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Part 36: withdrawn offer still relevant on costs

18 August 2020
Nicola Critchley analyses the recent High Court decision in Blackpool Borough Council v Volkerfitzpatrick Limited & Ors which considered the effect of a withdrawn Part 36 offer on the costs of a complex multi-party construction action.

Blackpool Borough Council v Volkerfitzpatrick Limited & Ors
High Court (TCC)
3 August 2020

In this commercial action, the claimant had claimed damages of almost £6.7m but recovered only £1,110,782. In addition to the claimant and defendant, a third, fourth and fifth party had also been joined.

While the HHJ Stephen Davies had no doubt that the claimant was properly to be regarded as the successful party, both in substance and in reality, he had to decide whether under the power conferred by 44.2(2)(b) the court should make a different order as to costs and, if so, what different order.

Background 

On 15 August 2019, some weeks before a mediation took place, the defendant made a formal Part 36 offer whereby it offered to pay the claimant £750,000 in settlement of all of the claim items save for some specified items. A comparison of the offer of £750,000 with the judgment on those items (inclusive of add-on) showed that the claimant only recovered £631,510.25, so that the defendant did better at trial than its Part 36 offer.

After further offers and counter-offers (which the judge found irrelevant to this judgment) the defendant withdrew the Part 36 offer on 27 January 2020. 

When considering the claimant’s costs, the judge held that he must take into account the claimant’s failure to achieve anything like the amount it was inviting the court to award on its primary case, as well as its conduct, which was open to criticism in a number of respects. However, the most significant issue was the impact of the defendant's Part 36 offer.

Unreasonable refusal of Part 36 offer?

The question to be asked was whether, following Thakkar v Patel (2017) the claimant acted reasonably or unreasonably in failing to accept the offer while it was on the table.

It could now be seen from the principal judgment that with the benefit of hindsight the offer was extremely well judged because, in the context of a multi-million-pound case, the offer was just under £120,000 more generous than the judgment for the relevant items. The offer must have been made on the basis of a broad-brush gut instinct which proved to be an extremely impressive prediction of the eventual outcome. If the Part 36 offer had not been withdrawn the question of the reasonableness of the claimant's decision not to accept it would not normally be relevant because the defendant would automatically be entitled to its costs from the expiry of the relevant 21-day period for acceptance.

On the basis of the authorities, the approach the court adopted was: (a) to put itself into the position of the claimant at the time and not simply decide the case by reference to hindsight; but (b) the focus must be on the reasonableness of the refusal by reference to the facts and matters relevant to the merits of the claim as they ought reasonably to have appeared to the claimant at that time, not by reference to wider commercial factors.

On that basis the claimant was in a position to undertake its own assessment and valuation of the case. It followed that the claimant acted unreasonably in the sense in which that term should be used for these purposes in rejecting the offer. It was taking a commercial risk in the knowledge that it could end up recovering less than the amount of the offer. It followed that the starting point was that the claimant ought to pay the defendant's costs of all the relevant issues from 21 days after service of the Part 36 offer, i.e. from 6 September 2019 onwards. 

The only obvious factor, which could potentially lead to a different conclusion, was the fact that the Part 36 offer was withdrawn for, what the judge had concluded, were tactical reasons.  It would be impermissible speculation for the judge to conclude that this claim would have settled had the Part 36 offer been accepted, as there were ongoing issues between the defendant and the additional parties. It must be assumed that this claim would have fought to trial so that the claimant would have been entitled to its costs of the remainder of the claim.

Whilst it would be possible to make an issue-based costs order after 6 September 2019, this was a paradigm case for the court to make a percentage order if practicable under CPR Part 44.2(7). There were two reasons why the case went to trial, the first being the claimant's failure to accept the defendant's Part 36 offer and the second being the defendant's unexplained decision to exclude a major part of the claim from its Part 36 offer. If that excluded issue had been the only matter tried it would have taken no more than 4 days. On a straight-line basis that would represent 20% of the costs of a 20-day trial. However, having considered issues of costs budgeting and all other the relevant considerations the appropriate orders were:

  1. The defendant should pay 80% of the claimant's costs of the action up to and including 5 September 2019.
  2. The claimant should pay 80% of the defendant's costs of the action, including the additional claims against the fourth and fifth parties (in relation to a specific issue) thereafter.
  3. The defendant should pay the fifth party’s costs of the additional claim up to and including 5 September 2019 and the claimant should pay the fifth party’s costs of the additional claim thereafter.

Comment

It is always a difficult call to withdraw a Part 36 offer and thus risk losing the automatic costs protection that it affords while in place. However, this case is a reminder that even if a Part 36 offer is withdrawn, it potentially still has historical relevance, as confirmed by CPR 44.2(4)(c), which allows a withdrawn offer ‘properly be taken into account as a relevant circumstance’.

Please contact Nicola Critchley, Partner at Nicola.Critchley@dwf.law

Further Reading

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