Part 36 of the rules covering offers to settle litigation will change next month. From 6 April you will no longer be obliged to tie up a chunk of cash for months on end

Part 36 of the Civil Procedure Rules deals with offers made to settle litigation, and it encourages parties to make offers by giving significant cost rewards.

Say a sprinkler system mistakenly goes off in a warehouse, and the resulting flooding causes damage. The warehouse owner claims against the subcontractor that supplied and installed the sprinklers for £100,000. The subcontractor offers to settle for £50,000, but this is rejected. If at trial the warehouse owner is awarded £45,000, the Part 36 rules ordinarily require the owner to pay all the subcontractor’s legal costs from the date the offer could have been accepted, to the end of the trial. The owner will also have to pay its own costs for this period.

From a tactical point of view, Part 36 offers can put the opponent under considerable pressure, as it can reverse the normal presumption that the losing party pays all the costs. The catch is that a defendant has to deposit the amount of the offer into a court bank account. The policy reason for this is to demonstrate the offer is genuine, and that the defendant has the means to pay. However, in the construction industry, litigation can easily last for 18-24 months and having chunks of cash tied up in a court bank during this time can be disastrous.

However, Part 36 rules are changing. From 6 April a defendant will no longer have to pay the amount it offers into court. The change follows recent case law that suggested that where the offerer was “good for the money” (for example, if it was an NHS trust), then it should not have to hand any money over. For institutions such as the NHS, it could be argued that there is a good and practical reason for not requiring the trust to pay in; that is, it is a better use of public money to spend the cash on patient care rather than have it tied up in court.

The removal of the requirement to pay into court will probably lead to an increase in Part 36 offers, as people know the cash, if it is not accepted, can be used in the normal course of the business.

However, if the offer is accepted, the money must be paid within 14 days. For professional indemnity and other insurers this may be a tight timescale.

If the offer is accepted, the money must be paid within 14 days. For insurers, this may be a tight timescale

Part 36 offers have to be open for acceptance for 21 days. Under the existing regime an offer could only be accepted outside the 21 days if the parties could agree on costs, and in the absence of agreement, with the permission of the court.

Under the new rules, an offer can be accepted at any time. This places an onus on the person making the offer to regularly reassess their case and consider withdrawing the offer. This is because the strength of a case can fluctuate as evidence emerges.

Say the sprinkler subcontractor obtained video evidence that a disgruntled employee of the owner vandalising the sprinklers to set them off. The subcontractor’s offer of £50,000 would suddenly seem too generous. In that case it would be important that the subcontractor withdraw its offer before the owner had the chance to accept it.

Enforcing unpaid adjudication decisions in court using the summary judgment method, will now be covered by Part 36. It will be interesting to see whether successful parties in adjudications immediately serve a Part 36 offer on the other side. If they beat (or match) the offer at the enforcement hearing, their costs should be assessed on a more favourable basis.

A final point: in normal contract law, a counter-offer amounts to a rejection of the original offer. If I offer to sell you a car for £10,000 and you offer £9,000, that nullifies my offer of £10,000, which you cannot subsequently accept. Not so with the new rules. Say the sprinkler subcontractor offers £50,000 and the warehouse counters with £80,000. If the subcontractor won’t budge, the warehouse owner remains entitled to go back and accept the original offer of £50,000.