Part 36 Offers: recap on what they are and recent changes to them

Part 36 offers are a specific type of offer which can provide a platform of advantages, as well as often causing the other party to reflect.

A Part 36 offer is an important tactical step which can be made by any party at any stage in legal proceedings, however, it has to be made in a specific way in order for it to be effective.

The Civil Procedure Rules (CPR) prescribes the criteria which must be met to satisfy being a Part 36 offer, and to ensure the costs consequences are applicable it must:

1. be in writing
2. clarify that it is being made pursuant to Part 36
3. specify a period of not less than 21 days within which the defendant will be liable for the claimant’s costs in accordance with rule 36.13 or 36.20 if the offer is not accepted (the Relevant Period); and
4. state whether it relates to the whole claim or part of it and state whether it takes into account any counterclaim.

Costs consequences

Distinct from generic “without prejudice save as to costs” offers, a Part 36 offer puts additional pressure on the other side to settle a case because of the potential impact of not accepting. It also can provide additional protection in respect of client’s costs and, to some extent, protects the client’s position on costs.

The costs consequences of accepting or not accepting Part 36 offers are set out in details within the CPR.

An example of the impact a Part 36 offer can have is:

A claimant is claiming £20,000 but makes a Part 36 offer to settle at £15,000:

• if the defendant accepts the claimant’s Part 36 offer whether within or outside the Relevant Period the claimant gets its costs up to the date of acceptance (including any pre-action costs)
• if the Defendant does not accept the Claimant’s Part 36 offer and the Claimant recovers more than £15,000 the claimant will have “beaten” its offer and will be entitled to:
  • interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting from the date when the Relevant Period expired
  • costs (including any recoverable pre-action costs) on the indemnity basis from the date on which the Relevant Period expired
  • interest on those costs at a rate not exceeding 10% above base rate; and
  • an additional amount of 10% of the first £500,000 of damages awarded, or 10% of the first £500,000 of costs where there is no monetary award, and 5% of any amount above those figures, subject to the limit of £75,000
• if the claimant recover less than £15,000 the normal costs rules apply.

Alternatively, where the claimant is claiming £20,000 but the defendant makes a Part 36 offer of £15,000:

• if the claimant accepts the defendant’s Part 36 offer the claimant will get its costs up to the date of acceptance if within the Relevant Period
• if the claimant does not accept the defendant’s Part 36 offer and recovers £15,000 or less the claimant will have failed to “beat” the defendant’s offer and the defendant will be entitled to:
  • costs (including any recoverable pre-action costs) from the date on which the Relevant Period expired; and
  • interest on those costs
• if the claimant recovers more than £7,500 the normal costs rules apply.

In both instances, if the claim is dismissed the normal costs rules apply.

The court has discretion to depart from the cost consequences which apply where judgment is more advantageous than an offer where it is “unjust” to apply the rules or to their full effect. To determine if it is “unjust” the court will need to take into account the terms of the Part 36 offer, the stage at which it was made, the information available to the parties at the time, the conduct of the parties and whether the offer has been made as a genuine attempt to settle¹ or not².

The New Rule

The Court of Appeal held³ that a Part 36 offer which excludes interest is not a valid Part 36 offer, as a result Part 36 has been amended⁴ to include CPR 36.5(5) which reads:

“A Part 36 offer to accept a sum of money may make provision for accrual of interest on such sum after the date specified in paragraph (4). If such an offer does not make any such provision, it shall be treated as inclusive of all interest up to the date of acceptance if it is later accepted.”

This new rule enables parties, when making a Part 36 offer, to include a provision for interest to accrue after the expiry of the Relevant Period until acceptance. Effectively, this acts as compensation to the party making the offer should it not be accepted within the Relevant Period.

However, if no such provision is stipulated when making the Part 36 offer it will be deemed to be inclusive of interest up to the date it is later accepted. This would mean that the offeror could miss out on accrued interest if the offer is not accepted until months later.

For example, if the claimant makes a Part 36 offer of £15,000 (inclusive of interest) and the defendant does not accept it until six months after the expiry of the Relevant Period, the defendant will have saved six months interest in the sum of approximately £600 (if the interest rate of 8% is applied). In accordance with the new rules, however, the claimant can now make a provision for interest to accrue after expiry of the Relevant Period until it is accepted when making its Part 36 offer.

If a party wishes to use form N242A to make its Part 36 offer, it can continue to do so, but as the form has not yet been revised to reflect the interest changes it would be sensible, if a party wishes to include provision for interest to accrue after the expiry of the Relevant Period, for it to be set out within a cover letter.

What rate of interest should be applied?

Whilst CPR 36.5(5) does not specify the rate of interest a party may claim it is important that it is reasonable. 

When considering what interest rate would be deemed as reasonable, it is worth taking into account that the judgment debt rate has been 8% since April 1993 and the Part 36 interest rate on costs is 10% above base rate.

In light of these new amendments, a party receiving a Part 36 offer can no longer assume that it can be accepted, without consequence, after the expiry of the Relevant Period.  It is therefore crucial to think very carefully at the time the offer is made as to whether or not it is likely to be beaten at trial.

If you wish to discuss any of the issues outlined in this article, then please contact a member of the Litigation and Dispute Resolution Team.

¹Shah & Anor v Shah & Anor [2021] EWHC 1668 (QB)
²Head (Executrix of the Estate of Michael Head, deceased) v The Culver Heating Co Ltd [2021] EWHC 1235 (QB)
³King v City of London [2019] EWCA CIV 2266
⁴In accordance with The Civil Procedure Amendment Rules 2021