How should pre-litigation offers to settle be treated in the light of part 36 of the Civil Procedure Rules (CPR) and Trustees of Stokes Pension Fund v Western Power Distribution Power Distribution (South West) plc [2005] EWCA Civ 854, [2005] 1 WLR 3595 (Stokes)? This was the question before Lord Justice Rix in the Court of Appeal case of French v Groupama Insurance Company Ltd [2011] EWCA Civ 1119.

The claimant (initially acting as litigant in person and later instructing solicitors) commenced proceedings against the defendant insurers for breach of contract. In 2011 the claimant succeeded in her claim and was awarded £126,963 and £5,000 in interest. The defendant then made submissions on costs and interest and sought to rely upon a settlement offer of £115,000 which it had made several years previously to the claimant.

The offers were set out in two separate letters. The trial judge found the offer worth more than what the claimant had in fact now recovered. Although the claimant may have seemed to have recovered more than she had been offered, nevertheless when allowance had been made for the additional damages that she had continued to suffer in the meantime, she would have been some £20,000 better off had she accepted the offer.

But what was the status of the offer? The claimant argued that the letters which contained the offer were privileged, whereas the defendant maintained that the parties had agreed for the letters to be open and admissible. The judge held simply that they had always been open letters. On that basis, he applied the judgment in Stokes in order to rule that, even though it was accepted on behalf of the defendant that neither letter was an offer within part 36 of CPR, nevertheless the second letter, which had at least allowed 21 days for its acceptance, met the conditions laid down by Stokes for a quasi-part 36 offer which ought to be accorded the same effect as a payment into court. Therefore the claimant ought to recover no costs herself, but instead pay the whole of the defendant’s costs.

Open or privileged letters?

Upon appeal, Rix first considered the status of the letters - were they open or privileged? It was found on the evidence that the letters had been agreed to be privileged, but that the parties had subsequently agreed to allow the letters to be shown to the trial judge after judgment. Rix held that it had been wrong for the judge to have held that the letters were open (that they had been written as open letters). The important issue was that the parties had agreed that the letters were privileged and therefore the judge was not allowed to go beyond that agreement.

CPR 36 and Stokes

Rix LJ then went on to consider the offer in the light of CPR 36 and Stokes. Rix found the defendant’s letters failed to meet the requirements of the original part 36 (part 36 as it stood in 2006/2007) in a number of ways: the letters were sent before proceedings began; the offer was not supported by a payment into court; it was time-limited to expire after 21 days so that it was not available for acceptance thereafter, but had effectively been withdrawn; and the requirements of rule 36.10 had not been observed. In the circumstances, there was no requirement that the court would even take the offer into account, let alone apply the consequences of part 36.20.

What was the status of the offer in the light of Stokes? Stokes was decided in the context of the original part 36. In Stokes, Lord Justice Dyson set out the following conditions which must be met in order for an offer to have the same effect as a payment into court: first, the offer must be expressed in clear terms so that there is no doubt as to what is being offered; second, the offer should be open for acceptance for at least 21 days and otherwise accord with the substance of a Calderbank offer; third, the offer should be genuine and not a ‘sham or non-serious in some way’; and fourth, the defendant should clearly have been good for the money when the offer was made. If these conditions were met then the offer should, according to Dyson, have the same costs consequences as payments into court.

Applying Stokes, Lord Justice Rix observed that the defendant’s offer had only met the third and fourth condition. The second condition, in particular, had not been met, for all of its 21-day life until it expired was covered by privilege (as was subsequently agreed). It was not a Calderbank offer. At the time when the offers were made, it was (and remains) uncertain whether the offers were open or privileged, but they were subsequently agreed to have been privileged. It was only after the offers had expired that the privilege was waived by agreement for the purpose of matters such as costs consequent to judgment.

The amended part 36

The amended part 36 came into effect on 6 April 2007 - shortly after the offer letters were sent to the claimant.

The amended part 36 made substantial changes to the old rules (see Gibbon v Manchester City Council [2010] EWCA Civ 726, [2010] 1 WLR 2081 and C v D (also named Middlegreen LP v Dominion Developments (2005) Limited) [2011] EWCA Civ 646). The need for a payment into court was dropped, but it became an essential feature of the part 36 regime and its consequences that the part 36 offer was identified as such (rule 36.2(2)), was not time limited, could only be withdrawn formally (rule 36.9(2)), and, if withdrawn, would not carry with it the costs consequences of part 36 (rule 36.14(6)(a)).

The part 36 consequences where a part 36 offer had not been beaten by a claimant after judgment applied ‘unless [the court] considers it unjust’, but those consequences did not apply, Lord Justice Rix observed, where the offer did not meet the requirements of part 36. The former rule 36.1(2), which expressly gave the court the power to apply the costs consequences of part 36 to an offer not made in accordance with part 36, was removed and instead the new rule 36.1(2) provides as follows:‘Nothing in this part prevents a party making an offer to settle in whatever way it chooses, but if the offer is not made in accordance with rule 36.2, it will not have the consequences specified in rules 36.10, 36.11 and 36.14.

‘(Rule 44.3 requires the court to consider an offer to settle that does not have the costs consequences set out in this part in deciding what order to make about costs).’

Thus the rule 44.3 discretion to take account of all the circumstances, including the conduct of the parties and any ‘admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which the costs consequences under part 36 apply’ (amended rule 44.3(4)(c)) lies in the background. It will be recalled that at the time of Stokes that rule had simply concluded - ‘(whether or not made in accordance with part 36)’. Therefore, Lord Justice Rix found that the defendant’s offer could not be considered as attracting part 36 cost consequences as the offer was not made in accordance with the specific requirements of part 36. Considering the working of part 36 Rix stated: ‘Thus there appears to be a new determination in the amended rules to specify carefully what does or does not count as a part 36 offer with part 36 consequences. All other admissible offers are relevant to the part 44 discretion, but they do not carry with them the costs consequences of part 36.’

What of the court’s discretion to consider a settlement offer which does not comply with part 36 requirements (see above rule 44.3)? Lord Justice Rix weighed up the factors in favour of the defendant and the claimant. As for the factors in favour of the defendant’s offer, Rix found that the offer was a serious one; the offer transpired to be more than what the claimant recovered at trial; and there was no valid reason for the claimant to have rejected the offer. For the claimant, the fact that the claimant was initially a litigant in person was a relevant factor. The offer was time-limited and expired after 21 days which contrasted with the current regime under part 36 which requires removal of the offer by formal notice.

Therefore, for the claimant to suffer the costs consequences under part 36 it should still be open for acceptance. The offer was not expressed to be a part 36 offer and therefore did not comply with the current part 36 requirements. The offer included the claimant’s costs, which a genuine part 36 offer would not, and therefore it was difficult to now calculate the true value of the offer.

As Rix observed: ‘Groupama’s offer was long dead and buried when proceedings commenced in March 2009 or trial approached.’ The defendant always had the opportunity to serve a formal part 36 offer in compliance with the necessary rule - this was not done. Finally the defendant’s defence and counterclaim had complicated matters whereas the claimant’s claim was straightforward and this led to a lengthy six-day trial. In the light of the above, Rix found in favour of the claimant and dismissed the defendant’s appeal.

The lesson to be taken from French is clear: if a party to litigation wishes to place his opponent at risk as to costs it should ensure that the offer is drafted in accordance with the strict requirements of part 36. Although a settlement offer which does not comply with part 36 will be considered by the court ­pursuant to part 44, the severe costs consequences under part 36 will not apply.

Masood Ahmed, Birmingham City University