It was reported in The Times that a couple who won their claim against their neighbour who built a loft which encroached about an inch on to their property, and who were awarded £200 in damages, ended up with a total legal costs bill of £130,000. This case illustrates the significance of making settlement offers in litigation, and why serious consideration must be given to making and accepting them.

The courts are very keen for parties to resolve disputes by agreement if possible, so costs penalties are imposed on those who do not accept reasonable settlement offers. Settlement offers that comply with Part 36 of the Civil Procedure Rules can have particularly stringent costs consequences.

If a defendant makes a Part 36 settlement offer that is not accepted by the claimant, then if the claimant fails to obtain a better judgment than the offer, the defendant will only be liable to pay the claimant’s costs incurred up to end of the “Relevant Period” (a minimum of 21 days after service of the offer). The claimant will not be entitled to recover any of their costs incurred after that date, and instead will be liable to pay the defendant’s costs for this period. The court could make a different costs order if it thinks it would otherwise be unjust, but this is relatively rare. In this case, the defendant had offered £13,000 to settle the case, however the award was only £200, and the costs consequences here mean that the claimants will end up making a significant net payment to the defendant. 

Claimants can also make Part 36 offers setting out what they are willing to accept to settle the claim. The costs consequences for these can be even more significant, as they can considerably enhance a claimant’s potential recovery, particularly if made at an early stage in the case. If a defendant does not accept a claimant’s Part 36 offer, and the claimant goes on to obtain a judgment which is at least as advantageous to the claimant as that offer, then unless the court considers it unjust to do so, in addition to the award the claimant will be entitled to an order for:

• Interest on the award (excluding any interest contained in the award itself) at a rate not exceeding 10% above base rate, for some or all of the period starting from the date the Relevant Period expired
• Costs to be assessed on the indemnity basis (a more generous basis of assessment to the receiving party than the usual standard basis) starting from the date on which the Relevant Period expired
• Interest on those costs at a rate not exceeding 10% above base rate, and
• An additional amount up to a maximum of £75,000 calculated by applying 10% up to £500,000 of the sum awarded and 5% thereafter.

Clearly the earlier a party can make a Part 36 offer, the better the costs protection it can obtain. Part 36 offers can be made even before a court case is started. This means parties need to get to grips as early as possible about the merits of the case and the likely level of the final award, so they can assess what is a sensible offer to make, or whether they should seriously consider accepting an offer. It also means that Part 36 offers should be kept under review, as they can be accepted at any time (unless specifically withdrawn, but if this happens the costs protection is lost), and the merits of an offer may have changed since it was made. 

It is possible to make settlement offers that do not comply with Part 36 - for example you may want to specify the amount payable for costs (or that you will not pay any costs), which is not possible with Part 36 offers. The court can still take such offers into account when considering costs, but they will not attract the "automatic" consequences of Part 36 offers.