Litigation costs update – “Near miss” rule relating to Part 36 dismissed by Court of Appeal

The notion of a “near miss” rule relating to Part 36 offers has recently been dismissed by the Court of Appeal.

In Sugar Hut Group Ltd & Ors v A J Insurance Service (A Partnership) [2016] EWCA Civ 46 (03 February 2016) it has been confirmed that in order to receive the costs benefit of a Part 36 offer, it is not enough for a party to simply get close to such an offer, they must beat it.

The Facts

Following a fire at the Claimant’s night-club in September 2009, significant damage was caused to the property.

The club was closed for almost a year whilst extensive repairs were carried out. However, owing to material non-disclosure, the Claimant’s insurers voided the insurance policy. The Claimant subsequently sued the insurers but at a trial in October 2010, this claim was dismissed.

Old building in full flaming infernoThe Claimant therefore pursued their broker (the Defendant), for negligent placement of the policy. Damages were pleaded at around £1.7m for property damage and business interruption. In addition to this figure, the defendant claimed the costs of the failed claim against the insurers.

During the course of the substantive action, liability was admitted and damages were agreed in respect of property repairs and the failed claim against the insurers in the sum of £883,000. A figure of £813,000 was paid on account of damages, however no agreement could be reached in respect of business interruption and interest.

Following a trial in respect of quantum, the Claimant was awarded a further sum of £568,000 in respect of business interruption and interest on all damages at 5%. The total recovery was therefore assessed at £1,670,000. However, as the Defendant was only liable for 65% of this figure, this was reduced to a net figure of £1,090,000.

It was common ground between the parties that no “effective” Part 36 offer had been made – the Claimant’s best offer was more than the figure recovered, whereas the Defendant’s best offer was less.

The last Part 36 offer made by the Defendant on 23 May 2014 offered to pay a further £250,000, which would have given total payments of £1,063,000 –  the offer also valued the Claimant’s business interruption claim at £600,000 with interest at 2.5%.  Crucially, these figures were not put forward as offers and therefore not capable of acceptance.

The Court ordered that from the expiry of the Defendant’s Part 36 offer onwards, the Claimant was only entitled to recover it’s costs in respect of the interest element of the claim. In addition, the Claimant was ordered to pay the Defendant’s costs from that date, save for those relating to interest. Although the Defendant’s Part 36 offer and total figure paid was actually less than what the Claimant had recovered, The Court had treated the Defendant’s Part 36 offer as being successful.

The Decision

The Claimant appealed the terms of the order and the appeal was allowed.

It was held that:

the Judge has treated the letter of 23 May as containing distinct offers in relation to (i) Business Interruption losses and (ii) interest, and has treated the Claimants on the footing that they could and should have accepted (i), notwithstanding his acknowledgement that (i) could not in fact be accepted without acceptance also of (ii). That with respect is an approach which is wrong in principle. The Defendant had made no offer to that effect capable of acceptance by the Claimants.”

“For all these reasons I am satisfied that the Judge came to a decision which was outside the bounds of reasonable decision-making which was moreover in large part based upon an error of principle, treating the 23 May letter as containing a free-standing offer to compromise the Business Interruption claim at £600,000. In those circumstances paragraphs 2 and 3 of the Judge’s Order of 19 November 2014 must be set aside and we must re-exercise the Judge’s discretion afresh. The Claimants’ recovery exceeded the Part 36 offer by a comfortable margin and in any event there is no longer a “near-miss” rule.”

Conclusion

In order to receive the cost benefits associated with a Part 36 offer, the offer must be clear and something that is capable of being accepted by the other side. Furthermore, the offer should always be slightly more than your best assessment of the case so that you are not scuppered by falling just shy as there is no opportunity to benefit from the now defunct “near-miss” rule.

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