In 2005, Judge Roy L. Pearson took a pair of pants to a Washington, D.C dry cleaner named Custom Cleaners. Unfortunately, the dry-cleaning company lost Judge Pearson’s pants. A simple error, which was soon corrected (two days later the pants were found), resulted in a legendary legal farce, attracting media attention from all over the world[1].
Judge Pearson smacked his neighbourhood dry cleaner with a $US54 million lawsuit (the claim was originally for $US67 million), despite the owners of the dry-cleaners, the Chung family, offering him $US12,000 compensation. The claim consisted of $US500,000 in legal fees, $US2 million for “discomfort, inconvenience, and mental distress,” and $US15,000, which he claimed would be the cost to rent a car every weekend to drive to another dry-cleaning service. The remaining $US51.5 million would be used to help similarly dissatisfied D.C consumers sue businesses
The case, now famously known as the “Pants” lawsuit, was heard before a court (which is extraordinary in itself) and the judge found for the Chung family. However, Judge Pearson refused to give up and came back weeks later asking the court to re-examine the case. His request was refused and he was sacked (remember, he was a Federal Court judge).
This type of horror litigation strikes fear into the heart of SMEs and local bodies. Larger organisations with healthy cash flows and in large-house legal budgets may be able to absorb mammoth court costs, but smaller organisations and those relying on public funding cannot.
Fortunately, the UK legal system would have a case such as the “Pants” lawsuit thrown out. And in addition to a sensible judiciary, both Claimants and Defendants have access to Part 36 offers, which are designed to ensure early settlement is reached in most cases, putting the parties at financial risk if settlement is not reached.
What is a Part 36 offer?
Litigation in England and Wales is conducted under the Civil Procedure Rules. They allow for Part 36 offers, a tactic used by solicitors representing litigants to put pressure on an opponent to settle the case prior to, or during, court proceedings.
They are different from making opening low-ball offers and eventually meeting somewhere in the middle following a negotiation. They significantly adjust the balance of power in litigation, and they must not be ignored.
They have to satisfy certain requirements. They must:
- be in writing;
- make clear that it is a Part 36 offer;
- specify a period of not less than 21 days (“the Relevant Period”) within which the Defendant will be liable for the Claimant’s costs, if the offer is accepted;
- state whether the offer is made to settle the whole claim or to part of it (and if so which part); and
- state whether it takes into account any counterclaim.
A Part 36 offer is treated as being without prejudice except as to costs. This means that even the fact that a Part 36 offer has been made, much less its terms, must not be communicated to the trial judge until after the case has been decided. The recipient of a Part 36 offer should not therefore treat it as a sign of weakness, but instead as a target that it has to beat.
Either a Claimant or Defendant can make a Part 36 offer.
What are costs and how does the court deal with them?
In litigation, costs means the costs incurred in bringing or defending a claim.
The general rule is that the loser pays the winner’s costs. So if a Claimant comes away from trial with any award of damages, they are the winner. For the Defendant to win, they have to come away without being ordered to pay anything.
But not always: because if a party beats its Part 36 offer, in reality, that party is the winner, even if it started off as the party being sued, and even if it ends up being ordered to pay damages.
What are the risks and consequences of not accepting a Part 36 offer?
If a Defendant does not accept a Claimant’s Part 36 offer, and the case goes to trial and the Claimant does at least as well, then the Defendant is liable for additional costs and penalty interest (up to 10% above base rate), from the end of the Relevant Period. And a monetary award of 10% of the damages awarded isn’t it?
For a Claimant who does not accept a Defendant’s Part 36 offer, but then does worse at trial, the Claimant will be liable for the Defendant’s costs from the end of the Relevant Period up to the end of the trial (and the trial costs are probably the largest of all).
In either case, for maximum pressure, a Part 36 offer should be made as early as possible, and pitched as competitively as possible. There is no benefit in going in late or low.
In what circumstances does Part 36 provide an advantageous negotiating tactic?
It is always sensible to consider making a well-pitched Part 36 offer. After receiving one, the recipient must evaluate the chances of doing better than the precise terms of the offer if they decide to force the case to be determined at trial, because if they fail, then they may be required to pay enormous costs, independent to any damages awarded.
How does it work in practice?
Unless there are unusual circumstances, we would generally advise making a good Part 36 offer as early as possible, so that the protection of Part 36 starts building.
Take the US example, but give it more sensible English prices: Roy Pearson now has a claim against Custom Cleaners in relation to his expensive lost trousers, which he values at £100,000, and he brings a claim for that amount.
Both sides appreciate that the claim may succeed completely, or be dismissed completely, or, more likely, the Court may award some amount in between. For Custom Cleaners, unless the claim is completely dismissed, it will end up liable for all of Pearson’s costs. Both sides should make Part 36 offers to take the risk into account.
Pearson, as the Claimant, may make a Part 36 offer of £75,000 on 1 January, because he expects to get at least that.
Custom Cleaners is reasonably sure it has a better case, so makes its own Part 36 offer of £25,000 on the same day, because it doubts it could be ordered to pay any more than that.
Custom Cleaners could accept Pearson’s offer, in which case it agrees to pay £75,000 plus Pearson’s costs to date. It is unlikely to do that however: it made its own lower offer at the same time, so why would it? Likewise, Pearson is unlikely to accept Custom Cleaners’ offer. Either party may decide to accept the offer much later, which is perfectly fine, and that makes things more interesting and complicated. For this example though, assume not, and instead assume that the Court is required to determine it at trial, in which case there are then 3 brackets of possible outcomes in this scene.
The Court awards £75,000 or more
If the Court makes a large award or even gives Pearson everything he asked for, then Pearson has been completely successful. Pearson gets the award of damages, and his costs of the whole claim, and from 22 January is entitled to additional interest and a more advantageous costs assessment. Custom Cleaners should have accepted Pearson’s Part 36 offer of £75,000.
The Court awards between £25,000 and £75,000
Neither side has beaten its offer. Pearson still gets his damages and costs, so wins, but neither party gets the benefit of Part 36. Each of them will wish they made a better offer.
The Court awards less than £25,000
Pearson gets his £25,000, and his costs up to 21 January, but Custom Cleaners is entitled to its costs from then on. Pearson should have accepted Custom Cleaners’ offer instead of forcing more costs to be incurred in taking the claim to trial. Custom Cleaners has done well though: if it had made no offer at all, then Pearson would have won if he had been awarded anything at all. Custom Cleaners’ Part 36 offer moved the target, and Pearson missed it.
In summary
Part 36 offers to settle are one of the best and most powerful tactics available to solicitors in litigation proceedings. If used wisely, they can bring about a swift settlement, saving all parties time, money, and stress, and turn a poor case into a good one. However, play the wrong hand, and you could end up with a large costs order. Instructing an experienced litigation solicitor is key to mitigating any risks associated with Part 36 offers.
Nalders Solicitors has a dedicated civil litigation team who can provide legal advice and representation on all dispute resolution matters. To speak to us, please phone our Truro office on 01872 241414.
[1] https://caselaw.findlaw.com/dc-court-of-appeals/1339256.html