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The fundamental principle behind CPR Part 36 is that one party makes an offer to settle litigation and the other party has to decide whether or not to accept that offer, in the knowledge that the consequences of rejecting the offer and failing to obtain a more advantageous judgment at trial are likely to be serious. The concepts of offer and acceptance are also central to the law on the formation of contracts. However, the precise relationship between CPR Part 36 and contract has, until recently, been unclear.

In Gibbon v Manchester City Council [2010] EWCA Civ 726, which was heard as a conjoined appeal with LG Blower Specialist Bricklayer Limited v Reeves, the Court of Appeal provided some useful guidance on this issue. At the same time, the Court of Appeal considered the controversial decision of Lisa Carver v BAA plc [2008] EWCA Civ 412 and attempted to limit its effect.

Gibbon and Blower are just two of a number of Part 36 cases which have reached the courts recently. This article also briefly considers two other decisions which are of particular interest. In Kunaka v Barclays Bank plc (CA (Civ Div) unreported), a differently constituted Court of Appeal considered whether a party making a Part 36 offer to a litigant in person should provide additional information about the consequences of failing to accept a Part 36 offer within the relevant period. In Moira Walsh v Mark Buddha Singh [2010] EWHC 1167 (Ch), HHJ Purle QC considered the circumstances in which it would be appropriate for the Court to decline to apply the usual penalties for failing to secure a judgment at least as advantageous as a rejected Part 36 offer.

Gibbon - the facts

In Gibbon, the claimant made a Part 36 offer of £2,500. The defendant initially rejected this offer but, after a number of lower Part 36 offers by the defendant had been rejected by the claimant, the defendant increased its offer to £2,500. The claimant rejected this offer but failed to withdraw her own previous offer in the same amount. The defendant then wrote to the claimant's solicitors formally accepting that previous offer. The Court of Appeal had to decide whether or not it was entitled to do so.

Can a rejected Part 36 offer still be accepted?

The claimant argued that the defendant's initial rejection of her Part 36 offer rendered it incapable of acceptance in accordance with usual contractual principles.

A similar issue had arisen in the case of Sampla and Others v (1) Rushmore Borough Council (2) Mr Timothy Crowley [2008] EWHC 2616 (TCC). In that case, Coulson J held that Part 36 offers (unlike contractual ones) can still be accepted even after they have previously been rejected. The Court of Appeal agreed. CPR 36.9(2) provides that an offer may be accepted "at any time" unless the offeror has withdrawn the offer by serving formal notice of withdrawal on the offeree. Moore-Bick LJ said that this language was quite clear. The rules state how a Part 36 offer may be made, how it may be varied and how it may be withdrawn. They do not provide for a Part 36 offer to lapse or become incapable of acceptance once it has been rejected as would be the case at common law.

Is it possible for a Part 36 offer to be withdrawn without using express terms?

In Gibbon, the claimant argued, in the alternative, that her rejection of the defendant's Part 36 offer of £2,500 demonstrated her clear intention that she was unwilling to accept that sum in settlement of her claim. She argued that this amounted to an implied withdrawal of her own previous Part 36 offer of £2,500.

The Court of Appeal also rejected this argument on the basis that CPR 36.3(7) makes clear that a Part 36 offer can only be withdrawn by serving written notice on the offeree. Moore-Bick LJ said:

"In my view that leaves no room for the concept of implied withdrawal; it requires express notice in writing in terms which bring home to the offeree that the offer has been withdrawn".

Blower - the facts

As stated above, Blower was heard by the Court of Appeal at the same time as Gibbon. In Blower, the defendants had made a series of offers, but then expressly withdrew all of them save for a Part 36 offer of £8,023.14 (including interest) which they had made in May 2007. In February 2008, they made a further offer which appeared to be slightly higher (but was actually lower as it was stated to be inclusive of costs). None of the offers was accepted and the claimant obtained judgment for £8,375.94 plus interest and costs.

One of the issues in Blower was whether the February 2008 offer amounted to an implied withdrawal of the May 2007 offer. The Court of Appeal held that it did not, for the reasons given in Gibbon. The May 2007 offer had not been expressly withdrawn and accordingly, it remained open for acceptance.

Do later Part 36 offers automatically vary earlier offers?

The next issue in Blower was whether the February 2008 offer amounted to a variation of the May 2007 offer.

It is worth noting that the February 2008 offer was not a valid Part 36 offer because, in breach of CPR 36.2(2), it failed to state that it was a Part 36 offer and purported to be inclusive of costs. Nevertheless, because the issue was of "some interest and importance" Moore-Bick LJ gave his views on the issue (without actually deciding it).

There is no restriction on the number of Part 36 offers that a single party can make and all of those offers can be concurrently open for acceptance.  Consequently, a later Part 36 offer will not automatically vary an earlier one. Moore-Bick LJ went on to comment that "in some cases there could be argument about whether a later offer was intended to vary an earlier offer or to stand alongside it" (paragraph 32). As a result, Moore-Bick LJ appeared not to rule out the possibility that a later Part 36 offer could vary an earlier one without saying so in express terms. This, presumably, will be a matter of ascertaining the meaning and effect of the later offer in accordance with normal objective rules of construction.

For Moore-Bick LJ, however, the solution was obvious. It is for parties and their legal advisers to make their intentions clear as to whether a new offer is intended to vary or supplement an earlier offer: "If they do so, problems of that kind should not arise" (paragraph 32). An equally important practice point arising out of Gibbon and Blower is that parties should keep all Part 36 offers under review and withdraw offers which no longer reflect the terms on which they are prepared to settle.

Is the decision made by the Court of Appeal in Carver v BAA still good law?

In Lisa Carver v BAA plc [2008] EWCA Civ 412, the Court of Appeal held that, when asking itself whether the judgment was more advantageous to the claimant than a Part 36 offer, the court should take into account all aspects of the case, including emotional stress and financial factors, such as the incurring of irrecoverable costs.

This judgment has been widely criticised for introducing an unwelcome degree of uncertainty into the process. The Court of Appeal expressed the view that there was "much force" in that criticism but recognised that Carver was binding on it. Despite being unable to overturn Carver, Moore-Bick LJ did seek to limit its effect.

In Blower, the defendants argued that, as the judgment only exceeded the May 2007 offer by a small amount, and if Carver was applied, the claimant had failed to obtain a judgment that was "more advantageous" than the offer and therefore should suffer the Part 36 consequences. The Court of Appeal rejected that argument.

The Court of Appeal accepted that in a case where a Part 36 offer has been beaten by a very small amount and there is clear evidence that the successful party has suffered serious adverse consequences as a result of pursuing the case to judgment, those factors (including factors such as emotional stress and irrecoverable costs) may be sufficient to outweigh pure financial success. However, the Court of Appeal made clear that such cases are likely to be rare and the weight that should be attached to each factor remained a matter for the judge in each case. Critically, Moore-Bick LJ stated:

"In most cases, obtaining judgment for an amount greater than the offer is likely to outweigh all other factors" (paragraph 40 ).

Departing from the usual costs consequences of Part 36

CPR  36.14 sets out the costs consequences of a party failing to obtain a judgment more advantageous than the terms of a Part 36 offer. The Court will apply those costs consequences unless the Court determines "it unjust to do so".

CPR 36.14(4) states that the Court, in determining whether it would be "unjust" to apply the costs consequences of Part 36, will take into account "all the circumstances of the case" including:

• the terms of any Part 36 offer;
• the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;
• the information available to the parties at the time when the Part 36 offer was made; and
• the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

In Moira Walsh v Mark Buddha Singh [2010] EWHC 1167 (Ch), the defendant argued that he had substantially won the litigation and therefore he should have the costs of the action on the standard basis until the "relevant period" of his Part 36 offer had expired and, thereafter, on the indemnity basis. The judge was satisfied that the claimant had failed to obtain a judgment which was more advantageous than the defendant's Part 36 offer. However, he held that it would be unjust to order the claimant to pay costs and interest from the date of the Part 36 offer, in the light of the defendant's:

• "Disgraceful behaviour" in seeking to rely on material that he had obtained by the use of spyware on a laptop which the claimant was using;
• unjustified attempts to portray the claimant as mentally unstable; and
• general conduct of the trial.

The judge also held that, given the Part 36 offer, it would not be equitable for the defendant to pay any part of the claimant's costs. He, therefore, made no order as to costs.

Whilst Walsh is a noteworthy decision because it provides an example of the Court refusing to apply the usual costs consequences of failing to beat a Part 36 offer, it is of real interest because in his judgment, HHJ Purle QC held that, because the phrase "all the circumstances of the case" is also used in CPR 44.3(4), the wider conduct factors listed in that part of the CPR are relevant when considering CPR 36.14(4). This widens the scope for parties to argue that matters such as: pre-action conduct; unreasonably running particular arguments; and/or exaggerating a claim should render an order applying the costs consequences of Part 36 "unjust" (see paragraph 14ff).

Litigants in person

In the recent case of Kunaka v Barclays Bank plc (CA (Civ Div) 16/7/2010), a differently constituted Court of Appeal to that in Gibbon and Blower, decided that the normal costs consequences of a claimant accepting a defendant's Part 36 offer may not apply if the claimant is a litigant in person. This is despite the clear indication given by the Court of Appeal in Gibbon that the rules of Part 36 should be strictly applied as encapsulated by Moore-Bick LJ when he stated that: "In some cases the demands of clarity and certainty in the operation of Part 36 may appear to produce injustice…".

In Kunaka, Barclays made a Part 36 offer which was eventually accepted by Kunaka some time after the 21 day "relevant period" had expired.  CPR 36.10(5)(b) makes clear that the usual position is that: "the offeree will be liable for the offeror's costs for the period from the date of expiry of the relevant period to the date of acceptance."  The Court has the discretion to order otherwise but it would not be unreasonable to expect that the Court would only do so in exceptional circumstances and that a claimant being a litigant in person would not fall into the "exceptional" category. However, the Court of Appeal decided that Barclays would not be entitled to its costs from the expiry of the relevant period.

The Court of Appeal based its decision on Barclays' failure to advise Mr Kunaka of the costs consequences of not accepting the offer within the "relevant period" when it wrote to him to explain that the offer would remain open after the 21 day relevant period. The Court of Appeal found that Barclays were under a duty to advise a litigant in person of the costs consequences of late acceptance of offers and failed to fulfil that duty.

Summary points

• If a party wishes to withdraw or vary a Part 36 offer then it must do so expressly in writing as arguing implied withdrawal or variation is highly unlikely to succeed.
• Even if an offer is rejected, it is still open for acceptance: normal contractual principles do not apply to Part 36.
• The strength of each side's case is likely to fluctuate as a case progresses. Parties should keep Part 36 offers under review and, where appropriate, withdraw or accept them.
• Carver v BAA is still good law but its scope has been limited.
• The conduct factors listed in CPR 44.3(4) (including pre-action conduct; unreasonably running particular arguments; and/or exaggerating a claim) may be taken into account when the Court determines whether or not it would be unjust to apply the usual costs consequences of a successful Part 36 offer.
• Where the offeree is a litigant in person, a Part 36 offeror must explain in correspondence the costs consequences of late acceptance of a Part 36 offer (i.e. acceptance after the expiry of the relevant period) in order to ensure that its offer is entirely effective.