|July 4, 2012|
Previously published on June 2012
Part 36 of the Civil Procedure Rules (CPR), which sets out an autonomous code for tabling settlement offers, has been the subject of considerable judicial consideration in recent years. In F & C Alternative Investments (Holdings) Limited & Ors v Barthelemy & Anor  EWCA Civ 843, the Court of Appeal reinforces the position that in order to benefit from the favourable cost consequences of Part 36, a party must strictly comply with its conditions and cannot seek to do so simply "by analogy".
The Appeal arose from three inter-linked sets of proceedings between hedge fund managers over a limited liability partnership fund they jointly owned and their partnership agreement to operate the fund. The Respondents sought to exercise a put option to acquire the fund. In response, the Appellants sought a declaration under Part 7 CPR that the Respondents had not exercised their option to acquire the fund validly. Both parties subsequently issued petitions under sections 994-6 of the Companies Act 2006 alleging unfair prejudice.
In December 2009, the Respondents sought to compromise the proceedings. They made a "without prejudice save as to costs" offer to the Appellants to settle the dispute for £5.9m. This offer was explicitly stated not to be a Part 36 offer due to the nature of the dispute and being made under the standard Part 44 CPR costs regime, which does not allow for the recovery of interest on costs at indemnity rates, save in exceptional circumstances. As claimants and defendants in related disputes, the Respondents faced the prospect of unfavourable cost consequences in the Part 7 claim where it was technically a defendant. This was unacceptable to the Respondents, who felt they were effectively the claimant in those proceedings. However, despite stating that the offer was not made within Part 36, the Respondents stated that they would invite the Court to apply the punitive interest rates available under Part 36. These apply in circumstances where, either a claimant refuses an offer to settle and subsequently fails to receive a more advantageous sum at trial, or a defendant refuses an offer to settle and judgment at trial is for a figure more advantageous to the claimant.
At first instance, the Respondents succeeded in bettering their offer and received a combined sum of £7.8m plus interest. At a separate costs hearing, the Judge felt the Respondents' circumstances exposed a "glitch" in Part 36. In order to resolve this apparent anomaly he relied on Part 44, but drew an analogy with Part 36 and awarded costs to the Respondents on an indemnity basis, at varying rates, for the period following the refusal of the settlement offer. The Appellants appealed against the award of indemnity costs amongst other issues.
The Court of Appeal allowed the appeal and overturned the award of indemnity costs of 10% above base rate (and higher for specific periods) and awarded a flat rate of 3% above base rate on the judgment and on costs. There was no basis for the High Court to draw an analogy with Part 36, unless the Respondents had made an offer strictly on the terms set out in Part 36. The Court ruled that Part 36 acts as a self-contained code for the settlement of disputes and it did not have the jurisdiction to entertain a departure from the rules of Part 36, even when, on the facts it may appear to be reasonable to do so. In those circumstances, Part 44 provides the Courts with authority to make costs awards, although the test that must be satisfied in awarding indemnity costs is markedly higher than under Part 36.
This judgment reinforces the requirement to strictly comply with the terms of Part 36 if you want to benefit from its favourable costs consequences. There is considerable judicial authority that stresses the importance of complying strictly with the terms of Part 36. In recent years the Court of Appeal has considered various efforts by parties to come within Part 36, despite their failure to obey its strictures. Each time it has batted away those efforts. As noted by Davis LJ, in Gibbon v Manchester City Council  EWCA Civ 726, the Court of Appeal ruled that Part 36 offers must be expressly withdrawn; and in C v D  EWCA Civ 646, the Court of Appeal ruled that a Part 36 offer can not be time limited if not accepted within 21 days, and remains open until withdrawn. The clear message from the Court of Appeal to all litigants making settlement offers is that if you want to benefit from the advantageous costs awards granted by Part 36, you must strictly comply with its terms; the courts will not overlook mere technical deficiencies in the wording of settlement offers, nor will they apply Part 36 by analogy to prima facie deserving cases.