Interpreting part 36 offers

One of the perennial areas of work in costs litigation concerns disputes over part 36 offers. Even now, in November 2017, some 18 years after the introduction of part 36 CPR there remains fruitful scope for satellite litigation over their (mis)use.

One area that arises from time to time, is construing what a part 36 offer actually means, as sometimes a dispute can ensue over whether a claim has been compromised, or whether if there has been a compromise it includes all or only part of the claim or what the terms of the compromise are.

It should be noted that part 36 offers may be made at an early stage of litigation, but subsist for a number of years before the offeree decides that it may be better to accept for one reason or another, a part 36 offer that has been made. At that time the litigation may have entirely changed in nature or scope.

The conceptual difficulty that arises, however, is that a part 36 offer can only ever have one meaning: the rules in part 36 provide for it to be “clarified” at the offeree’s request, but it can only have one true meaning. Logically, the offer must mean the same thing when it is made, whilst it exists and when it is accepted even though that period might span years.

It follows in turn, logically, that events or negotiations or documents, created subsequent to the making of the part 36 offer can have no bearing on what the offer meant when made. How could they? They were not in existence or were unknown factors when the part 36 offer was made.

When identifying what a part 36 offer means, it is entirely appropriate to apply by analogy, the general principles of contractual interpretation but suitably modified to take account of the self contained nature of part 36. In C v D itself, the Court of Appeal observed:

45 It follows from my answer to the first issue that there is a necessary inconsistency between an offer being both time-limited and a Part 36 offer. An offer may be one or the other, it cannot be both. That is the objective context in which the offer in this case was made by the claimant’s solicitors to the defendant’s solicitors. Both the writer and the reader of that offer must be taken, objectively, to know the legal context. Of course, mistakes occur and must be allowed for. However, the question is how a reasonable solicitor would have understood the offer in that context, including the known context of the dispute as it stood at that time: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896.

(emphasis added)

This passage makes it plain that although the contractual rules of construction are adopted by way of analogy, the point in time whereby the court construes the background matrix of fact, is the date when the offer is made, not as in a contractual compromise, the date the contract is made. This in turn is a logical approach to adopt. Unlike a contractual compromise, which might be contained in a number of interlocking documents, a compromise brokered through part 36 will only consist of the part 36 offer, and a simple acceptance of it.

It follows, that this is one of the differences between the part 36 regime the self-contained code, and the general law of contract: when the court construes a contract, it is concerned to construe the contract at the date it is made.

In cases where disputes arise under part 36, because a part 36 offer is either accepted or it is not, the court is concerned not to construe the compromise, but rather to construe the offer and then see whether that has been accepted or not. This is a subtle but very important difference. Because at a stroke, the subsequent events to the making of the part 36 offer become irrelevant.

The exclusion of subsequent material once, it is accepted that the material date is the date of making the part 36 offer, rather than the date of acceptance of it, to determine what the compromise means is supported by the analogous position in contract law: per Union Insurance Society of Canton Limited v George Wills and Co [1916] 1 AC 281

“It is immaterial to the construction of the contract to consider subsequent events. The intention of the parties must be gathered from the language of the contract, the subject matter, and the circumstances in existence at the time it was made.”

If you ignore all events after the making of a contractual compromise, because the compromise was frozen in amber, at the time it was made, logically you must also ignore all events after the making of a part 36 offer, which is similarly frozen in amber. Otherwise as noted you reach the problem in James Miller and Partners Limited v Whitworth Street Estates (Manchester) Limited [1970] AC 583

I must say that I had thought it now well settled that it is not legitimate to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent event meant something different a month or a year later.

The law has moved on from ICS Ltd.v.West Bromwich Building Society [1998] WLR 896 in that Lord Hoffmann’s principles have been expanded, and explained in a series of further cases, before the House of Lords and Supreme Court. The most recent of these is Arnold.v.Britton [2015] AC 1619.

Reference is made to Lord Neuberger’s restatement of principles in paragraphs 14 to 22: those principles demonstrate a re-emphasis on the importance of the language used, and count against broad, sweeping constructions which do violence to the language used by the parties.

It follows that construction of a part 36 offer can be just as involved as construction of a contractual compromise, where there may be little doubt that a claim has been compromised, but a real dispute as to the terms of that compromise.

Costs and unallocated cases

From time to time, part 36 offers are made and accepted in respect of unallocated claims which if they had run their course, may well have been allocated to the Small Claims Track. The settlement will usually provoke service of a Bill of Costs in detailed assessment proceedings in due course, claiming “standard basis” costs, quantified and advanced on the traditional hourly rate basis.

The counterblast in the Points of Dispute will assert that the case was always a Small Claim in all aspects, would have been so allocated and the only costs that should be awarded are the costs appropriate to a Small Claim. How should the court resolve this dispute?

Rule 36.13 provides so far as is material as follows:

(1) Subject to paragraphs (2) and (4) and to rule 36.20, where a Part 36 offer is accepted within the relevant period the claimant will be entitled to the costs of the proceedings (including their recoverable pre-action costs) up to the date on which notice of acceptance was served on the offeror.

(Rule 36.20 makes provision for the costs consequences of accepting a Part 36 offer in certain personal injury claims where the claim no longer proceeds under the RTA or EL/PL Protocol.)

(2) Where—

(a) a defendant’s Part 36 offer relates to part only of the claim; and

(b) at the time of serving notice of acceptance within the relevant period the claimant abandons the balance of the claim,

the claimant will only be entitled to the costs of such part of the claim unless the court orders otherwise.

(3) Except where the recoverable costs are fixed by these Rules, costs under paragraphs (1) and (2) are to be assessed on the standard basis if the amount of costs is not agreed.

(emphasis added)

Rule 27.14 provides so far as is material as follows:

27.14

(1) This rule applies to any case which has been allocated to the small claims track unless paragraph (5) applies.

(Rules 46.11 and 46.13 make provision in relation to orders for costs made before a claim has been allocated to the small claims track)

(2) The court may not order a party to pay a sum to another party in respect of that other party’s costs, fees and expenses, including those relating to an appeal, except –

(a) the fixed costs attributable to issuing the claim which –

(i) are payable under Part 45; or

(ii) would be payable under Part 45 if that Part applied to the claim;

(b) in proceedings which included a claim for an injunction or an order for specific performance a sum not exceeding the amount specified in Practice Direction 27 for legal advice and assistance relating to that claim;

(c) any court fees paid by that other party;

(d) expenses which a party or witness has reasonably incurred in travelling to and from a hearing or in staying away from home for the purposes of attending a hearing;

(e) a sum not exceeding the amount specified in Practice Direction 27 for any loss of earnings or loss of leave by a party or witness due to attending a hearing or to staying away from home for the purposes of attending a hearing;

(f) a sum not exceeding the amount specified in Practice Direction 27 for an expert’s fees;

(g) such further costs as the court may assess by the summary procedure and order to be paid by a party who has behaved unreasonably;

(emphasis added)

Rule 46.13 provides

46.13

(1) Any costs orders made before a claim is allocated will not be affected by allocation.

(2) Where –

(a) claim is allocated to a track; and

(b) the court subsequently re-allocates that claim to a different track,

then unless the court orders otherwise, any special rules about costs applying-(i) to the first track, will apply to the claim up to the date of re-allocation; and

(ii) to the second track, will apply from the date of re-allocation.

(3) Where the court is assessing costs on the standard basis of a claim which concluded without being allocated to a track, it may restrict those costs to costs that would have been allowed on the track to which the claim would have been allocated if allocation had taken place.

(emphasis added)

It will be seen that the fact that a Part 36 offer has been made and accepted creating a deemed costs Order for costs to be assessed on the standard basis does not preclude the court from restricting those costs to the costs allowable on the track to which the case would have been allocated, had matters gone so far.

Rule 46.13(3) predicates that (i) if the court is satisfied that the claim would have been allocated to the Small Claims Track it can (ii) exercise its discretion to restrict the costs to Small Claim Track costs.

This in turn means that the parties will draw their arguments based on consideration of what is the “normal” track per rule 26.6(3) CPR for the case as put and whether consideration of the various factors in rule 26.8 CPR indicate that it might have found a home on another track.

The origins of the provisions in rule 36.13(3) and the discretion in rule 46.13(3) can be traced to cases such as Solomon v Cromwell Group plc [2012] 1 WLR 1048 where use of a part 36 offer and a deemed costs Order, did not oust a fixed costs regime and O’Beirne v Hudson [2010] EWCA Civ 52 where a consent Order for standard basis costs did not preclude fixed Small Claims track costs being applied by way of analogy to limit the costs to a sum equivalent to fixed costs.

An obvious concern displayed by the Court of Appeal in both cases was that the manner of settlement of a low value claim should not confer an advantage on the receiving party when it came to matters of costs.

The Civil Procedure Rules are delegated legislation and have the force of statute. The construction should give to the discretion in this case afforded to the court by the word “may” should be exercised in accordance with what can be discerned to be the Parliamentary purpose: see R (on the application of Electoral Commission) v City of Westminster Magistrates Court and United Kingdom Independence Party [2011] 1 AC 496.

The purpose behind the inclusion of the discretion is plainly to ensure that like cases are treated alike and that proportionate costs are awarded on a consistent basis in cases that are either actually allocated or would be so allocated to the Small Claims Track.

The rule also provides an incentive for the parties to settle a case on the merits as quickly and efficiently as possible, without being overly concerned as to whether they should delay the settlement until after allocation in order to achieve clarity on the costs position.

Finally the rule is intended to provide certainty of outcome: although the use of the word “may” imparts to the court a discretion, in context it must be regarded as a “weak” discretion, rather than a “strong” judicial discretion. In effect the court exercises it’s discretion, to do what it must.

The costs that have been decided to be reasonable and proportionate costs for a litigant to recover in a claim allocated to the Small Claims Track are the fixed costs prescribed by the rules.

If the claim had been allocated to the Small Claims Track, then the receiving party’s costs would have been limited to the Small Claims with no “escape route” or provision in the rules, by which a sum in excess of those prescribed by rule 27.14 CPR could have been awarded.

Consequently, the fact that a case settles a matter of weeks, or possibly days, before the court would have made a decision on allocation should be neither here nor there.

The rule is an interesting evolution from the case law on costs in low value claims and is  another preliminary Point of Dispute, which can have devastating consequences on a Bill of Costs despite the making of a deemed costs Order on a standard basis.