Part 36 Regime Operates to Reject Earlier ‘Without Prejudice’ Offer

DB UK Bank Limited (T/A DB Mortgages) v Jacobs Solicitors [2016] EWHC 1614 (Ch)

What seems to be a fairly simple analysis of the interplay between the common law and the Part 36 regime under the Civil Procedure Rules may now prove havoc for those of us at the coal face. In DB UK Bank Limited (T/A DB Mortgages) v Jacobs Solicitors it has been held that if a party makes a without prejudice (WP) offer (which as all law students will appreciate is a contractual offer governed by the general principals of common law) and the other party then makes an offer pursuant to the Part 36 regime (which is governed by the statutory regime) the Part 36 offer acts as a counter offer and as a matter of common law will operate to reject the first WP offer rendering it incapable of later acceptance.

I read through the case this morning in horror. Whilst, of course, this is sensible contractual analysis, in practice parties often make a mixture of WP and Part 36 offers, previously safe in the knowledge that the two regimes did not interfere with each other. If we now have to consider that every time we make a Part 36 offer it will operate to reject any earlier WP offer thereby rendering it incapable of later acceptance, it may mean that only one party will ever make an offer in litigation and the other side will never make any further offers for fear of inadvertently rejecting what should be able to remain on the table. This will hamper negotiations and might make a settlement less likely.

In this case DB Mortgages (the Bank) fell out with Jacobs Solicitors (Jacobs) over a loan made to the purchaser of a new build property. The bank claimed breach of duty; Jacobs said there has been no loss because the Bank would have made the loan anyway.

The claim rumbled on and two years into the litigation process in August 2015, Jacobs’ solicitors, Caytons, sent an offer to the Bank’s solicitors Rosling King LLP (Rosling), which was expressed to be Without Prejudice Save As To Costs (WPSATC). By way of background, Jacob’s insurers had been declared to be in default. Therefore the Financial Services Compensation Scheme (FSCS) was to pay out 90% of the liability claim, less the excess, and 90% of the determined or agreed costs.

Caytons could not be sure how long it would take the FSCS to pay its portion of the settlement and so could not make an offer on the usual Part 36 terms, which obliges a party to pay the settlement sum within 14 days of acceptance. Caytons estimated that the payment would take 6 – 8 weeks to come through, but could not be sure.

The offer remained open as the Bank did not accept it. Caytons chased it several times, and there were exchanges of letters and telephone conversations all on a WP basis. Caytons even repeated the offer, twice.

Eventually, on 19 May 2016 Rosling sent its own offer. This was expressed to be a Part 36 offer and was compliant with Part 36.

On 22 June 2016, 5 days before the trial was supposed to start, Rosling on behalf of the Bank, purported to accept Caytons’ August 2015 WPSATC offer and enclosed a Tomlin Order documenting the ostensible terms.

Regrettably for the Bank, who clearly exhibited a case of cold feet, Andrew Hochhauser QC, sitting as a deputy High Court Judge, held that the August 2015 offer was no longer available to accept. As the August 2015 offer had been made outside the Part 36 regime it fell to be determined by common law. Under the common law if a party makes a counter offer it automatically rejects any earlier offer.

If the August 2015 offer had been capable of being made as a Part 36 offer, which all concerned agreed it could not due to the uncertainty of the timing of an FSCS contribution to the payment terms, it would have been determined under that regime, which expressly says offers remain open for acceptance until they are withdrawn by the party making it who must serve a notice of withdrawal.

It was therefore held that because the August 2015 offer had been made under common law, the Bank’s Part 36 Offer made on 19 May 2016 operated as a counter offer and accordingly rejected the August 2015 offer, which was now no longer open for acceptance.

It made no difference that the second offer was made under Part 36. It was still a counter-offer which amounted to a rejection of the earlier common law, non-part 36 offer. If the first offer had been made under Part 36, the second Part 36 offer would have proceeded under the self-contained regime and would not have had the same effect.

The Bank and Jacobs will now proceed to trial – unless, of course, they find a way to settle in the meantime having lost their trial window.

Consequences for Practitioners

Until now, many of us had proceeded on the fact we could run two different lines of settlement correspondence at the same time. The common-law WP correspondence, which might offer us some protection on costs if the case ever got to trial but offered a flexibility which cannot be had with the Part 36 regime; and the Part 36 offers which were more prescriptive and offered better costs protection and had the benefit of being able to make multiple offers without fear a later offer would inadvertently reject any earlier offers your opponent had made.

Now, practitioners must note that a Part 36 offer will automatically reject an earlier WP offer rendering it incapable of acceptance at a later date.

What consequences this will have remain to be seen. However, on a personal note it adds further complications to what are often delicate negotiations which frequently only succeed thanks to the combination of pressure that can be brought using open, WP and Part 36 offers. Although this judgment has clarified an area which has not been reviewed by the Courts since the 1999 introduction of the CPR, it feels like it has tied our hands in the flexibility of negotiations we previously operated. I only hope it does not prevent parties making offers for fear of rejecting previous offers that they may wish to later accept for tactical reasons.

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