Michael Axe considers how substantial additional penalties may now be available to a Claimant from a Defendant who fails to beat a Claimant's Part 36 settlement offer, thanks to recent changes to the court rules.

Settlement offers made in accordance with Part 36 of the Civil Procedure Rules (known as "Part 36 Offers" for short) have become a crucial weapon in the arsenal of any party involved in litigation.  Their primary benefit to date have been that they provide additional advantageous cost consequences to a party that makes a Part 36 Offer which the other side does not accept and then fails to beat at trial.

However, there was a perception amongst some that the Part 36 rules did not provide a Claimant with as many advantageous cost consequences as were provided to a Defendant.  For example, a Defendant who was awarded advantegeous cost consequences (for making a Part 36 Offer which the Claimant failed to beat) would normally be entitled to:

a)      his legal costs from the period starting 21 days after he made the Part 36 offer up to trial, and,

b)      interest on those costs,

despite the fact that the Defendant still lost the case.  Conversely, a Claimant who was awarded Part 36 cost consequences would normally be awarded interest on damages and legal costs at a beneficial rate, and have his legal costs assessed by the Court on a more generous basis, but he might have felt that he did not get significantly more than he would have got without making a Part 36 Offer.

The new Part 36 "Penalty"

To redress this perceived imbalance, the Part 36 rules were changed so that any Claimant's Part 36 Offer made on or after 1st April 2013 would now be subject to an additional cost consequence.

If a Claimant makes a Part 36 Offer (on or after 1st April 2013) and obtains a judgment against the Defendant at trial which is “at least as advantageous” to him as his earlier Part 36 Offer, then in addition to the increased interest and generous assessment of costs allowed under the previous regime, the Claimant will also normally be entitled to an additional monetary "penalty" from the Defendant.

Calculating the Part 36 "Penalty"

The "penalty" is calculated by applying the percentages set out below to either (a) the sum of money awarded to the Claimant as damages if it was a money claim, or (b) the legal costs awarded to the Claimant if it was a non-money claim.  The "penalty" is, however, subject to a cap of £75,000.00.

Amount Awarded by the Court:                      “Penalty” Percentage:

Up to £500,000                                           10% of amount awarded.

Above £500,000 up to £1million                    10% of first £500,000 plus
                                                                 5% of any amount over £500,000.

Raising the Stakes

The introduction of the additional “penalty” award for Claimants making Part 36 Offers on or after 1st April 2013 was designed strongly to encourage Defendants to consider accepting a Claimant’s reasonable early settlement offer, in circumstances where it was perceived that under the previous Part 36 rules there was no strong incentive for Claimants to make early settlement offers or for Defendants to accept them.

As Defendants will now be faced with the risk of paying the Claimant an additional 10% of the value of his claim (up to a maximum of £75,000.00) if the Claimant obtains a judgment at trial as advantegeous to him as the Part 36 Offer, a Defendant who receives a borderline "competitive" Part 36 Offer from a Claimant will now have to give serious consideration to whether or not he can be reasonably confident that he will beat that offer at trial.  A miscalculation in this regard could prove extremely costly to a Defendant under this new Part 36 regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.