THE CASE OF Coldunell Ltd v Hotel Management International Ltd THROWS FRESH FOCUS ON PART 36 REGIME AS A STRUCTURED AND PRESCRIPTIVE RULE

Parties to a dispute are often confident in their individual positions about the strength and merits of their case, but they are also mindful that under the Civil Procedure Rules (“CPR”) there is an expectation to resolve a dispute without recourse to litigation whenever possible. One of the tools available for such alternative dispute resolution is for either party to make an offer to settle under Part 36 of the CPR.

Parties understand that regardless of their assessment of the quantum of damages, a court could make an award which is higher or lower than the figures they put forward. Whichever way it goes, a Part 36 offer is a stick and carrot because the offer carries with it certain costs consequences (particularly for defendant’s) if it is not accepted and subsequently beaten at trial. Should a party to whom the offer is made (“the offeree”) not accept it and the party who made the offer (“the offeror”) is successful in beating the offer at trial, the offeror will receive additional amounts which can include an uplift on their compensation award, enhanced costs, and an enhanced rate of interest. These enhancements can be valuable. The offeree is exposed to the risk of being held liable for those enhancements and that is why there is a tactical advantage for the offeror in making a Part 36 Offer.  

The rules prescribe in detail what is required in order to make a valid Part 36 offer, but  the judgment of Vernonique Buehrlen KC (sitting as a High Court Judge) in Coldunell Ltd v Hotel Management International Ltd[2022] EWHC 3084 (TCC) (“Coldunell”), throws fresh focus on some of the critical issues relating to the construction of pre-issue Part 36 offers, which take into account potential set-off or counterclaim; the certainty of the offer; the position when the offer is made by email and whether it was unjust for the defendant to bear the normal consequences of failing to beat the offer. 

What it means for a party to suffer the usual consequences of not beating a Part 36 offer is set out in Part 36.17(4), but Judge Buehrlen KC took the view that as the “Part 36 regime is there to encourage settlement and reduce costs, an order” according to her, “applying the consequences set out in CPR rule 36.17 is not intended to be purely compensatory”. 

In Coldunell, a Part 36 offer in the sum of £495,000 was made by the Claimant on 2 July 2019 (“the 2 July 2019 offer”) and subsequently a further reduced Part 36 offer of £380,000 was made on 13 November 2019 (“the 13 November 2019 offer”). Both offers were beaten when the Claimant obtained a judgment following trial in the sum of £597,117. Among other things, the Defendant considered that the 2 July 2019 offer and the 13 November 2019 offer had fallen short of the requirements of Part 36. In addition, the Defendant argued that the offers were not valid and effective because they had not been validly served. Finally, the Defendant argued that even if the offers were valid Part 36 offers, then it would be unjust to award to the Claimant the additional benefits contained in CPR 36.17.

The offer validity arguments

The Defendant based their invalidity case on three issues. The first was that the offer did not come within the scope of Part 36.2(3) because the offer took into account the Claimant’s liability for costs arising from a costs order made against the Claimant in earlier proceedings involving the same parties in 2016 (“the 2016 order”). That goes as far as saying that the offer was not limited to the claim as it should have been. Secondly, the offer did not comply with 36.5(1)(d) to the extent that it incorporated the 2016 order, which was neither part of the claim nor an issue that arose from the claim or any counterclaim. That being the case, the Defendant’s case was that offers did not sufficiently and clearly define the claim they were settling. Thirdly, the Claimant’s offers having been served by email were not properly served and without valid service there were no valid Part 36 offers. 

The scope arguments

The Judge did not find any basis to invalidate the Claimant’s Part 36 offers either for purposes of Part 36.2(3) or for any other reason. The Judge accepted that although the Defendant had not brought a counterclaim at the time the 2 July 2019 offer was made in order for it to come within the scope of Part 36.2(3), the offer was nonetheless consistent with the provision of Part 36.7 to the effect that a Part 36 offer can be made at any time including before the commencement of proceedings. That being the case, the offer having been made prior to any counterclaim being brought did not render it invalid. The Court of Appeal case of Calonne Construction Ltd v Dawnus Southern Ltd [2019] 1 WLR 4793 – referred to by the Judge, is a good authority on the proposition that an offer will not be invalidated because it refers to a proposed counterclaim that has yet to be pleaded at the time the offer is made. In any event, the 2016 costs order was a liability known to both parties and the Judge did not hesitate in finding that both parties were aware of the 2016 order and understood that it needed to be set off against any liability established by the Claimant against the Defendant in the present proceedings. 

The Judge took the view that even if she was wrong to so hold that the 2016 order was an issue that arose in the claim and therefore within the scope of Part 36.2(3), its inclusion would still have been found to be correct within the meaning of Part 36.5(2), and even Part 36.2(2), expressly preserves the ability to make an offer to settle in whatever way a party chooses, although if rule 36.5 is not complied with, the offer will not have the costs consequences provided for at rule 36.17.  

Part 36.5(1)(d) non-compliance

The Defendant advanced the case that the offer was insufficiently clearly defined and accordingly the Defendant could not understand sufficient what the Claimant was seeking to settle when making the offer. The Judge found the offer to be sufficiently clear as it made no mistake about the fact that it offered to settle the claim (including its liability to the Defendant in respect of the 2016 order) for the sum of £495,000. Even for purposes of argument, the Defendant should have sought clarification if they were not clear about the terms or scope of the offers. 

Invalidity as result of service by email

It is trite that a Part 36 offer is made when it is served as mirrored by Part 36.7(2), but service can only be effected if it is done in accordance with CPR Part 6. Service by email is an accepted practice under CPR PD6A, para. 4.2 but for a party to serve by email they must have sought and obtained prior consent of the other party to do so. The Defendant contended that they had not given consent to be served by email when the Claimed sent the 2 July 2019 offer and that, they said, rendered the offer invalid. The Claimant conceded that the 2 July 2019 offer had not been validly served but relied on the decision of Robin Vos in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021] 4 WLR 143 at [25] to advance the case that any invalidity arising from service by email can be ameliorated by the effect of CPR Part 3.10(a) by virtue of the fact that failure to comply with the rule as to service did not of itself invalidate the making of Part 36 offer unless the court so ordered. Having regard to all the circumstances, the Judge found no justification to make such an order. The Claimant had corresponded with the Defendant’s solicitors via email throughout the proceedings and the 2 July 2019 offer was made via the same method. It was not disputed that the Defendant’s case-handler had received the 2 July 2019 offer by email, which indeed the Defendant went onto reject, but not for reasons relating to service by email. The Judge agreed with the Claimant that invalidating the offer based on service by email would amount to no more than “triumph of form over substance”. She concluded that even if she were required to make an order, she would exercise her jurisdiction under CPR rule 3.10(b) or indeed CPR rule 6.28 to dispense with service and order that the Claimant’s 2 July 2019 offer was validly made on that date. 

Inadequate identification of the claim

The Defendant took issue with the wording of the 2 July 2019 offer which described the claim as “terminal dilapidations claim (including its claim for loss of profits)”. The Defendant alleged that this was an inadequate identification of the claim. The Judge considered the definition of the claim as referring to the Claimant’s “terminal dilapidations claim (including its claim for loss of profits” in respect of the Mitre Hotel as “sufficient to identify the claim in respect of which the offer was being made”. 

Suffering the consequences of Part 36.17

If the court concluded that the 2 July 2019 offer was a valid Part 35 offer, the Defendant contended that it would be unjust for the Claimant to take the full benefit of CPR 36.17. The Defendant relied on three matters which it said supported it’s position: (i) the Claimant unreasonably refused a second mediation, (ii) the Claimant’s claim was overstated and 40% of the claim value was abandoned shortly before trial, (iii) there was late disclosure of a report from 2015 concerning the condition of the carpets at the Mitre Hotel. 

Having considered all of the circumstances as required under Part 36.17(4), the Judge found the Claimant’s 2 July 2019 Offer was a genuine attempt to settle the claim before proceedings were issued, with a view to saving the considerable costs that would otherwise be incurred in litigation. The Judge did not find the Claimant’s decision to decline the second dilapidation mediation as unreasonable, she also did not think the overstatement of the claim was particularly relevant on the facts of the case given that the Defendant well knew or ought to have known of the true condition of the hotel in question. 

The Judge fully applied the consequences of Part 36.17(4) and held that its application would not be unjust to the Defendant who should have accepted the Claimant’s offers on the terms they were made particularly the 13 November 2019 offer. She did not fail to emphasise: “I have kept in mind the fact that it is well settled that the purpose of the Part 36 regime is to encourage settlement and reduce costs and that an order applying the consequences set out in CPR rule 36.17 is not intended to be purely compensatory”. 

The Judge held that it was not unjust for the Defendant to suffer the normal consequences of CPR 36.17 but she did reduce the additional sum the Claimant was entitled to by a percentage. The judge stated that it was not in doubt that the Claimant obtained a judgment that was significantly more advantageous to it than the sum it was willing to settle for in July 2019. However, the judge concluded that the matter did not involve fraud and nor was the Defendant’s defence one which was dishonestly maintained. In addition, she also took account of the fact that the Claimant did abandon aspects of its case shortly prior to trial.

Consequently, the Judge gave effect to Part 36.17(4) and held that the Claimant was  entitled to: (i) Interest at 5% per annum on the amount of money awarded); (ii) Indemnity costs from the end of the relevant period set out in the 2 July 2019 offer; iii) Interest on those costs at a rate of 5% per annum; and (iv) 60% of the maximum amount payable pursuant to CPR 36.17(4)(d), being £32,914.

Conclusion

The judgment is instructive about the potential risks involved in turning down a Part 36 offer and the best approach is to heed the warning of LJ Moore-Bick in Gibbon v Manchester City Council [2010] 1 WLR 2081 to the effect that Part 36 is a “carefully structured and highly prescriptive set of rules”. if you want the benefits of the Part 36 regime, you must follow those rules in every respect. If you do that, then you can expect to receive the benefits of doing so if you make a Part 36 compliant offer that you subsequently go on to better at trial.