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18 July 2019
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Practitioners should steer clear of making Part 36 offers with costs conditions attached, warns Paul Bracewell

A part 36 offer (pre-issue) which imposes a condition as to costs is not a valid offer, HHJ Matthews (Sitting as a High Court Judge) held in Knight & Another v Knight & Ors (Costs) (2019) EWHC 1545 (Ch).

The case is also notable for rejecting the claimants` argument that the defendants` failure to accept a reasonable offer, made outside of part 36, should lead to the claimants` being awarded indemnity costs.

The case had been to trial in March 2019 on the issue of the beneficial ownership of the proceeds of sale of property. The claimants are the administrators of an estate and the defendants are the brother and sister-in-law of the deceased. The defendants lost and accepted that they would be responsible for costs and also agreed an interim payment. Issues remained as to whether or not a pre-issue offer which included costs was a part 36 offer and if so, the consequences. There was a further issue as to the basis upon which costs would be assessed with the claimant seeking costs on the indemnity basis.

By letter dated 27th July 2017, the claimants made an offer expressed to be a part 36 offer, without prejudice save as to costs. The letter, inter alia, offered to pay the sum of £35,000 from proceeds of sale which was inclusive “of your client’s 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 know are around £30,000.”

Part 36 offers which include terms as to costs are inconsistent with the part 36 rule. This was upheld in the Court of Appeal in two cases, Mitchell v James (2002) EWCA Civ 997 and French v Groupama Limited (2011) EWCA Civ 1119 which were relied upon by the claimants and accepted by HHJ Matthews.

The claimants` also referred the court to Proctor & Gamble Co v Svenska Cellulosa AB SCA (2013) 1 WLR 1464 where a claimant`s offer to pay the defendant`s reasonable costs up to the point of acceptance was found to be a valid part 36 offer.

HHJ Matthews, in finding that he was not free to follow the decision in Proctor but was bound by the Court of Appeal decisions, held that no term as to costs should be included in a Part 36 offer. At paragraph 13:

“In these circumstances, I do not think that I am free to simply follow the decision of Hildyard J (Proctor and Gamble), 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 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”.

HHJ Matthews also rejected the claimants` submission that notwithstanding the finding that the offer was not a part 36 offer, indemnity costs should be awarded. The claimants argued that if indemnity costs did not apply, there was no incentive to accept the offer.

If the defendant had accepted the offer, they would have received £35,000 and not had to pay the claimants` costs. If it was rejected, they would have had to pay costs on the standard basis. HHJ Matthews found that there was “significant incentive” to accept the offer. At paragraph 28:

“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 judgement 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….”.

On the claimants’ submission that the defendants` had unreasonably refused the offer, at paragraph 31 the court 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 which prompts the court to visit the paying party with a special mark of condemnation. I see nothing of that kind here….”.

Practitioners should also note two comments made obiter in that a pre issue part 36 was valid even if the format of the future proceedings were unknown and that a decision that a particular asset is owned beneficially by a particular person is not a “sum of money awarded” or a “monetary award” for the purposes of CPR 36.17.

Practitioners should clearly avoid making part 36 offers with costs conditions. Whilst that has always been the case, it has become apparent in recent years that more part 36 offers are being made subject to costs conditions. In considering the application of CPR 36.17, parties can expect to see more challenges that the additional amounts should not be recoverable on grounds that it would be “unjust”. Indeed, it can be seen from reported cases that part 36 and its application generally, is very much a hot topic.

Paul Bracewell is a Costs Lawyer, a Council Member of the Association of Costs Lawyers, and Accredited Civil & Commercial Mediator with Bracewell Costs.

This article first appeared in the New Law Journal on 18 July 2019

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