Adhering to the spirit of Part 36

In the Court of Appeal has recently overturned a first instance decision in which the judge had awarded indemnity costs and enhanced interest under CPR 44.3 to a party who had beaten its without prejudice offer, by analogy with the costs provisions set out in Part 36.

The underlying dispute in F & C Alternative Investments (Holdings) Limited & Ors v Barthelemy & Anor [2012] EWCA Civ 843 related to the exercise of put options contained in a limited liability partnership agreement. The defendants purported to exercise the put options, which would require the claimants to purchase the defendants' interest in the LLP. The claimants issued a claim seeking, among other things, a declaration that the put options had not been validly exercised and that the claimants had no liability to pay the defendants the sums sought.

Analogy with Part 36

There were various, unsuccessful, attempts to settle the proceedings. One of these attempts was a 'without prejudice save as to costs' offer made by the defendants. The defendants deliberately chose to make the offer outside Part 36 since, had it been made in Part 36 form and accepted, the defendants would have been liable for the claimants' costs. The defendants were of the view that this would be a 'nonsensical result' given the fact that they, despite not having initiated the proceedings, were in reality in the position of a claimant in the claim. So, instead, the defendants instead fashioned their offer to operate by analogy with Part 36 (and made it clear to the receiving party that they were doing so) in the hope that the court would exercise its discretion on costs under CPR 44.3 in an analogous way to Part 36.

At first instance the court accepted the defendants' approach as a sensible way of proceeding in the circumstances and, with the defendants being the successful parties in the action, made costs orders similar to those that would have been made under Part 36. The court ordered indemnity costs and enhanced interest (at 10 per cent above base rate) from the last date when the offer could have been accepted.

The claimants successfully appealed the first instance decision. The Court of Appeal held that the judge was not justified in drawing an analogy with Part 36 so as to make an award of indemnity costs and enhanced interest. The defendants' offer did not comply with the requirements of Part 36 and so was not a Part 36 offer. There was no reason for indirectly extending Part 36 beyond its expressed ambit. To do so would undermine the requirements of Part 36 and the repeated insistence of the courts that Part 36 offers should be carefully drafted so as to comply with its requirements.

The judge's jurisdiction as to costs therefore fell to be exercised under CPR 44.3, as had been accepted by the judge. It is a generally accepted principle that for indemnity costs to be awarded (as opposed to standard) something out of the norm by way of improper or unreasonable conduct is required. The mere rejection of what transpires to be a very reasonable offer will not in itself amount to unreasonable conduct

The Court of Appeal therefore substituted an order for standard costs in place of the order for indemnity costs and substituted an award of interest at a rate of 3 per cent above base rate on the principal sum and costs.

Strict approach

This decision demonstrates the court's strict approach to compliance with Part 36. The Court of Appeal stated that it was not permissible to wholly discount a number of failures to comply with the requirements of Part 36 as the merest technicality. The appeal judges were also critical of some first instance judges who had done so. The general rule was that 'for an offer to be a Part 36 offer it must strictly comply with the requirements' allowing perhaps only for 'de minimis errors or obvious slips which mislead no one'.

It will in future be difficult, if not impossible, for parties who, for valid reasons, can't or don't want to use Part 36, to attract Part 36 cost consequences unless the other party has been unreasonable.

Although this decision will have a greater impact on claimants, who might have wished to make Part 36-analogous offers to take advantage of the ability to obtain indemnity costs and enhanced interest, defendant lawyers should also take heed and recognise that they cannot now be over-confident of obtaining Part 36 equivalent costs protection by way of an old-style Calderbank offer.