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Closing the interest trap: CPR 36.5(5)

Made an offer to your opponent under CPR 36.5? What happens next?

If the offer is accepted under CPR 36.11 within the “relevant period” as defined in CPR 36.3(g) (usually within 21 days unless fewer than that number are left before the trial is due to start), the case is compromised in the terms of the offer and the costs of the action belong to you, to be assessed on the standard basis if not agreed: see CPR 36.13(1).

However, what if the offer is rejected? The show will go on until trial, when the judge will decide who has won and who has lost, and will make an award of costs to reflect that outcome.

Suppose, next, that the opponent has a change of heart and wants to accept the offer at a point after the relevant period has expired. Herein lies a difficulty known as the “interest trap”. Whilst a Part 36 offer is treated as being inclusive of interest where it offers to pay or accept a sum of money, there is no automatic entitlement to any interest which has accrued since the date of the offer if it is accepted outside the “relevant period”. Expressed in a costs of action context, if the party entitled to costs offers to accept £100,000 inclusive of interest in settlement of their bill, but this is not accepted until six months after the expiry of the relevant period, the party paying costs will have saved half a year’s interest at 8%, since that is the rate payable on costs from the date of the costs order under the Judgments Act 1837.

To address a potential interest trap such as this, the obvious answer is for the offer to provide for interest to continue to run until the date of acceptance, if this occurs outside the period allowed for doing so under CPR 36.5.

Or is it? It is binding Court of Appeal authority that an offer expressed to be under Part 36 which is exclusive of interest, is not a compliant offer under the rule: see King v City of London Corporation. By the same token, if an offer expressed to be made under Part 36 also provides for interest to continue to accrue after the end of the relevant period, is that susceptible to a King-like challenge? If so, then as in King, those special benefits which are available to claimants who beat their own Part 36 offers under CPR 36.17(4) (an additional sum of up to £75,000 on damages or costs recovered, indemnity basis costs and enhanced interest) will be lost. That will be a disaster in a big case should a bonus of £75,000 go a begging for want of compliance with the simple wording of CPR 36.5.

That was the issue which faced the Court of Appeal in Calonne v Construction Ltd v Dawnus Southern Ltd, where the claimant had offered to settle on the following terms under Part 36:

Our client is willing to settle the whole of your client’s claim contained within the claim number HT2016000331, together with the counterclaim which our client will shortly be issuing within the same proceedings:

  1. You pay to our client the sum of £100,000 (‘the Settlement Sum’) payable within 14 days of service of the Notice of Acceptance.
  2. The Settlement Sum does not include costs and, as mentioned above, your client will be liable to pay our client’s costs on the standard basis, to be assessed if not agreed, up to the date of service of Notice of Acceptance if this Offer is accepted within the Relevant Period.
  3. The Settlement Sum is inclusive of interest until the relevant period has expired. Thereafter, interest at a rate of 8% per annum will be added.

[emphasis added]

Before the trial judge and again in the Court of Appeal, the defendant argued that that the addition of a provision relating to the rate of interest to be charged after the end of the relevant period rendered the offer invalid as a Part 36 offer.

That argument failed both below and on appeal, Asplin LJ holding that nothing in Part 36, and in CPR 36.5 in particular, precluded the inclusion of terms as to interest in a Part 36 offer which were  intended to apply after the relevant period had expired. It was only in respect of an offer needing to be inclusive of interest to the end of the relevant period that was an express requirement under the rule. Moreover, if parties could not provide for interest to run after the end of the relevant period, they would not be compensated with interest for any delay between the end of that period and the subsequent acceptance of the offer. In any case, any interest which might accrue after the relevant period had expired was ignored for the purposes of deciding whether the CPR 36.17(4) special benefits applied and if offerees found the particular clause to be unpalatable, they could make their own Part 36 offer in the same terms but without the offending provision as to the accrual of interest. For all these reasons, the court had no hesitation in finding that the claimant’s offer had been compliant with CPR 36.5.

With effect from 6 April 2021, however, none of these arguments will matter anymore, because that is the date upon which the Civil Procedure (Amendment) Rules 2021 (SI 2021/117) come into force. These will change CPR 36.5 as follows:

“In rule 36.5, after paragraph (4) insert—

“(5) A Part 36 offer to accept a sum of money may make provision for accrual of interest on such sum after the date specified in paragraph (4). If such an offer does not make any such provision, it shall be treated as inclusive of all interest up to the date of acceptance if it is later accepted.”.”

It follows from this amendment that offerors who construct their offers so that they provide for interest to run after the end of the relevant period, will be compensated should there be any delay by the offeree in accepting the offer outside that period. All that offerors will need to do is to remember to include that provision, otherwise, their offers will be treated as including interest to date of acceptance, whenever that is. They must also be alert to the fact that the standard “Offer to settle” Form N242A, does not cater for interest accrual, so that if the form is being used, offerors will need to set out in a covering letter that interest will continue to run after the date of expiry of the relevant period, until the date of acceptance. Do that, and the interest trap will snap shut forever.

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