Many business disputes are resolved by agreement between the parties. That may occur after court proceedings have been issued or before any formal action has commenced. There are a number of ways in which a party can make an offer to settle, and each carries different potential consequences in relation to the court’s ultimate decision on costs. One commonly used mechanism, available to both claimants and defendants, is the making of a formal offer to settle, known as a ‘Part 36 offer.’
‘From a commercial perspective, the objective is usually to resolve a dispute in a way that protects the client’s position while maintaining control over cost and risk. Early, well-judged settlement can significantly reduce legal spend and management distraction, and the court will expect parties to have engaged constructively in seeking resolution’ says Daniel Barnden, Associate Solicitor in the commercial disputes team at Nalders. ‘A carefully structured Part 36 offer introduces certainty as to potential costs consequences and can be a powerful strategic tool in progressing settlement discussions without compromising leverage.’
Achieving resolution via a settlement can usually be achieved quickly, whereas court action or even methods of alternative dispute resolution can take longer to resolve.
Daniel looks at how a Part 36 offer is used, when it is used, and what it means for both parties, illustrating this with a brief case study.
What is a Part 36 offer?
Part 36 is a section of the Civil Procedure Rules that provides a formal framework for making settlement offers during a dispute. A Part 36 offer must meet strict requirements set out in the rules and can be made by either a claimant or a defendant. The regime is designed to encourage the parties to settle cases at a realistic level and to avoid the time and cost of contested litigation.
A Part 36 offer is treated differently from an ordinary offer because it carries potential cost consequences if it is not accepted and the case proceeds to trial. This makes it an important strategic tool. It allows the parties to signal their realistic valuation of the dispute while demonstrating to the court that settlement has been properly explored.
A Part 36 offer can be made at any stage of a dispute, including before formal proceedings have started. Because it is a self-contained procedure within the rules, it gives both sides clarity and certainty about how the offer should be made and how it will take effect if not accepted.
When is it used?
It can be used at any time, both before and after a claim is issued in court, up to trial.
Who can use it?
It can be used by either party in a dispute.
What is the effect of a Part 36 offer?
A Part 36 offer creates a set of automatic cost consequences if it is not beaten at trial. These consequences are designed to encourage the parties to settle on realistic terms and to avoid unnecessary litigation costs.
If a defendant makes a Part 36 offer which the claimant rejects, and the claimant recovers less at trial than the amount offered, the claimant will usually face adverse cost consequences. In most cases the claimant will be ordered to pay the defendant’s legal costs from the end of the 21 day period for accepting the offer, together with interest on those costs. This applies even where the claimant succeeds overall in establishing liability. The courts generally take a strict approach because Part 36 is intended to promote settlement.
If a claimant makes a Part 36 offer which the defendant fails to beat at trial, the defendant may face enhanced financial consequences. These can include the claimant receiving interest on damages at a higher rate, an additional amount on top of the damages awarded, and an order that the defendant pay the claimant’s costs on the indemnity basis from the expiry of the offer period. These consequences reflect that the claimant made a reasonable offer that should have been accepted.
The court retains a discretion to depart from the usual consequences where it would be unjust to apply them, but that discretion is narrow. The court will look at all the circumstances, including the terms of the offer, the stage of proceedings when it was made, the information available to the parties at the time, and the parties’ conduct. However, the starting point is that the usual Part 36 consequences should follow unless there is good reason not to.
Because of these financial implications, a well judged Part 36 offer can shift significant costs risk onto the other party. It remains a powerful tool in encouraging settlement and narrowing the issues in dispute.
How Part 36 interacts with fixed recoverable costs
Part 36 offers continue to apply in cases subject to the fixed recoverable costs regime. The usual Part 36 cost consequences still operate, but they are applied by reference to the fixed cost amounts set out in the rules. A party who fails to beat a Part 36 offer at trial may still face significant financial consequences, but those consequences will be based on fixed sums rather than assessed costs. This means that Part 36 remains an important tool even where costs are capped, because a well judged offer can still shift costs liability and materially affect the final outcome.
How do you make a Part 36 offer?
A Part 36 offer has to be a genuine offer to settle and must comply with the strict conditions of Part 36 of the Civil Procedure Rules. It must be made in writing and be headed without prejudice save as to costs.
It should give a reasonable period for the offer to be accepted, which cannot be less than 21 days. If accepted within that time, the usual costs rules will apply.
The offer has to be very specific on what it is covering, so if it relates to only part of a claim, it must say this. Similarly, if it includes the terms of a counterclaim, it must state this clearly.
How do you accept a Part 36 offer?
A Part 36 offer should be accepted in writing, which must be sent to the party making the offer and filed in court if proceedings have already been issued in court.
Can you negotiate a Part 36 offer, and what are the consequences of doing this?
You could make a counteroffer, also under Part 36. However, a counteroffer does not automatically invalidate the original Part 36 offer, which will still stand until it is withdrawn or unless it was limited in time originally and the time limit has expired.
Case study illustration
The following is a fictional example that helps to illustrate how a typical Part 36 offer can affect the outcome of a dispute and the allocation of costs.
Smith Engineering Ltd supplied bespoke components to Jones Build Construction PLC for a large infrastructure project. Jones Build failed to pay the final instalment and claimed defects and delays with the supplied components.
Smith claimed £250,000. Jones counterclaimed for £100,000 for their alleged losses due to defective parts and delays. Smith issued their claim in court. Jones filed a defence and issued a counterclaim.
Just before witness statements were exchanged, Jones made a Part 36 offer stating: “Without prejudice save as to costs, the defendant offers to settle the claim and counterclaim on the basis that the defendant will pay the claimant £160,000 inclusive of interest and costs, and both sides will withdraw their claims and counterclaims.”
The offer remained open for 21 days. Smith rejected the offer as too low.
The case proceeded to trial. The judge awarded Smith £155,000 on the original claim and also accepted the counterclaim for £30,000. The net award to Smith was therefore £125,000.
Because Smith recovered £125,000, which was less favourable than Jones’ Part 36 offer of £160,000, significant cost consequences followed. Smith was entitled to recover their standard costs only up to the end of the 21 day acceptance period. After that point, the court ordered Smith to pay Jones’ legal costs up to trial.
Do all settlement offers have to be made as Part 36 offers, or are there alternatives?
A settlement offer does not have to be made under Part 36. It is possible to make an offer, formal or otherwise, at any time, which does not have the same costs consequences.
How we can help
Due to the serious cost related consequences of a Part 36 offer, it has to be used at the right time and in the right way, and be realistic. Our solicitors will work with you to decide when such an offer should be made, or whether an offer should be accepted to ensure it is going to work for you.
Our dispute resolution lawyers specialise in supporting businesses to achieve fast, effective and cost-efficient solutions to contractual disagreements. For further information and assistance, please contact our commercial disputes team by completing our enquiry form.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.