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Vanishing Part 36 offers?

The Court of Appeal has looked again the interaction of Part 36 offers and interim payments in Gamal v Synergy Lifestyle Ltd, in which Arden LJ agreed with the judgment of Flaux LJ. The decision is important.

The appellant, Ms El-Gamal, was the defendant to a claim brought by her builder for £151,000. HHJ Bailey found that the invoice on which the builder sued was fraudulent and had been concocted in collusion with Ms El-Gamal, in order to assist her in obtaining money from the owners of the house in which she lived, but he went on to value the work actually done at £30,324.32 plus VAT, a total of £36,389.30. The defendant had already paid £16,600 towards the works, and HHJ Bailey arrived at a judgment sum of £19,788.97.

Ms El-Gamal had made a Part 36 offer of £15,000 and so HHJ Bailey concluded that the builder had beaten the offer, and was entitled to its costs. However, because of the fraudulent exaggerated claim, and for other reasons related to the builder’s conduct, HHJ Bailey awarded Ms El-Gamal to pay only 25% of those costs.

HHJ Bailey accepted after judgment that he had wrongly added VAT to the judgment sum and so he reduced it to £14,275.49 (£30,275.49 minus £16,600 already paid). Ms El-Gamal then sought to persuade the judge that he had awarded less than the Part 36 offer and should amend the costs order. He declined to review the order further (a decision described by the Court of Appeal as sensible), and the costs order was appealed to the Court of Appeal.

Seeking to distinguish Macleish v Littlestone, Ms El-Gamal contended that the costs order was wrong: £14,275.49 was less than £15,000 and she therefore said that the judge was in error in not considering or applying CPR 36.17.

In Macleish, Briggs LJ, giving the lead judgment, had said that a payment made for an admitted sum of £17,504 against a claim for some £75,000 was not to be added to a defendant’s Part 36 offer of £35,000 in considering whether the claimant had beaten the Part 36 offer: the Part 36 offer was an offer to settle for £35,000, no more, no less, and the part-payment had been made and accepted on the basis that it was a payment on account of the entire claim, and a part-payment in advance of the £35,000 that would have been payable had the Part 36 offer been accepted. The judge had been correct to treat the admission payment as on account, rather than as reducing the quantification of the judgment sum.

“The critical flaw in the defendants’ primary case is that it fails to address the obvious reality that an admitted payment on account of a claim, following a Part 36 offer in a higher amount must, in the absence of any agreement to the contrary, be taken as being made as much on account of the Part 36 offer to settle the claim as it is made on account of the claim itself.”

There is nothing inconsistent in a defendant both wishing to encourage settlement by making an offer to settle the whole claim, then making one or more smaller payments outright pursuant to admissions, while leaving the Part 36 offer open for acceptance throughout.

Briggs LJ then went on to consider whether this analysis was inconsistent with that of Moore-Bick LJ in LG Blower Specialist Bricklayer Ltd v Reeves and insofar as necessary he doubted that analysis (noting it was obiter dicta and so he was not obliged to follow it).

Counsel for Ms El-Gamal sought to argue that Macleish should be limited to cases where the paying party made it clear that the payment in effect reduced the amount of the Part 36 offer and was not be added to it, and in other cases the offer would remain open for acceptance in the full amount, despite the payment already made.

Flaux LJ said that the critical aspect of the reasoning in Macleish was not the fact of the admission of liability but that the admissions payment had been on account of the claim, reducing the defendant’s liability for the claim as a whole: the reasoning was equally applicable to any payment on account of a claim as it was to an “admissions payment”. Where such a payment is made, there is a presumption of law that it is also on account of the earlier Part 36 offer as Briggs LJ found in Macleish, otherwise it would lead to the absurd consequence that the offeree could accept both the payment and the sum of the Part 36 offer, even where the total of both was more than the total of the claim. If a paying party wishes to prevent the presumption from operating, it is incumbent on that party either to state expressly at the time the payment is made that it is not intended also to reduce the amount of the earlier Part 36 offer or to provide clarification to that effect promptly after the payment was made.

Ms El-Gamal had done neither and so the default position applied: there was a presumption that the £10,000 payment reduced both liability in respect of the claim and the amount of the Part 36 offer. An unconditional payment on account of the sums claimed in the proceedings, made after the date of a Part 36 offer, results in the amount of the Part 36 offer being correspondingly reduced unless the payer makes it clear to the other party, at any time prior to judgment or acceptance of the Part 36 offer, that it is not to be so treated.

It followed that the judgment obtained by the builder (even after the Judge’s adjustment pursuant to his order of 30 November 2016) was more advantageous than the Part 36 offer, and the costs order should stand.

Sensible. As Briggs LJ said in Macleish, the conclusion that an interim payment should be added to the Part 36 offer would be absurd.

Despite the references to reducing a Part 36 offer, what the decision does not mean is that a payment on account generally, or a payment following an admission, reduces the sum of the Part 36 offer so that the costs protection is for a lesser sum. So a payment on account of £10,000, in a case where the defendant has made a Part 36 offer of £50,000, does not mean that the costs protection is reduced to £40,000: what is meant is that the claimant cannot accept both the £10,000 and £50,000.

39 Essex Chambers Judith Ayling

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