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Part 36 offers to settle

by | Mar 29, 2021

Part 36 offers to settle

Intellectual property litigation is costly and time-consuming. Commercially pragmatic parties will understandably want to avoid this cost and will seek to negotiate an end to the dispute. But what if one side just isn’t being reasonable? It can be difficult or impossible to compromise a case when faced with an obdurate party who simply won’t seriously consider offers to settle.

The law can’t actually force a party to adopt a reasonable negotiating position, but what it does do is provide incentives to encourage parties to realistically evaluate their own cases, make sensible offers, and seriously consider offers made to them.

Part 36 of the Civil Procedure Rules sets out quite a detailed framework for making a certain kind of offer, in particular setting out the consequences if such an offer is not accepted. Offers to settle do not have to be made within the Part 36 rules[1], but if they are then some potentially powerful incentives come into play. The incentives relate mainly to the recovery of legal costs in the action.

The basic rule on costs

The starting point is the old rule that if a case goes to trial and judgment then there ends up being a “winner” and a “loser”, and the loser has to pay the reasonable legal costs of the winner. Nowadays that old rule is subject to some very significant caveats:

  • where costs are assessed on the “standard basis”, any doubt as to whether a particular cost was reasonably incurred or was reasonable in amount is resolved in favour of paying party;
  • a relatively recent extra hurdle is that costs which are disproportionate to the matters in issue may be disallowed or reduced even if they were reasonably or necessarily incurred;
  • costs capping, not only to the total amount but to individual stages, applies in the Intellectual Property Enterprise Court; in the High Court[2] costs budgets will put a lid on recoverable costs.

You can see why “winner” is in inverted commas – it is highly likely that in the normal course of things the winner will recover only a contribution, perhaps about two-thirds, of what they had to spend on lawyers.

But a Part 36 offer can change that.

The effect of an unaccepted Part 36 offer

Part 36 is not simple and this is a long article. The rules are detailed and any simplified explanation is inevitably going to miss out some pretty important points. With that said, in case you want to stop reading now, the point of Part 36 is this:

If you do not accept a Part 36 offer, and the result of the judgment ends up being less favourable to you than accepting the offer would have been, then you are going to be penalised. The main penalty is that you will be ordered to pay a larger contribution towards the other side’s legal costs.

For more detail, keep reading…

What a Part 36 offer looks like

To fall within the Part 36 rules, the offer has to meet certain formal requirements. An official form is available, but using it is optional. The offer does have to be made in writing, and has to state expressly that it is made pursuant to Part 36.

The offer needs to state a “relevant period”, the significance of which will become clear. The relevant period has to be at least 21 days, and usually the practice seems to be to give 21 days exactly[3].

Part 36 offers are made “without prejudice save as to costs”. This means that the judge will not be allowed to see any offers, or even be told that offers exist, until after judgment.

Obviously, the written offer also needs to state what is offered – what it is that the offeror will accept to bring the dispute to an end. When formulating an offer under Part 36 it needs to be kept in mind that it needs to be possible to determine whether a subsequent judgment is more favourable than the offer or not. In an IP case this will normally mean a straightforward offer that the defendant will stop doing whatever it is that the claimant says infringes their IP rights, and pay a certain amount of money. More complicated agreements involving cross-licences, modified products, agreements to supply and so on may be a good idea, but they are probably going to take an offer outside the ambit of Part 36.

To understand, at least in general terms, how a Part 36 offer might play out, we’ll use an example. Suppose we are in the early stages of a copyright infringement claim.

Example Claimant’s Part 36 offer

Steaming Ahead Limited, our Claimant, says that it owns the copyright in a variety of amusing nautical-themed mottos and cartoons. The Defendant, Not Under Command Limited, prints these things on mugs and t-shirts. According to the Defendant, they are all very old and unoriginal and there is no copyright to be infringed.

The Claimant’s view is that, while the products were inspired by some old jokes, their work is original enough to qualify for copyright protection and the Defendant’s products infringe.

The Claimant believes that its sales have suffered as a result of the infringement and, if successful, they would be likely to get about £50,000 in damages. However, what the Claimant wants most is just for the Defendant to stop copying, and so it is prepared to accept less to compromise the case and avoid the disruption and expense of protracted litigation.

The Claimant offers to settle the claim on the basis that:

  • the Defendant will not make any more copies of the mottos and cartoons;
  • the Defendant will pay £35,000 in damages for the copies already made.

The offer is made on the basis that the “relevant period” is 21 days.

Now we have an offer, let’s work through the possibilities as to what could happen next.

Accepting the Claimant’s offer

If the Defendant decides to accept the offer, the position is reasonably straightforward. They will have to stop printing those t-shirts and mugs, pay the £35,000 agreed damages, and pay the Claimant’s legal costs on the standard basis.

Whether the offer is accepted before or after the 21 day period expires might be thought to make little difference, and in most cases it probably doesn’t. The result of the Defendant accepting a Claimant’s Part 36 offer will normally be that the Defendant does what is agreed, and pays the Claimant’s legal costs. Obviously if the Defendant waits for a long time before accepting, the amount of the Claimant’s costs is likely to be larger.

However accepting the offer after the 21 day relevant period does seem to trigger the possibility that a different costs award can be argued for[4].

Not accepting the Claimant’s offer

Perhaps our Defendant is not inclined to accept the offer. They may still feel they have a strong case that copyright does not subsist at all. Moreover, they may think that even if infringement is found, the Claimant is overestimating the damage really done, which according to the Defendant is minimal, certainly nothing like £35,000.

If no compromise is reached then the case will proceed to trial and judgment.

The Defendant may be successful. If the Defendant is the winner, in that the court finds there was no infringement at all, then the Claimant’s Part 36 offer is of no consequence. The Defendant will be able to claim its legal costs from the Claimant on the standard basis.

Alternatively the Defendant might lose the claim (in that the court finds that there was copyright and it was infringed), but be vindicated in its position that the damages were minimal. Say the court orders payment of just £5,000 in damages. In that case, again, the Claimant’s Part 36 offer is of no effect. The Claimant has won and can claim its legal costs from the Defendant, but only on the standard basis[5].

However, what if the Court finds that not only has the Defendant infringed, but that the damage is more than £35,000? Suppose the judge accepts the Claimant’s evidence of damage and awards £50,000[6] in damages for copyright infringement. This is when the effect of the Claimant’s Part 36 offer kicks in. In effect, the Defendant failed to accept an offer which was a good offer that it should have accepted. There are going to be consequences. Those consequences are usually[7]:

  • interest on the damages, at a rate of up to 10% above base rate;
  • costs on the indemnity basis, meaning that that the Claimant can claim from the Defendant pretty much all of the money that it spent on lawyers; any doubt as to reasonableness is resolved in favour of the Claimant and the proportionality requirement does not apply;
  • interest on those costs;
  • an uplift of 10% on the damages award.

What if the Defendant wants to make an offer?

Let’s wind the clock back again to the early stages of the claim when the parties were considering their chances. Our Defendant doesn’t think it infringes, but would be prepared stop selling the products and avoid all the hassle if the Claimant will accept a reasonable amount. The Defendant reckons the real damage has been small, but is prepared to offer £10,000 for the sake of putting an end to the problem.

Example Defendant’s Part 36 offer

The Defendant offers to settle the claim on the basis that:

  • the Defendant will not make any more copies of the mottos and cartoons;
  • the Defendant will pay £10,000 in damages for the copies already made.

Again, the offer is made on the basis that the “relevant period” is 21 days.

In our scenario the Defendant’s offer might have been made in response to the Claimant’s offer, or in another scenario perhaps the Claimant did not make an offer but the Defendant did. It doesn’t matter. A Claimant’s and Defendant’s offer can both be “live” at the same time, with one or the other, or neither, triggering consequences depending on the eventual result[8].

The Claimant is going to have to decide whether to accept the offer.

Accepting the Defendant’s offer

If the Claimant accepts the offer within the 21 day relevant period, then the Defendant will have to stop making the t-shirts and mugs, and pay the £10,000 they offered in damages. The Defendant will also have to pay the Claimant’s legal costs on the standard basis.

If the Claimant accepts the offer after the 21 day relevant period, then the Defendant will have to stop making the t-shirts and mugs and pay the £10,000 agreed damages. The Defendant will normally have to pay the Claimant’s costs up until the end of that 21 day period, but the Claimant will normally[9] have to pay the Defendant’s costs incurred after the 21 day period expired. This makes sense, since the costs incurred after the 21 days have in effect been wasted by the Claimant’s delay in accepting an offer.

Not accepting the Defendant’s offer

If the Claimant does not accept the offer then again the case will run its course and eventually the judge will make a decision.

If the Defendant wins, i.e. the judge finds there is no infringement at all, then the Defendant will be able to claim its costs from the Claimant on the standard basis.

If the Defendant loses, in that the judge finds there was infringement, but is ordered to pay damages which are less than or equal to the £10,000 that was offered, then the Claimant will have to pay the Defendant’s costs from the end of the 21 day “relevant period”. The Claimant has failed to accept an offer which turned out to have been a good one and so there is a penalty for that, even though the Claimant has “won”.

If the Claimant wins, and gets more than the £10,000 which was offered, then of course their decision not to accept the Defendant’s offer is vindicated. The Claimant has won and the usual rule that the loser pays will apply.

It can be seen that in the scenario where Claimant’s and Defendant’s Part 36 offers are both live, there will be different consequences arising out of:

  • judgement for the Defendant (normal rules, loser pays);
  • judgement for the Claimant but for less than £10,000 (consequences of Defendant’s offer are triggered, Claimant penalised);
  • judgment for the Claimant for more than £10,000 but less than £35,000 (neither offer “triggered”, normal rules, loser pays);
  • judgment for the Claimant for more than £35,000 (consequences of Claimant’s offer triggered, Defendant penalised).

Summary

Part 36 offers need to be carefully considered, because failing to accept what turns out to have been a good offer can result in potentially severe penalties. Claimants’ Part 36 offers have particular potential to put pressure on a Defendant.

Here is a handy table of the various ways offers can play out.

Claimant’s Part 36 offer
Accepted within relevant period Defendant pays Claimant’s costs on standard basis
Accepted after relevant period Defendant pays Claimant’s costs on standard basis, unless it would be unjust
Not accepted, Claimant loses at trial Consequences of Claimant’s Part 36 offer not triggered, normal rules, Claimant pays Defendant’s costs on standard basis
Not accepted, Claimant wins but fails to do better than the offer Consequences of Claimant’s Part 36 offer not triggered, normal rules, Defendant pays Claimant’s costs on standard basis
Not accepted, Claimant wins and does better than the offer made Costs consequences of Claimant’s Part 36 offer triggered. Defendant pay Claimant’s costs on indemnity basis, plus interest and uplift.
Defendant’s Part 36 offer 
Accepted within relevant period Defendant pays Claimant’s costs on standard basis
Accepted after relevant period Defendant pays Claimant’s costs up to the end of the relevant period; Claimant pays Defendant’s costs after that
Not accepted, Claimant loses at trial Claimant pays Defendant’s costs on the standard basis
Not accepted, Claimant wins but fails to do better than the Defendant’s offer Claimant pays Defendant’s costs from the end of the relevant period
Not accepted, Claimant wins and does better than the Defendant’s offer Defendant pays Claimant’s costs (normal rules, the Part 36 consequences have not been triggered)

 

And it goes on…

Part 36 has all sorts of twists and turns. I hope this summary is useful – it should give you an idea of the main principles behind Part 36 and the main consequences of these offers. But there are all sorts of complexities. In the main, the consequences are “default rules” but can be displaced if a party can argue that the default rule is unjust. The rules seem to change reasonably frequently, and some of them are potentially still open to judicial interpretation. Please give us a call if you need to discuss your particular case.

Footnotes

[1] And there may well be good reasons not to. Part 36 is not a panacea; it is a good idea in certain situations.

[2] But not at the moment in the “Shorter Trials Scheme”

[3] Though it may be sensible for claimants to depart from this practice following the procedural trick apparently pulled off in Pallett v MGN [2021] EWHC 76 (Ch). That’s another story.

[4] Accepting on the 22nd day is the “procedural trick” referred to in the above footnote. The detail is still another story.

[5] If the Defendant made their own Part 36 offer then they will do better, for which, keep reading…

[6] Any amount over £35,000, even one penny more, would do.

[7] Unless the court considers it is unjust.

[8] The usual rule in contract law that a counter-offer constitutes a rejection does not apply to Part 36 offers.

[9] Again, unless the court considers it is unjust.

If you have any patent, design or trade mark infringement issues, please contact us via email, by telephone: +44 (0) 1242 691 801, or using the form below and we will be happy to advise and guide you. 

 

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