Nicola Sharp of Rahman Ravelli considers a case that outlines the possible consequences of withdrawing a Part 36 offer.
In the recent judgement of Blackpool Borough Council v Volkerfitzpatrick Ltd  EWHC 2128, the High Court granted the defendant a favourable costs order, in circumstances where a claimant failed to beat a defendant’s Part 36 offer. The case serves as an important reminder that a party that withdraws a Part 36 offer loses the costs protection associated with Part 36 and then has to rely on the court’s general discretion.
Background to the Judgement
Blackpool Council, the claimant, contracted Volkerfitzpatrick, the defendant, to construct a new tram depot. It later brought proceedings against the defendant on the grounds that significant parts of the depot were defective and not suitable for the depot’s coastal location. The council claimed over £6 million in damages.
In August 2019, the defendant made a Part 36 offer of £750,000 in respect of certain parts of the claimant’s claim. The claimant put forward its own Part 36 offer, to accept just under £2.4 million for the entire claim, in November 2019. Neither offer was accepted. The defendant’s offer was withdrawn in January 2020.
The trial took place in February 2020 and the judge awarded the claimant just over £1.1 million - far less than the amount it had claimed. The amount awarded in respect of the items that had been included in the defendant’s Part 36 offer was £631,510 - less than the amount of the offer.
Under CPR 36.17, where a claimant fails to obtain a judgment that is more advantageous than a defendant’s Part 36 offer, the court must (unless it considers it unjust to do so) award the defendant its costs from the date on which the relevant offer period expired. This does not apply where a Part 36 offer has been withdrawn. But, under CPR 44.2, the court will still have regard to a withdrawn offer in deciding on the appropriate costs order.
HHJ Stephen Davies ordered that the defendant should pay 80% of the claimant’s costs up to the end of the relevant period for acceptance of the defendant’s Part 36 offer (that being 5 September 2019) and that the claimant should pay 80% of the defendant’s costs thereafter.
The court noted that this can be a more complicated question than it first appears, particularly where the award of damages is very modest in comparison with the amount claimed. On the facts, the court found that the claimant was properly to be regarded as the successful party. It had succeeded on six out of seven heads of claim and recovered a substantial amount, even if this was significantly less than what had initially been claimed.
The starting point was, therefore, that the claimant should be awarded its costs. However, the court had a discretion to make a different order taking into account all of the circumstances; including the defendant’s withdrawn Part 36 offer.
The Defendant’s Withdrawn Part 36 Offer
The judge noted that, had the defendant’s Part 36 offer of £750,000 not been withdrawn, it would have been more advantageous to the claimant than the judgment made as part of the claim (i.e. £631,510). In such circumstances, the defendant would have been entitled to its costs on that part of the claim (from the expiry of the 21-day period for acceptance of the offer), unless the court considered such a result to be unjust. While the judge accepted that the withdrawn offer could have no costs consequences under Part 36, it was a factor that should be taken into account in exercising the court’s discretion on costs.
The judge considered the guidance given by the Court of Appeal in Thakkar v Patel  EWCA 117 on how to treat a withdrawn Part 36 offer. In that case, the Court of Appeal held that the crucial question is whether the offeree acted reasonably or unreasonably in failing to accept the offer while it was on the table; although the judge said it would be wrong to treat that as the only relevant question, and that each case would turn on its facts.
Applying this principle, the court found that the claimant had acted unreasonably in rejecting the Part 36 offer when it was available for acceptance. As the judge put it: “It was taking a commercial risk in the knowledge that it could end up recovering less than the amount of the offer.”
That meant that the claimant should pay the defendant’s costs on the aspects of the case included in the defendant’s Part 36 offer from the end of the relevant offer period (i.e. 6 September 2019). Rather than making an issue-based costs order, however, the court made a percentage order, very similar to the costs consequences that would have applied under CPR Part 36, despite the defendant having withdrawn the Part 36 offer before trial.
The automatic costs consequences under CPR Part 36 do not apply to a withdrawn offer, but the offer may still be taken into account in the court’s decision regarding costs. In this case, the defendant benefitted from withdrawing the Part 36 offer. But the case still serves to emphasise that the costs protection associated with Part 36 is lost if a Part 36 offer is withdrawn. In such circumstances, the matter then depends on the discretion of the court.
This article was also featured on Lexology.com.
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