Mitchell v James [2004] 1 WLR 158, and in French v Groupama Insurance Co Ltd[2011] 4 Costs LO 547, [2012] CP Rep 2. In the former case, the claimants having brought an action against the defendants thereafter sent the defendants an offer to settle the proceedings, on terms, inter alia, for each party to bear its own costs. Peter Gibson LJ (with whom Potter LJ and Sir Murray Stuart Smith agreed) held that, for four separate reasons which I do not need to rehearse, the draughtsman of CPR Part 36 did not intend terms as to costs to be included in a Part 36 offer. Accordingly, the offer made in that case was not a Part 36 offer.
    2. In the latter case, the claimant had issued her claim (for breach of contract) in March 2009. After judgment had been handed down, the defendant relied on offers made in December 2006 and February 2007 (ie before proceedings were issued) of a sum to cover the entirety of the claimant’s claims, “inclusive of interest and costs”. Rix LJ (with whom Lloyd and Toulson LJJ agreed) said:
“[39] … the offers were all embracing, so that to that extent they were clear, or at any rate the February offer was so; but, although Mr Brown on behalf of Groupama submitted, and the judge accepted, that it was inclusive of everything, including costs, it is not entirely clear to me that costs were included. However, if it was, and Mr Brown has on this appeal continued to submit then it was, then it was not to that extent a quasi Part 36 offer, for such an offer must not include an offer as to costs: see Mitchell v James…”
    1. Mr Dew, on behalf of of the claimants, says that, notwithstanding these authorities, it is open to an offeror to include terms in the offer which limit payment of its own costs by the offeree. He relies on the decision of Hildyard J in Proctor & Gamble Co v Svenska Celluslosa AB SCA [2013] 1 WLR 1464. In that case the claimant had sold part of its business to the defendants pursuant to an agreement providing for an adjustment of the purchase price in certain circumstances. A dispute arose as to the amount of that adjustment. The claimant said it was zero, whereas the defendants said it was £19 million. The claimant sought declarations and other relief in legal proceedings. It also made an offer, expressed to have Part 36 consequences, to settle its claim on the basis that the adjustment due to the defendants was £3 million and (critically) that the claimant would be liable for the defendants’ costs up to the date of acceptance. The offer was not accepted, but at trial the claimant obtained two of the three declarations it sought, and the adjustment due to the defendants was held to be less than £3 million.
    2. The claimant sought its costs on the basis that it had made a Part 36 offer, and that the statutory consequences should follow. The judge first held that overall the claimant had been the successful party. He also held that, even though the claimant had sought declaratory relief about the extent of its liability to the defendants, formally it was nonetheless the claimant for the purposes of Part 36. Finally, the judge held that it was open to a claimant making a Part 36 offer to agree to forsake its entitlement to costs on acceptance of the offer and instead to pay the defendant his costs, and therefore the claimant’s offer was compliant with Part 36.
    3. In so deciding, the judge considered the decision of the Court of Appeal in F & C Alternative Investments (Holdings) Ltd v Barthelemy (No 3)[2013] 1 WLR 548. That was a case in which an offer to settle had been made, but deliberately and expressly “outside the terms of Part 36”. It was nonetheless sought to apply Part 36 by analogy. However, the Court of Appeal held that there was no reason or justification for extending Part 36 beyond its expressed ambit. Davis LJ (with whom both Arden and Tomlinson LJJ agreed) said:
“[63] … in my view it is not permissible wholly to discount a number of failures to comply with the requirements of CPR Part 36 as the merest technicality. Perhaps there can be de minimis errors or obvious slips which mislead no one: but the general rule, in my opinion, is that for an offer to be a Part 36 offer it must strictly comply with the requirements.”
It is, however, to be noted that Mitchell v James was not cited to the Court of Appeal in F & C Alternative Investments nor to Hildyard J in Proctor & Gamble. On the other hand, French v Groupama was briefly discussed, albeit in a different connection, by Davis LJ (at [65]) in the Court of Appeal in F & C Alternative Investments (but was not cited to Hildyard J in Proctor & Gamble).
    1. Nevertheless, Hildyard J said this:
“47. In my view, the issue in the F & C case was really whether an offer accepted not to be within Part 36 could be given, by analogy, the same consequences as would have followed if it had been compliant and intended to be so. Here, the issue is whether CPR 36.2(2), and thus the gateway to CPR 36.10 and 36.14, is to be so strictly construed that it requires (by rule 36.2(2)(c)) the offer made to provide for the defendant to be liable for the claimant’s costs even if the claimant expresses his offer to be a Part 36 offer, but as part of that offer, agrees to forsake that entitlement and instead pay the defendant his costs. Put another way, I do not accept that it is impossible for a claimant to comply with Part 36 unless he requires to be paid his costs and such payment to be made within a period of not less than 21 days.
48. As it seems to me, such a strict construction would tend to undermine a central objective of Part 36, identified by Davis LJ himself as being to encourage claimants to make sensible offers and provide an inducement to defendants to accept them lest otherwise they be exposed to the consequences provided. That objective would be advanced, not undermined, by reading CPR36.2(2)(c) as requiring a claimant who seeks his costs to specify a period of not less than 21 days within which the defendant will be liable to pay them, but not as mandating that the claimant must seek costs and make payment of them a condition of his offer.
49. I do not myself see why such a purposive approach to construction should not be available in the context of Part 36, as it is in the context of statutes and contracts and other instruments (subject, of course, to well-known limitations). Nor do I see that such an approach is precluded by the judgment of Davis LJ in F & C: this is not a matter of applying Part 36 by analogy; and the strict compliance required is of the statutory provision properly, and, if appropriate, purposively, construed.”
(It should be borne in mind that this case was decided on the old version of Part 36, before the reforms made in 2014, which inter alia changed the numbering of the rules.)
  1. I therefore understand Hildyard J to be saying that it is still possible to comply with Part 36 by including in the offer a term as to costs, provided that the term concerned reduces the burden on the offeree that would otherwise be imposed as a consequence of accepting the offer, rather than increases it. As it seems to me, that is strictly inconsistent with the decisions in Mitchell v James and French v Groupama, that no term as to costs should be included in a Part 36 offer. The first of these decisions concerned an offer which would have altered the cost consequences otherwise flowing from a Part 36 offer. The second of them concerned the offer of a sum to cover the entirety of the claimant’s claims, “inclusive of interest and costs”. That is very similar to the wording of the offer in the present case, which (so far as material) reads “to pay [to the offerees] … the sum of £35,000 … inclusive of your clients’ costs…” It might have been argued that all that means is that the total sum to be paid is £X, and it will not be increased to take account of any offerees’ costs already incurred. Yet the Court of Appeal held that the similar wording used in that case introduced a term as to costs and therefore could not amount to a Part 36 offer.
  2. In these circumstances, I do not think that I am free simply to follow the decision of Hildyard J, even if it applied on the facts. The decisions of the Court of Appeal in Mitchell v James and French v Groupama, binding on me, that no term as to costs should be included in a Part 36 offer, were not cited to him, and so I do not know how he would have dealt with them. Moreover, the offer made in the present case is materially indistinguishable from the offer made in the latter of the two cases. Accordingly, I hold that this offer is not a Part 36 offer, and therefore does not have the costs consequences of such an offer.

THE COURT WOULD NOT AWARD INDEMNITY COSTS SIMPLY BECAUSE A PARTY REFUSED A REASONABLE OFFER

Having found that this was not a Part 36 offer the judge rejected the argument that the claimants should be entitled to indemnity costs in any event.
  1. Given that I have held that Part 36 does not apply to the offer made in the present case, the question then is whether I should for some other reason order the defendants to pay the claimants’ costs on the indemnity basis. Mr Dew says that I should, for two reasons. The first reason is that, if this is not a Part 36 offer (as I have held), the defendants have no incentive to accept it. The only way to give them an incentive to accept it is to put them in a worse position if they do not, by ordering them to pay the claimant’s costs on the indemnity basis. One problem with this argument is that when the court is dealing with relatively modest amounts of costs, as here, the difference between standard and indemnity basis costs is likely to be very small, and therefore not much of an incentive anyway.
    1. But in any event I am not persuaded that the argument is sound. If the defendants had accepted the (non-Part 36) offer, they would have received £35,000 out of the proceeds of sale and paid nothing of the claimants’ costs. On the other hand, if the defendants did not accept the offer and fought the case, then in line with my judgment they would have received nothing and were likely as the unsuccessful party to be ordered to pay the claimants costs on the standard basis (as indeed they have agreed to do). To my mind, those are significant incentives to accept the offer. So I reject the first point.
    2. The second point is that the defendants behaved unreasonably in refusing to accept the offer made, and that unreasonable conduct takes the case out of the norm, and justifies an award of indemnity costs. Thus, in F & C Alternative Investments, Davis LJ said:
“[70] There may be special cases where refusal to accept reasonable offers of settlement is capable of justifying an award of indemnity costs: see Epsom College v Pierce Contracting Southern Ltd [2012] 3 Costs LR 351. But, as Rix LJ there emphasised, the failure to accept such offers, or to accede to an approach for settlement, must be unreasonable: see paragraphs 71 and 72 of his judgment … “
    1. However, Davis LJ went on to quote from the judgment of Simon Brown LJ (with whom Waller and Sedley LJ J agreed) in Kiam v MGN Ltd (No 2)[2002] 1 WLR 2810:
“[12] I for my part, understand the court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. …
[13] It follows from all this that in my judgment it will be a rare case indeed where the refusal of a settlement offer will attract under Part 44 not merely an adverse order for costs, but an order on an indemnity rather than standard basis …”
  1. I respectfully agree with what Simon Brown LJ said. A mere failure to accept a reasonable offer is not enough. That happens every day of the week, with both parties acting reasonably and in accordance with the advice that they are receiving from their professional advisers. So if the matter is to be taken “out of the norm” there must be something more, something which prompts the court to visit the paying party with a special mark of condemnation. I see nothing of that kind here. In my judgment it is appropriate to order the defendants to pay the claimant’s costs on the standard basis.
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