England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)

		Royal Courts of Justice Strand, London, WC2A 2LL
		21 July 2009

Lord Justice Lloyd:

1. This is an edited version of a judgment handed down in private, which must for the time being remain confidential. It has been agreed that the confidential elements include the identity not only of the parties but also of the lawyers involved.
2. The application before the court arose from a dispute 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 is that there had not been a binding compromise, so the proceedings will continue. In the meantime secrecy is needed because a Part 36 offer was made on one side, and courts which have to deal with the continuing proceedings (not only the Court of Appeal but also at first instance) should not know of the fact, still less of the details, of the offer, and of the response to it.
3. However, the arguments put before the court raise issues which seem to be of potentially wider significance as to the interpretation of Part 36. So, in order to balance the need for others to know what we decided about Part 36, on the one hand, and the need to keep secret the fact and details of the offer from courts who may come to deal with the proceedings in future, this heavily edited version of the judgment is made available at this stage. The full judgment will be published when the continuing proceedings have reached a stage at which the Part 36 offer does not need to be kept secret for the future. This version of the judgment is restricted to the discussion of Part 36 and its application to the offer actually made, to a brief discussion of the court's jurisdiction, and to such other material as is necessary to understand the points. Part of the letter by which the Part 36 offer was made is quoted, but in a form edited to conceal any distinguishing characteristics, though not to eliminate any feature necessary for the understanding of the points argued.
4. I refer to the parties, purely for convenience and anonymity, as the Applicant and the Respondent. The offer was made on behalf of the Respondent.

Jurisdiction

5. The jurisdiction of this court is statutory, and (subject to an anomalous exception, or apparent exception, in the field of judicial review) only appellate. However, if it needs to do so, the Court of Appeal can resolve issues that arise incidentally to proceedings properly brought before it: c.f. Ocean Software Ltd v Kay [1992] QB 583, at 588. The present issue is just such an incidental question. According to how it is resolved, the proceedings in the Court of Appeal, initiated by both parties, will either be stayed, under Part 36, or will continue to an oral hearing; in turn the same will apply to the proceedings generally. This court can, and has to, decide all issues on which may depend the question whether it should order that the stay of the proceedings (which has been in place since the point was raised) is to continue, or whether, instead, to relist the oral hearing which had been due to take place. The primary question is that of construction of the exchange of letters.

The exchange of letters

6. I must set out much of the offer letter. The letter is marked "without prejudice save as to costs" and "Part 36 offer". It is headed in relation to the proceedings which are referred to and defined as "the Claim". At the beginning of the letter, the writer refers to a collateral agreement between the parties and asserts that, in the events which had happened, the Applicant was obliged to reimburse the Respondent for certain expenditure under that agreement. The letter continues as follows:

"Accordingly, our client has a counterclaim against you in the Claim for the debt [giving the amount] plus interest. Such counterclaim has not yet been pleaded in the Claim but our client intends to amend his pleadings to incorporate this counterclaim in the future, if required.

For the reasons set out previously in correspondence with you and in our client's submissions to the Court, we do not consider that the claims you are pursuing against our client have any reasonable prospect of success.

However, our client realises that significant cost and inconvenience will be caused to all parties concerned if this matter is taken any further. Our client is, therefore, willing to accept payment of [a specified sum, smaller than that identified above as the subject of the intended counterclaim] ("the Sum") in full and final settlement of the whole of our client's claim and the whole of your claim against our client. For the avoidance of doubt, this offer includes all of the claims you have advanced against our client in the Claim.

This letter is intended to have the consequences of a claimant's offer to settle in accordance with Part 36 of the Civil Procedure Rules. In particular, you will be liable for our client's costs up to the date of written notice of acceptance, in accordance with CPR 36.10, if the offer is accepted within 21 days of service of this letter on you ("the Relevant Period").

Our client will be entitled to withdraw or amend this offer without the permission of the Court if this offer is not accepted within the Relevant Period. However, if the offer remains open and is accepted after the expiry of the Relevant Period, the Court will make an order as to costs unless the parties agree liability as to costs.

As required by CPR 36.3(3)(a), the Sum is inclusive of interest up until the expiry of the Relevant Period. Thereafter interest, calculated at 1% above Bank of England base rate from time to time, will accrue on the Sum.

We should point out that you will face potentially adverse costs consequences in the event that you choose not to accept the proposal set out in this letter and any judgment subsequently awarded is at least as advantageous to our client as the offer set out in this letter. In these circumstances our client will seek:

1 his costs on the indemnity basis with interest at 10% above base rate on those costs; and

2 interest on his damages at 10% above base rate,

from the date on which the Relevant Period expired.

If you are not entirely clear about any of the terms of this offer, please notify us of this in writing within 7 days, setting out clearly which points you believe to be ambiguous or unclear. Failure to provide such notification will, in our view, preclude you from seeking to avoid the adverse costs consequences outlined above by referring to any alleged ambiguities or technical errors in this letter.

For the avoidance of doubt, this Part 36 offer is intended to be entirely independent of any other settlement discussions between the parties."

7. For present purposes what happened next does not matter, save that the offer letter was answered in terms which gave rise, eventually, to a dispute as to whether it had been accepted.
8. The Applicant argued that the offer was not a Part 36 offer at all. For that reason, and because of the detailed points taken as to the effect if it is a Part 36 offer, I need to refer to some of the terms of Part 36 as it now stands. The rule was amended into its present form in April 2007. We had some submissions by reference to the former versions of the rule and to the papers to do with the preparation for the amendment in 2007 but it seems to me that nothing turns on any of that.

CPR Part 36

9. The purpose of Part 36 is to prescribe, or allow for, certain consequences if an offer is made within its terms and is, or is not, accepted. Rule 36.1(2) makes it clear, on the one hand, that parties can make offers to settle in any way but, on the other hand, that an offer not made in accordance with rule 36.2 will not have the particular consequences specified in rules 36.10, 36.11, and 36.14. Rule 36.2(1) and (2) are as follows:

"(1) An offer to settle which is made in accordance with this rule is called a Part 36 offer.

(2) A Part 36 offer must

(a) be in writing;

(b) state on its face that it is intended to have the consequences of Part 36;

(c) specify a period of not less than 21 days within which the defendant will be liable for the claimant's costs in accordance with Rule 36.10 if the offer is accepted;

(d) 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

(e) state whether it takes into account any counter claim."

10. Rule 36.3 makes it clear, among other things, that a Part 36 offer may be made at any time, including before the commencement of proceedings. It also prescribes the effect of a Part 36 offer to pay or to accept a sum of money as regards interest. Rule 36.3(4) is in the following terms:

"A Part 36 offer shall have the consequences set out in this part only in relation to the costs of the proceedings in respect in which it is made, and not in relation to the costs of any appeal from the final decision in those proceedings".

11. The rule also provides that during the 21 day, or longer, specified period, during which the offer is to be open for acceptance, the Part 36 offer may not be withdrawn or its terms changed to the disadvantage of the offeree unless the court gives permission for that. Rule 36.8 allows the offeree, within seven days of receipt of a Part 36 offer, to request the offeror to clarify the offer. If the offeror does not give the clarification requested, the offeror may apply to the court for an order that he should do so; if the court makes such an order it must specify the date when the Part 36 offer is to be treated as having been made, which might well be a date connected with the date on which the clarification is provided.
12. The most important parts of Part 36 are those concerned with the consequences of acceptance of a Part 36 offer, in rules 10 and 11, and the consequences if the offer is not accepted, in rule 14. Rule 11 provides that if a Part 36 offer is accepted and it relates to the whole claim, the whole claim will be stayed on the terms of the offer. That stay will not affect the power of the court to enforce the terms of the offer or to deal with any question of costs relating to proceedings. Rule 36.11(8) provides (with a presently irrelevant exception) that if a Part 36 offer is accepted and a party alleges that the other party has not honoured the terms of the offer, that party may apply to enforce the terms of the offer without the need for a new claim.
13. The more important consequences of acceptance are those in relation to costs, governed by rule 10. Rule 36.10(1) and (6) need attention.

"(1) Subject to paragraph (2) and paragraph (4)(a) [neither of which is relevant], 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 on which notice of acceptance was served on the offeror."

"(6) The claimant's costs include any costs incurred in dealing with the defendant's counterclaim if the Part 36 offer states that it takes into account the counterclaim."

14. So much for acceptance. The major significance of Part 36, especially for an offer made by a claimant, comes in rule 36.14. This differentiates between the case where a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer, on the one hand, and that in which the claimant obtains judgment against the defendant which is at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer: see rule 36.14(1)(a) and (b). Under rule 36.14(2), in the case where (to use shorthand) the claimant fails to beat the defendant's Part 36 offer, 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 period for acceptance of the offer expired, and interest on those costs. Conversely by rule 36.14(3), if the claimant obtains a judgment which is at least as good as his Part 36 offer, then the court will, unless it considers it unjust to do so, award to the claimant (a) interest on the whole or part of any sum of money awarded, at a rate not exceeding 10% above base rate, (b) his costs on the indemnity basis from the end of the relevant period, and (c) interest on those costs at a rate not exceeding 10% above base rate. Thus, in terms of the incentive towards acceptance created by a Part 36 offer, the position of a claimant making an offer to accept a sum in satisfaction of his claim is much more powerful than that of the defendant when making an offer to satisfy the claimant's claim.
15. Apart from the claim mentioned in the offer letter, the Respondent was only a defendant in the proceedings and would therefore, otherwise, have been limited to making an offer as defendant, with the clear but comparatively limited sanctions provided by rule 36.14(2). If and to the extent that the Respondent could, consistently with Part 36, present himself as a claimant, and therefore able to make an offer which, in terms of rule 36.14(1)(b), counted as a claimant's Part 36 offer, that would be of much greater advantage to him. In order to decide whether, and if so how, Part 36 applies to the letter of offer, the letter and the rule need to be considered in some detail.
16. The Applicant's contention that it is not in accordance with rule 36.2 turns on the words: "this letter is intended to have the consequences of a claimant's offer to settle in accordance with Part 36", and the specific reference to a claimant's offer. He argues that the insertion of the word "claimant's" has the result that the offer does not, as required by rule 36.2(2)(b), "state on its face that it is intended to have the consequences of Part 36". I disagree. The letter does state on its face that it is intended to have those consequences. It goes into considerable detail on this, including a specific reference to the position as regards interest, under rule 36.3(3). The purpose of it being identified as a claimant's offer was to show that the offeror took the view that it would fall within rule 36.14(1)(b) and (3), if it were not accepted. That is reiterated by the passage later in the letter pointing out the potentially adverse costs consequences if the offer were not accepted and if the Respondent obtained a judgment at least as advantageous as that offer. Normally the position in that respect would not be in doubt, but where there is a claim and a counterclaim the position could be in doubt. Here, what is more, there was an existing claim but only a proposed or contemplated counterclaim. It seems to me that it was entirely appropriate and legitimate for the offer letter to spell out the fact that it was not just an offer in accordance with Part 36, but that it was an offer made by the Respondent by way of a claimant's offer. Whether it is properly to be regarded as a claimant's offer depends on the construction of the offer as a whole, not just on the statement by the offeror, but to make this statement does not mean, as the Applicant submitted, that it is not a Part 36 offer at all.
17. The Applicant's next point is that, if it is within Part 36, it only relates to the proposed counterclaim. Accordingly, he argues, the consequences that the offer has in relation to the costs of the proceedings arise only in relation to the costs of the counterclaim: see rule 36.3(4). I disagree with that contention as well. The situation is unusual because the counterclaim had not been pleaded, and therefore did not yet exist as a claim in the proceedings. However, the counterclaim was a genuine claim, whose nature was clear, and which was for a stated amount, albeit a relatively modest amount compared to the sum that was said to be at stake on the claim. As rule 36.3(2) says, a Part 36 offer may be made before the commencement of proceedings. So the fact that the counterclaim had not been formulated or pleaded does not of itself matter. The Applicant pointed out that the Respondent would require permission to amend his proceedings to include the counterclaim, because of rule 20.4(2)(b). The offer letter recognised that this would be necessary, and I do not need to decide whether such permission would have been, or would be, granted.
18. A Part 36 offer made in respect of the whole of a claim, as this was, must state that it does so relate, and it must also state whether the offer takes into account any counterclaim. This offer did so state; it made it clear that the offer was put forward on a net basis, and that acceptance of it would constitute full and final satisfaction both of the proposed counterclaim and of all claims asserted by the Applicant against the Respondent. It would therefore settle both the liability on the proposed counterclaim and the liability on the claim. In those circumstances, it seems to me that rule 36.3(4), with its reference to "the proceedings in respect of which [the Part 36 offer] is made", applied in the present case to both the claim and the counterclaim. Accordingly, it seems to me to follow that, where rule 36.10(1) speaks of "the costs of the proceedings", it means in the present case the costs both of the counterclaim and of the claim.
19. The Applicant argues that rule 36.10(6) is inconsistent with that. I have set this rule out already. He argues that this rule only applies to a claimant, properly so-called, who makes an offer which takes into account the defendant's counterclaim and that it does not apply if it is the defendant, albeit claimant on the counterclaim, who makes an offer on a net basis taking into account the claimant's original claim. He says this is so because the claimant's original claim cannot properly be fitted within the words "takes into account the counterclaim".
20. It seems to me that that would be a curious reading of the rule. It is quite common to find, on the one hand, a monetary claim for a given amount and on the other hand a counterclaim, which is raised both by way of set-off and defence and by way of counterclaim, for a different, and often larger, monetary amount. A typical example is a claim by a professional for fees, met by a defence and counterclaim for damages for negligence. There may or may not be an issue as to liability for the fees (possibly only as regards quantum), but there will usually be a real issue on the negligence claim. On the Applicant's argument, the original claimant could make a Part 36 offer which would have the consequences attaching to a claimant's offer as regards both the costs of the claim and the counterclaim, but the defendant could not do so. Accordingly, the result as between the parties, as regards 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. The Applicant submitted that the policy behind that was that the claimant could not choose whether he was sued by the defendant by way of counterclaim or by way of separate action whereas the defendant could choose how he wished to proceed. If the defendant to the first proceedings wished to be able to make an offer as claimant he should bring separate proceedings rather than counterclaim. That would seem to me to be odd and unsatisfactory because, naturally enough, the defendant would wish to, and indeed possibly need to, defend and counterclaim in the first action in order to set up his cross-claim as a defence to the claimant's claim. To read the rules in such a way that separate proceedings, rather than a counterclaim in the same proceedings, were desirable does not seem to me to be either sensible or consistent with the overriding objective.
21. In any event it seems to me that the Applicant's reading of rule 36.10(6) is incorrect. It fails to take into account the provisions of Part 20 dealing with counterclaims. The express purpose of Part 20 is to enable counterclaims and other additional claims to be managed in the most convenient and effective manner. By rule 20.2 it applies both to counterclaims against the claimant, or against the claimant and others, and also to additional claims by a defendant against someone who may or may not already be a party to the proceedings, and of course to yet further additional claims by parties brought in as defendants to additional claims themselves. By rule 20.2(2), for the purposes of the rules, "additional claim" means any claim other than the claim by the claimant against the defendant and "unless the context requires otherwise references to a claimant or defendant include a party bringing or defending an additional claim". By rule 20.3(1) "an additional claim shall be treated as if it were a claim for the purposes of these rules, except as provided by this Part." Nothing in Part 20 excepts Part 36 from the provisions of that rule. Thus the Respondent's proposed counterclaim is to be treated as if it were a claim and the Respondent, as the party bringing the counterclaim, is to be treated as within references to a claimant; correspondingly, in relation to his position defending the proposed counterclaim, the Applicant is treated as within references to a defendant. Accordingly, going back to rule 36.10(6), that rule covers the Respondent's costs as the party bringing the additional claim and the rule has the effect that his costs include any costs incurred in dealing with the counterclaim of the Applicant who is for this purpose treated as within the reference to the defendant. The Applicant's argument is that that contention cannot succeed because he has not brought a counterclaim. He has brought an original claim but not a counterclaim. I agree that the word does not fit perfectly but it seems to me that, making the adjustments that need to be made in order to apply Part 20 to Part 36, where one is talking about a situation where the "defendant" is himself the original claimant as well as the defendant to a counterclaim, the reference to the defendant's counterclaim in rule 36.10(6) is to be taken as being to the original claim, i.e. the cross-claim to the new counterclaim by the original defendant, the Respondent. Only in that way does it seem to me that the rule can apply in an even-handed way, as it plainly should, and so as not to have arbitrary results according to which party brought proceedings first.
22. For those reasons, in my judgment, the offer letter was a Part 36 offer, the proceedings to which it relates are the entire proceedings, both original claim and proposed counterclaim, and upon acceptance it would have the effect not only that the entire proceedings would be stayed but that the Applicant would become liable to pay the Respondent his costs not only of asserting the proposed counterclaim but of defending the Applicant's original claim.
23. Whether, if the offer has not been accepted and is not accepted, but the result at the end of the day is at least as advantageous to the Respondent as the proposals contained in that offer, the court would think it just to allow indemnity costs and the additional interest that it can allow under rule 36.14(3) is quite another matter. The Applicant argued that, if the offer has the effect that I have held it to have, the concession made by the Respondent is trivial in the overall context. He referred us to the case of Huck v Robson [2002] EWCA Civ 398 where the Court of Appeal recognised that circumstances may exist where, notwithstanding that a claimant has recovered in full after making a Part 36 offer for marginally less than his full claim, he will not be awarded costs on the indemnity basis: see per Schiemann LJ at paragraph 81. However the question whether indemnity costs and additional interest would be awarded only arises if the offer is made under Part 36. If the question is what costs consequences flow from acceptance, rather than from non-acceptance, of the offer then no discretion arises.
24. The remainder of the court's full judgment dealt with the issue as to whether the offer had been accepted, and related points, and does not require even edited publication at this stage.

Lord Justice Rimer

25. I agree.