Contract law does not bind 'Part 36' offers to settle, rules Court of Appeal

Contract law may not apply to such settlements, the Court said.

The Court of Appeal considered two cases concerning Part 36 of the Civil Procedure Rules, the code that governs litigation in England and Wales.

The purpose of Part 36 is to encourage settlement and to enable those who make sensible offers to protect themselves against liability for the costs incurred in the continuation of proceedings.

People or organisations conducting lawsuits in court can make settlement offers using Part 36 or not using it, the Court said, but if they do use Part 36 then only the specific court rules govern that offer. Other contract law principles cannot be assumed to govern the dealings, it said.

"Part 36 is drafted as a self-contained code. It prescribes in some detail the manner in which an offer may be made and the consequences that flow from accepting or failing to accept it," said Lord Justice Moore-Bick in his ruling.

"Basic concepts of offer and acceptance clearly underpin Part 36 … it does not follow, however, that Part 36 should be understood as incorporating all the rules of law governing the formation of contracts, some of which are quite technical in nature."

"Certainty is as much to be commended in procedural as in substantive law, especially, perhaps, in a procedural code which must be understood and followed by ordinary citizens who wish to conduct their own litigation. In my view, Part 36 was drafted with these considerations in mind and is to be read and understood according to its terms without importing other rules derived from the general law, save where that was clearly intended," said Lord Justice Moore-Bick.

A woman who sued Manchester City Council for damages when she tripped on a pavement rejected a Part 36 offer of £1,150 and made her own Part 36 offer saying she would accept £2,500.

Following an offer from the Council being rejected, the Council then sought to accept her offer of £2,500, made three months earlier, which had not been withdrawn, saying that it was still valid and capable of acceptance. The Court of Appeal confirmed that the Council was entitled to accept the offer, which had not been formally withdrawn.

"Rule 36.9(2) is quite clear: a Part 36 offer may be accepted at any time unless the offeror has withdrawn the offer by serving notice of withdrawal on the offeree. Moreover, it may be accepted whether or not the offeree has subsequently made a different offer, a provision which is contrary to the general position at common law," said Lord Justice Moore-Bick.

"The rules state clearly how a Part 36 offer may be made, how it may be varied and how it may be withdrawn. They do not provide for it to lapse or become incapable of acceptance on being rejected by the offeree. That would be the case at common law, but it is inconsistent with the concepts underlying Part 36, which proceeds on the footing that the offer is on the table and available for acceptance until the offeror himself chooses to withdraw it," he said.

The ruling said that the CPR rules were created this way to encourage settlement of claims before they reach court. "To import into Part 36 the common law rule that an offer lapses on rejection by the offeree would undermine this important element of the scheme," the ruling said.

In a separate case that formed part of the same ruling the Court of Appeal expressed a view on how courts should consider whether or not an offer of settlement is more advantageous than the eventual settlement. That is an important consideration for deciding who should pay costs in Part 36 cases involving a near miss, i.e. in cases where the amount awarded only marginally exceeds a sum previously offered.

The Court said that though it had previously said that factors such as the stress of taking a case should be considered when judging the relative value of offers and court case outcomes, sums of money should be the main factor for deciding which approach was the more successful.

"When deciding how much weight to attach to any particular factor I think it important to see things from the litigant's perspective rather than to be too ready to impose the court's own view of what is and is not to his advantage," said Lord Justice Moore-Bick.

"That is particularly important when dealing with money claims, both because to recover judgment for more than what was offered is legitimately regarded as success, and because a party faced with a Part 36 offer ought to be entitled to evaluate it by reference to a rational assessment of his own case (including the risk of incurring unrecoverable costs if he presses on)," he said.

"He should not have to make a significant allowance for the court's view of factors that are inherently difficult to value, such as the amount of unrecoverable costs and (even more so) the stress likely to be generated by pursuing the case to judgment," said his ruling.

"In a case where the offer has been beaten by a very small amount and there is clear evidence that the successful party has suffered serious adverse consequences as a result of pursuing the case to judgment those factors may be sufficient to outweigh success in pure financial terms, but in my view such cases are likely to be rare," he said. "In most cases obtaining judgment for an amount greater than the offer is likely to outweigh all other factors."

Keith Levene, a costs lawyer with Pinsent Masons, the law firm behind OUT-LAW.COM, said the ruling emphasises that, in most cases, success in financial terms should be the governing factor. 

"The Court of Appeal is clearly trying to discourage the possible approach it promulgated by an earlier case where it  took into account other factors, such as the emotional stress and unrecoverable costs involved in pursuing the case to judgment," said Levene.

"Normally, as a general rule, in contract if you reject an offer you can't then change your mind and accept it. What came out of the Court of Appeal's ruling is that because Part 36 is a complete code, normal rules of contract do not apply," he said. "So you can reject a Part 36 offer but accept it later, provided it's not withdrawn in accord with the rules in Part 36 of the court rules. You're not within the normal contract rules."

A party who has made a Part 36 offer to settle must remember that if it elects to withdraw such an offer, it will lose the automatic cost protection under the rule. "In such a scenario, the court still has discretion to take the withdrawn offer to settle into account in the exercise of its inherent discretion, but it's not guaranteed," said Levene.

Levene recommended that anyone handling a dispute keeps all Part 36 offers under review.

"If it is decided to withdraw any of them, this must be done by serving a written notice of withdrawal," he said.