Mitchell v James

A settlement offer which includes a term about costs falls outside the scope of a Part 36 offer. The mandatory costs consequences of acceptance under Part 36 are inconsistent with parties substituting their own costs term. The comparison required by rule 36.21 is directed to substantive liability or the substantive judgment, not the costs order.

A party may make a wider offer including costs, but it obtains only the ordinary costs-discretion consequences. Rule 36.1(2) can cure a technical non-compliance with Part 36 where appropriate, but cannot validate a costs term as a Part 36 term for the purpose of obtaining rule 36.21 indemnity costs.

The claimants sought specific performance of an alleged oral agreement giving them a beneficial half-share in a garage company. After proceedings had continued for many years, they made an offer described as a claimant’s Part 36 offer. It required payment and division of company assets, dismissal of the counterclaim, and specified that each party would bear its own costs.

Park J upheld the claim in principle, declared the claimants entitled to 50 shares, dismissed the counterclaim, and awarded standard costs. He declined indemnity costs under Part 36 because the claimants had not clearly bettered their offer. The claimants appealed, arguing that the trial costs order made the judgment more advantageous. The central issue was whether a term concerning costs could form part of a Part 36 offer.

1. Appeal dismissed unanimously. Lord Justice Peter Gibson held, with whom Potter LJ and Sir Murray Stuart-Smith agreed, that the offer was not an effective Part 36 offer for rule 36.21 purposes because it included a term that each party should bear its own costs.
2. The omission of the words required by rule 36.5(6)(b), concerning acceptance after 21 days, was technical on these facts. The respondents were legally advised and there was no evidence that they had been misled. If that had been the only defect, the court would have used rule 36.1(2) to give the offer Part 36 consequences.
3. The costs term was a substantive objection. Rule 36.14 applies whenever a claimant’s Part 36 offer is accepted without permission. The corresponding Practice Direction provisions also prescribe the costs consequences. Their language does not permit an offeror to displace those consequences by inserting a private costs term.
4. Rule 36.21 compares what the defendant is held liable for, or the substantive judgment, with the offer. It does not require the trial judge to value an unassessed costs order. Treating costs as part of the comparison would be impracticable and would enable claimants to seek indemnity costs merely by offering their full claim while conceding costs.
5. A party remains free to make a non-Part 36 settlement offer dealing with costs. It may be considered under the ordinary costs discretion, but cannot attract the automatic rule 36.21 consequences. The remaining issues therefore did not arise. The appeal was dismissed with costs summarily assessed at £9,277.98.

• Court of Appeal (Civil Division): appeal dismissed: [2002] EWCA Civ 997.
• High Court, Chancery Division (Park J): the claimants succeeded in principle; they were declared entitled to 50 shares and the counterclaim was dismissed. The judge awarded standard, rather than indemnity, costs and granted permission to appeal that costs ruling.