Withdrawn Part 36 Offers – can they still provide costs protection?

Blackpool Borough Council v Volkerfitzpatrick Limited [03.08.20]

The intricacies of Part 36 have been further illustrated by the judgment in this High Court case, where the court was asked to consider the impact of a withdrawn Part 36 offer and how the ‘reasonableness’ of rejecting such an offer should influence the liability for costs.

Background

The claimant entered into a contract with the defendant to build a new tram depot. A claim was subsequently brought against the defendant as it was alleged that significant parts of the depot did not meet their intended design life of 50 years. The cost of the necessary remedial works was put at over £6 million. Shortly before a mediation, the defendant made a Part 36 offer of £750,000 for discrete elements of the claim. Several months later, the offer was withdrawn and at trial the claimant recovered £631,510.25 for the relevant heads of loss.

Law

Where a Part 36 offer is withdrawn, the automatic costs consequences under rule 36.17 of the Civil Procedure Rules (CPR), i.e. the defendant recovering its costs post expiry of the relevant period, do not apply. However, it is settled law that a withdrawn offer can be taken into account as a relevant circumstance under rule 44.2 of the CPR when the court is exercising its discretion as to where the liability for costs should flow.

Pursuant to the judgment of Lord Justice Jackson in Thakkar v Patel [2017], there is no presumption that an offeror should recover costs where the offeree has failed to beat a withdrawn Part 36 offer, and the crucial question is whether the offeree acted unreasonably in failing to accept the offer whilst it was on the table.

Decision

How to determine ‘reasonableness’ was the key question to be addressed and had not been considered previously. The court identified that there were two potential approaches – the first being to simply consider only the outcome of the claim, and effectively to apply the benefit of hindsight to the detriment of the offeree; or alternatively to consider the offeree’s reasonable perception of its own interests.

Having favoured the latter approach, His Honour Judge Davies found that:

(a) the court must 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.

Applying this rationale, the court found that the offeree was in a position to undertake an effective valuation of the claim, and there was no information available to the offeror to which the offeree did not have access. The offeree took a commercial risk in the knowledge that it could end up recovering less than the Part 36 offer and therefore acted unreasonably.

Comment

The judgment is helpful as a general principle, but sets the scene for potential satellite litigation with the court being tasked with conducting a ‘mini trial’ as to the objective risks in a claim at the time a claimant fails to accept a Part 36 offer.

In considering whether there were “any other factors which should lead to a different conclusion”, the court addressed the potential relevance of whether a Part 36 offer has been withdrawn for “tactical reasons”. The judge concluded the offer in this case was withdrawn for such reasons, however he held “that has no particular significance”, adding that “there is no basis for thinking that it would have been accepted after that date even if not withdrawn.” Whilst it did not alter the decision in these circumstances, the reasons for withdrawal of a Part 36 offer may lead to uncertainty and further disagreement between parties disputing costs.