Articles

This article was first published in the September 2009 edition of Commercial Litigation Journal.

Mark Brown and Angela Fouracre consider the Court of Appeal's recent decision in AF v. BG

The Court of Appeal has recently considered whether an offer made by a defendant in respect of a potential counterclaim may be treated as a claimant's Part 36 offer in AF v. BG [2009].  Whilst it is not uncommon to see a defendant making such offers in practice, until now there has been little guidance on how Part 36 applies in respect of counterclaims and therefore the judgment provides welcome authority on this point.

The Part 36 regime

Lord Justice Jackson tentatively concluded in his preliminary report from his ongoing review of civil litigation costs published in May 2009 that there was a degree of consensus that the Part 36 regime, amended into its present form in April 2007, works well and does incentivise settlement.  Part 36 is an important tactical tool as it provides a means of putting pressure on the other side to settle a case without seeming 'weak' and of protecting, to a certain extent, a party's position on costs.  Its use is now quite standard in cases. 

Whilst there is no prohibition against a party making an offer to settle in any way he chooses, if the offer does not comply with the provisions of Part 36, the consequences set out in the rule will not apply. 

Part 36 not only applies to claims, but also to counterclaims and other additional claims under Part 20.  A Part 36 offer can be made at any time, including before the commencement of proceedings (CPR 36.3(2)), but must comply with the formalities prescribed by CPR 36.2 and accordingly has to:

• be in writing;
• state on its face that it is intended to have the consequences of Part 36;
• specify a period of not less than 21 days within which the defendant will be liable for the claimant's costs in accordance with CPR 36.10 if the offer is accepted;
• state whether it relates to the whole of the claim or to part of it or to an issue that arises in it and if so to which part or issue; and
• state whether it takes into account any counterclaim.

CPR 36.3(4) makes clear that a Part 36 offer will only have the consequences set out in Part 36 in relation to the costs of the proceedings in respect of which it is made, and therefore not in relation to the costs of any appeal.

Where a Part 36 offer is accepted within the relevant period, the claimant will be entitled to the costs of the proceedings up to the date of acceptance (CPR 36.10(1)). This will include any costs incurred by the claimant in dealing with the defendant's counterclaim if the Part 36 offer states that it takes into account the counterclaim (CPR 36.10(6)).

The essential reading in Part 36, especially where an offer has been made by a claimant, comes in the form of CPR 36.14 - Costs consequences following judgment.

If a claimant obtains judgment against a defendant which is at least as advantageous as the proposals within its own Part 36 offer, a court will order, unless it considers it unjust to do so, that the claimant is entitled to its costs on an indemnity basis from the date on which the relevant period expired, interest on those costs of up to 10% above base rate and interest on the whole or part of any sum awarded at a rate not exceeding 10% above base rate (CPR 36.14(3)).

If a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer then the court will, unless it considers it unjust to do so, order that the defendant is entitled to his costs from the date on which the relevant period expired and interest on those costs (CPR 36.14(2)). The sanctions set out above in respect of a claimant's Part 36 offer are not available to a defendant's Part 36 offer so there remains a more powerful incentive for a defendant to accept a claimant's Part 36 offer than vice versa.

The Court of Appeal's controversial decision in BAA v. Carver [2008] arguably places at least some additional pressure on a claimant to accept a defendant's Part 36 offer. Under the old rules a claimant would have been entitled to the enhanced benefits in Part 36 where they bettered a defendant's payment into court or Part 36 offer, even if only by £1.  However, the position since Carver is now much less certain.  Where a claimant rejects a Part 36 offer and then, at trial, beats it by a small amount, the claimant may still be penalised on costs if the overall result is considered to be less advantageous than the defendant's rejected offer.  As a result of Carver, strict monetary comparison is not now the only governing criterion - the phrase "more advantageous" was interpreted as permitting a wide-ranging review of all the facts and circumstances of the case in deciding whether the judgment obtained was "worth the fight", including more subjective factors such as the emotional toll of the litigation.  However, Lord Justice Jackson has suggested in his recent preliminary report on costs that serious consideration should be given to a rule change to reverse Carver as it has introduced an unwelcome degree of uncertainty into the Part 36 process.

AF v. BG (July 2009)

The application arose from a dispute between AF (the claimant) and BG (the defendant) as to whether proceedings pending in the Court of Appeal had been the subject of a binding compromise or not.  The outcome of the application was that there had been no binding compromise and therefore proceedings are continuing.  However, the Court of Appeal thought that the issues raised during the application had potentially wider significance as to the interpretation of Part 36 and has therefore made an edited version of the judgment available.  As the proceedings are ongoing, it is essential that the courts dealing with the proceedings going forward do not know of the fact that the defendant made a Part 36 offer, still less the details of the offer and the claimant's response to it.  Accordingly, the identity of the parties has not been made public and the version of the judgment which has been published is heavily edited and restricted to the discussion of Part 36 and its application to the offer made.

Background Facts

The defendant wrote a letter to the claimant in which it asserted that the claimant was obliged to reimburse it for certain expenditure under a collateral agreement and, accordingly, stated that it had a counterclaim against the claimant for the debt.  As the counterclaim had not yet been pleaded, the defendant indicated its intention to amend its pleadings in the future, if required. In the same letter, the defendant then went on to make an offer to settle proceedings. 

Importantly, the defendant's letter:

• was marked "without prejudice save as to costs" and "Part 36 offer"; 
• indicated that the defendant would be willing to accept payment of a specified sum in full and final settlement of the whole of the counterclaim and the claimant's claim against the defendant;
• stated it was intended to have the consequences of a claimant's offer to settle in accordance with CPR 36; and
• set out the costs consequences the claimant would potentially face if it did not accept the proposal and a judgment was awarded which was at least as advantageous to the defendant as the offer set out in the letter i.e. costs on indemnity basis and interest as set out in CPR 36.14 (3).

In the letter the defendant effectively sought to present itself as a claimant enabling it to make an offer which counted as a claimant's Part 36 offer, attracting the added advantages of the penal cost and interest consequences set out in CPR 36.14.

The offer letter was answered in terms which gave rise to a dispute regarding whether it had been accepted.  The claimant argued that it was not a Part 36 offer at all.

The Court of Appeal's decision

Firstly, the claimant argued that the defendant's offer was not a Part 36 offer as it was not made in accordance with CPR 36.2.  The claimant contended that the specific reference in the letter to it being a "claimant's offer" meant that the offer did not, as required by 36.2(2)(b), "state on its face that it is intended to have the consequences of  Part 36".   The court disagreed - the letter did state that it was intended to have those consequences and it was entirely appropriate and legitimate for the letter to spell out the fact that it was not just an offer in accordance with Part 36 but an offer made by the defendant by way of a claimant's offer.  Whether it was to be properly regarded as a claimant's offer depended on the construction of the offer as a whole but to make such a statement did not mean that it was not a Part 36 offer at all.

The claimant then argued that if the offer did fall within Part 36, it only related to the defendant's proposed counterclaim. Accordingly, the consequences that the offer had in relation to the costs of the proceedings arose only in relation to the costs of the counterclaim (CPR 36.3(4)). 

Again, the Court of Appeal disagreed.  CPR 36.3(2) permits a Part 36 offer to be made before the commencement of proceedings. It found that the counterclaim was a genuine claim, whose nature was clear and for a stated amount (albeit a relatively modest amount compared to the sum at stake on the claim).  The fact that the counterclaim had not been formulated or pleaded did not itself matter. 

Further, the Court found that the offer clearly stated that acceptance of it would constitute full and final settlement of both the proposed counterclaim and all claims asserted by the claimant.  Therefore, if accepted, it would settle both the liability on the proposed counterclaim and the liability on the claim.  In those circumstances, CPR 36.3(4) applied to both claims. Accordingly, where CPR 36.10(1) speaks of the claimant's entitlement to "the costs of the proceedings" it means in this case the costs of both the counterclaim and claim.

The claimant argued that CPR 36.10(6) (i.e. claimant's costs to include costs incurred in dealing with defendant's counterclaim) was inconsistent with this as it only applies to the 'properly so-called' claimant who makes an offer which takes into account the defendant's counterclaim.  The Court of Appeal rejected this reading of the rule as the result would be that the opportunity for using Part 36 as a claimant would depend on what might be a matter of chance as to who started the proceedings.  To read the rules in such a way that separate proceedings, rather than a counterclaim in the same proceedings, were desirable was neither sensible nor consistent with the overriding objective.  Further, Part 36 applies to Part 20 (Counterclaims and Other Additional Claims) claims. Therefore, the defendant's proposed counterclaim was to be treated as if it were a 'claim' and the defendant, as the party bringing the counterclaim, was to be treated as the 'claimant' for the purposes of the rule.  Correspondingly, the claimant would be treated as within references to 'a defendant' in relation to its position defending the proposed counterclaim.  The Court of Appeal thought that in this way the rule would apply in an even-handed way and avoid the arbitrary results according to which party brought proceedings first.

The Court of Appeal concluded that the defendant's offer letter was a Part 36 offer and that it related to the entire proceedings, that is both the original claim and proposed counterclaim.  If the claimant had accepted the Part 36 offer, the claimant would have been liable to pay the defendant his costs not only of asserting the proposed counterclaim but of defending the claimant's original claim.  However, if the offer had not been accepted, the question of whether a court would go on to consider it just to allow the defendant indemnity costs if it achieved a result at trial which was at least as advantageous as the proposals set out in its letter was thought to be quite another matter. 

It is worth noting that the claimant made reference during the application to the case of Huck v. Robson [2002] where the Court of Appeal recognised that circumstances may exist, notwithstanding that a claimant has recovered in full after making a Part 36 offer for marginally less than his full claim (i.e. a trivial concession), where he will not be awarded costs on the indemnity basis.

Case comment

AF v. BG appears to be the first time that the courts have considered whether an offer made by a defendant in respect of a counterclaim can constitute a claimant's Part 36 offer.  The court recognised that a prospective or actual counterclaimant can make a valid claimant's Part 36 offer and provided clear guidance on the costs consequences of a claimant accepting such a Part 36 offer.  Accordingly, where a defendant has a prospective or actual counterclaim consideration should be given as to whether a claimant's Part 36 offer can be made in respect of the counterclaim. 

It is not clear, however, whether it will be possible to apply this authority in all cases where a defendant has a counterclaim.  The defendant in this case sought a net payment from the claimant in its offer letter although Lloyd LJ indicated in his judgment that the defendant's counterclaim was for a "relatively modest amount" compared to the sum said to be at stake on the claim.  It therefore seems unlikely that the comparative value of the claims would be determinative.  Emphasis was placed on the fact that the counterclaim in this case was genuine, clear and for a stated amount.  It may, however, be more difficult to establish that an offer is a claimant's, not defendant's, Part 36 offer where the counterclaimant is offering to pay a net sum to the claimant in settlement of the claims.

Nevertheless, this authority is likely to provide an incentive for defendants with genuine counterclaims to make such offers and, of course, provide an added incentive for claimants to accept any well pitched offers made by counterclaimants.  It could, conceivably, lead a defendant to allege a counterclaim for purely tactical reasons.  However, it should be borne in mind that, even if such an offer was held to be valid, if it was perceived by the court to be trivial or not genuine, there would be a risk that the enhanced costs and interest benefits will not be awarded in any event.

Cases:

AF v. BG [2009] EWCA Civ 757

Carver v BAA Plc (2008) EWCA Civ 412, (2009) 1 WLR 113

Huck v. Robson [2002] EWCA Civ 398