An Idiot’s Guide to Part 36

/ dispute resolution

If there is one thorny issue which pervades all of civil litigation, it is this: the recovery of legal costs.

Other than in multi-£billion litigation, the subject of legal costs - who pays them and how much - is something that needs to be properly considered before and during the litigation process. This note hopes to serve as an "idiot’s guide" to Part 36 offers.  What are they, why and when you should make one, and what to do if you receive one.

The problem: Shortfall in recovering costs

Even if you win at a trial and are awarded your costs of bringing/ defending the case, those costs are assessed. They are assessed only down, never up! The usual rule is that the costs will be on the ‘standard’ basis which, without going into a technical definition, might amount to between 60-70% of the actual costs you’ve incurred. Put bluntly, if you spent £100,000 in litigation, you might be left with a £30,000-£40,000 shortfall, on a good day.

There are a number of ways to get beyond ‘standard’ costs, to enable better costs recovery. The Court may order a party who has behaved unreasonably to pay costs on the ‘indemnity’ basis due to unreasonable conduct (see CPR 44.3(1), and the factors which the Court may take into account as set out in Rule 44.4). Where assessed on the indemnity basis, the Court will resolve any doubt as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party. This can make a big difference, and reduce the shortfall in costs. Of £100,000 spent, you might recover £80,000 or more.  

Part 36 – the answer?

Rather than leaving the matter of arguing conduct to the trial, Part 36 offers a very helpful and strategic mechanism whereby if you are successful at trial, there is a neater way of securing indemnity basis costs. Part 36 is a Rule within the Civil Procedure Rules.

Part 36 is an offer of settlement which, if ‘beaten’ at trial, will give you automatic enhancements on both damages and costs recovered.  However, not all offers are Part 36 offers, and in order to reap the benefits, you must ensure that you have complied with the technical requirements.

To be valid and therefore effective, a Part 36 must comply with the requirements in the rule. The offer must:

  • be an offer to settle all or part of the case,

  • be made in writing,

  • make it clear that the offer is made pursuant to Part 36,

  • specify the relevant period of not less than 21 days within which a defendant will be responsible for the claimant's costs if the offer is accepted (the Relevant Period),

  • state the scope or extent of the offer, and whether any counterclaim is included.

In basic terms, if the offer is accepted by the other party, then the parties will be bound in terms of that offer, including that the Defendant will be responsible for the legal costs of the Claimant (in the case of a claimant’s offer) up to the day the offer is accepted.

When can a part 36 offer be made?

A Part 36 offer can be made, by claimants or defendants, at any time during the litigation, and even prior to litigation commencing. However, if a Part 36 offer is made less than 21 days before trial/final hearing, then the automatic Part 36 cost consequences (more below) will not follow and will be at the discretion of the Court.

A Part 36 offer, unlike other ‘without prejudice’ offers to settle, is not cancelled or rejected by the other party ignoring it or making a counteroffer. It is still a procedural offer which remains open, unless it is explicitly withdrawn by the party who made the offer.

Cost consequences

Now for the fun bit.

If you are a claimant and you make a Part 36 offer, say, for £100,000 plus your legal costs, and you go on to obtain a judgment which is equal to or more advantageous than your offer (i.e. £100,000 or more) then in addition to the defendant having to pay you the judgment the court awards, you are very likely to receive the following:

  • interest on the judgment you have been awarded at a rate of up to 10% above base from the end of the Relevant Period

  • your legal costs up to the end of the relevant period on the standard basis, and after the relevant period on the indemnity basis;

  • interest on those costs at a rate of up to 10% above base rate for that period;

  • an additional amount of 10% of the damages awarded up to £500,000, and above that 5% of anything beyond, up to an overall limit of £75,000

Clearly there are significant advantages to a claimant of making such an offer, and as early as possible for the maximum effect. Often the real difference is made by the part highlighted above – indemnity costs from expiry of the relevant period. Equally, if you on the other hand receive a part 36 offer, you should carefully (and quickly) consider how realistic it is that you will better it at trial.

Even as a defendant, when faced with a best-case scenario of defeating a claim and recovering your costs, the same shortfall in costs applies. The defendant can mitigate this risk by making a decent Part 36 offer to pay the claimant a sum of money together with its legal costs. A defendant's Part 36 letter also needs to follow the correct formalities (see above). If the claimant fails to beat the defendant’s Part 36 offer, the defendant will ordinarily obtain its costs on the indemnity basis following the expiry of the relevant period.

Given the consequences of an effective Part 36 offer can be far reaching, it is an important tool in the hands of a litigator, and to be considered seriously and as early as possible, as well as needing to be given due consideration when receiving one.

This article was written by Toby Walker, Dispute Resolution Partner at Allan Janes LLP. You can contact him directly on 01494 893512 or at toby.walker@allanjanes.com