The decision of Mr Justice Morgan in Tim-Alexander Gunther Nikolaus Hertel -v- Artemis International Sarl  EWHC 2848 (Ch) involves a complex set of facts but is extremely important in terms of construction of Part 36 offers. (It is perhaps even more remarkable because the defendants were permitted to argue, on appeal, case that was fundamentally different to that before the Master. However that is another matter).The fact that the offer made was not a Part 36 offer (despite both parties calling it such and, initially, agreeing it was) made a major difference in relation to the award of costs.
“I will set aside the orders that the Defendants pay the Claimants’ costs of the claim up to 10 March 2015 and the Claimants’ costs of the hearing on 30 March 2015. I will set aside the order that the Defendants make a payment on account of those costs.
I will make orders for costs in favour of the Defendants in accordance with this judgment.”
The claimant sued a number of parties alleging that certain individuals were involved in a partnership and claiming sums due from certain companies. The claimant applied for permission to amend the Particulars of Claim. Prior to the Particulars being amended the defendants’ solicitors wrote a letter of settlement to the claimant, stating that it was made under CPR 36. That offer stated that the claim, as pleaded, was bound to fail against the indvidual claimants. However the offer was made on the basis of the proposed amendments. The claimant accepted that offer.
The matter went before a Master where both parties agreed that this was a Part 36 offer. The Master held that, in accordance with the provisions of Part 36, the defendants should pay the claimants’s costs.
On appeal the defendants argued that this was never a Part 36 offer (contrary to their stated position before the Master). The judge accepted this. Part 36 could not be construed so as to cover a case that had not, in fact, yet been pleaded or formulated in an existing action.
The judge also considered whether the offer complied with Part 36 in relation to giving 21 days and held, on balance, that it did.
The order that the defendants pay the claimant’s costs was (largely) overturned with an order that the claimant pay the defendants’ costs.
The Deputy Master made his orders on the basis that the Defendants had made a Part 36 offer on 17 February 2015 which had been accepted by the Claimants on 10 March 2015 and that the matter was governed by r. 36.10(2) (in the form which applied before Part 36 was amended with effect from 6 April 2015). Before the Deputy Master, both sides accepted that the offer letter of 17 February 2015 (hereinafter referred to as “the offer letter”) was indeed a Part 36 offer. On the hearing of this appeal, the Defendants now contend that the offer letter was not after all a Part 36 offer so that r. 36.10(2) had no application and so that the appeal court should now exercise its own discretion under r. 44.2 to produce the result that the Claimants should be ordered to pay the Defendants’ costs. The Defendants’ appeal therefore raises new points which were not argued before the Deputy Master and which are indeed contrary to the position then adopted by the Defendants. Nonetheless, the Claimants do not contend that the Defendants are prevented from arguing these new points as to Part 36 on this appeal.
The procedural history
(1) a declaration that there was a partnership or joint venture between Mr Hertel and Mr Saunders and that Mr Hertel’s share of remuneration under the partnership or joint venture was to be paid to Artemis;
(2) an order winding up the partnership or joint venture;
(3) accounts and inquiries;
(4) an order that the Defendants account to the Claimants; and
(5) an award of damages in favour of the Claimants against the Defendants for breach of agreement.
The Particulars of Claim referred to a number of projects with which the parties to this litigation were involved. The Claimants’ primary case was that in relation to such projects there was a partnership between the individuals, Mr Hertel and Mr Saunders. The two companies were not alleged to be members of this partnership. Instead, it was pleaded that Liquid was to be used by Mr Saunders as “the corporate vehicle” for the purpose of the projects and that Mr Hertel’s entitlement to remuneration would be satisfied by payments made to Artemis. It was also pleaded that Mr Saunders was under an obligation to cause Liquid to pay sums to Artemis at Mr Hertel’s direction and in default of Liquid paying such sums, Mr Saunders himself would be liable to account for the same.
The Claimants’ alternative case was that there was a joint venture agreement between the individuals, Mr Hertel and Mr Saunders, for the joint benefit of the individuals and with rights and liabilities similar to those in a partnership. It was also pleaded, apparently only in relation to this alternative case, that all payments made to Liquid by third parties in relation to the projects were held by Liquid on trust for itself and Mr Hertel and Artemis so that Liquid had a duty as trustee to account to Mr Hertel and Artemis.
The Particulars of Claim pleaded that specified sums had been received by Liquid (or Liquid was entitled to receive such sums) and Liquid was liable to account to Artemis for the monies payable to Artemis. It was then pleaded that Mr Saunders had written to Mr Hertel/Artemis on 30 September 2011 asserting that no partnership existed but instead there was a contract with Liquid (the pleading does not make it clear whether the other party to the contract as alleged by the Defendants was Mr Hertel or Artemis).
Finally, the Particulars of Claim raised a further matter. It was pleaded that Mr Saunders on behalf of Liquid had refused to subscribe for shares in BR Gaming Ltd whereby Mr Saunders and Liquid had acted in breach of a duty of good faith and were liable to account for a resulting loss and/or to pay damages. This allegation as to a failure to subscribe for shares was not the subject of any real attention at the hearing of the appeal.
The Claimants gave Further Information in relation to the Particulars of Claim before a Defence was served. The Further Information repeated the claim that Mr Hertel and Mr Saunders were partners. It was then added that Liquid owed a duty as a constructive trustee to account to Mr Hertel and Artemis. In so far as there was a joint venture between Mr Hertel and Mr Saunders, rather than a partnership, it was said that Liquid was liable to account as a fiduciary. It was repeated that in the case of a joint venture, Mr Saunders was liable to cause Liquid to account to Artemis; it was added that in so far as Mr Saunders had personally received Artemis’ share of the remuneration from joint venture projects, he was liable to account for that to Artemis.
The Defendants served a Defence and Counterclaim. The Defence pleaded that invoices had been rendered by Artemis to Liquid in relation to consultancy services and that was the basis of the relationship between the two companies. It was said that there was no partnership or joint venture between Mr Hertel and Mr Saunders. It was said that there was an agreement between Artemis and Liquid under which in certain circumstances, Liquid would be obliged to pay a fee to Artemis; the fee was to be paid after Artemis had provided its services and Liquid had received the remuneration from which the fee was to be paid. In relation to the Claimants’ claim that specific sums had been received by Liquid so that monies were due to Artemis, the Defence pleaded that certain sums were received by Liquid but denied the liability to pay Artemis. It was then pleaded that Mr Hertel had acted in breach of a duty owed to Liquid causing Liquid loss and damage which Liquid was entitled to set off against any fee payable to Artemis. As to the claim that Mr Saunders and Liquid had failed to subscribe for shares in BR Gaming Ltd, it was accepted that they had not subscribed for such shares but it was denied that they were under any obligation to do so or had broken any such obligation. As to the relief claimed by the Claimants, the Defendants denied that there was a partnership or joint venture or that monies were due under a partnership or a joint venture. The Counterclaim appeared to have been made by both Defendants against both Claimants although it relied upon a matter pleaded in the Defence as a breach by Mr Hertel of a duty allegedly owed by him to Liquid.
(1) there was no partnership;
(2) there was no joint venture;
(3) there was an agreement pursuant to which Artemis would become entitled to payment of certain sums;
(4) there was an agreement pursuant to which Liquid would be entitled to payment of “overheads”;
(5) the conditions giving rise to an entitlement to payment had not arisen;
(6) an entitlement to payment was not the same as an entitlement to an account;
(7) Liquid was entitled to deduct Artemis’ liability for overheads;
(8) Liquid was entitled to deduct a sum for damages caused by Mr Hertel’s breach of duty.
(1) the Claimants were to serve a copy of their proposed amendments by 25 July 2014;
(2) the Defendants were to tell the Claimants, by 1 August 2014, whether they accepted the proposed amendments; and
(3) in the event that the Defendants did not accept the proposed amendments, the Claimants were, promptly thereafter, to make an application for permission to amend.
On 25 July 2014, the Claimants served a draft Amended Claim Form and a draft Amended Particulars of Claim. The draft Amended Claim Form was headed “in accordance with Rule 17.3 CPR”. That rule applies where a court has given permission to amend. The order of 11 July 2014 had not given permission to amend. The draft Amended Claim Form added a further claim which was for a declaration of an agreement under which Liquid was to account to Artemis in relation to certain matters. The draft Amended Particulars of Claim did not withdraw any of the allegations in the original Particulars of Claim but added allegations of a claim or claims against Liquid. Paragraph 20A of the draft was on the basis, in the alternative to the principal claim, that there was no partnership or joint venture between Mr Hertel and Mr Saunders. On that basis, there was alleged to be an agreement between Artemis and Liquid under which the two companies were to collaborate and whereby Liquid was to account to Artemis for certain expenses and a share of remuneration received by Liquid from others and which would allow Artemis to invoice Liquid for consultancy services provided by Mr Hertel. The draft pleading also included an amendment to the original claim in relation to shares in BR Gaming Ltd. It was pleaded by amendment that Liquid was liable in damages for breach of contract. The Prayer for Relief in the Particulars of Claim was also amended to reflect the new allegations.
“Thank you for providing your draft Amended Claim Form and Particulars of Claim upon which we have taken instructions from our client. Without prejudice to our client’s case and the complete denial of the claims you make by Amendment (and otherwise) we see no value in opposing the Amendment in the terms you have sought but this is strictly without prejudice to our client’s full defence to the claim as made and as Amended. For the present purposes however we have no issue with you moving your Amendment in front of the Court on the next occasion.”
The parties then attended a mediation in November 2014 and again in January 2015 but the matter was not settled in the course of the mediation. The matter was due to be heard by the Master on 30 March 2015. Before that hearing took place, there was an important exchange of correspondence, to which I will now refer.
The offer letter
“Our Clients: Mr John Saunders/Liquid Strategies Limited
Your Clients: Mr Tim Hertel/Artemis International SARL
Claim No: HC13E02592
PART 36 OFFER
WITHOUT PREJUDICE SAVE AS TO COSTS
We write on behalf of our clients to make an offer in settlement of your client’s proposed claim, by amendment, for an account based on an agreement. We do so before the case begins its next stage and with a view to conserving the costs that will otherwise be incurred consequent upon the amendment and the orders likely to be made by Master Teverson on 30 March.
Our offer is predicated upon the basis that your clients’ currently pleaded claim based [on] a partnership or joint venture is going to fail. Our clients have always denied that there was any such partnership and that the only genuine claim your clients have is the one based on an agreement between Messrs Hertel and Saunders for and on behalf of their respective companies, Artemis International SARL (“Artemis”) and Liquid Strategies Limited (“LS”). That remains our clients’ position and our clients are confident that, if and when this matter goes to trial, that position will be vindicated.
The claim which your clients are now seeking permission to bring is one for a declaration that there was an agreement whereby LS was to account to Artemis for Mr Hertel’s expenses and share of remuneration for collaborating on projects with third parties. Our clients are willing to consent to the making of a declaration. They will consent to the making of a declaration that there was an agreement between LS and Artemis whereby LS agreed to account to Artemis on the following basis:
1. LS would pay to Artemis any direct project-related expenses recovered from third party clients on projects on which Mr Hertel worked.
2. LS would pay to Artemis 66.66% of any remuneration recovered from third party clients on projects on which Mr Hertel worked.
3. LS would deduct or be paid by Artemis 50% of its operating costs during the period in which Mr Hertel worked on third party client projects.
The result of this is that Artemis will become entitled to a substantial payment (by our calculations £130,303 but the precise figures will hopefully be uncontroversial) and 2/3 of the shares which have been recovered from BRG pursuant to the settlement agreement. Artemis will also become entitled to further sums from LS as and when further sums are received from BRG.
This offer is made without prejudice to the existing claims and counterclaims of the parties made in these proceedings. It is a matter for your clients as to whether they want to pursue their existing claim. It is a matter for LS as to whether it wishes to pursue its existing counterclaim.
This offer is intended to have the consequences of Section 1 of CPR Part 36. If accepted within 21 days from the date of receipt, your clients will be entitled to their costs (if any) relating to that part of the claim which, by amendment, they have indicated an intention to plead. It does not relate to any other part of the claim. It does not take into account the counterclaim.
We await hearing from you.”
“Our Clients: Mr Tim Hertel
Artemis International S.A.R.L.
Your Clients: Mr John Saunders
Liquid Strategies Limited
Matter: (1) Hertel (2) Artemis – v- (1) Saunders (2) Liquid
Claim No: HC13E02592
We refer to your letter dated 17th February 2015 comprising your Clients’ “Without Prejudice Save as to Costs” offer of settlement made in these above-captioned Proceedings and expressed to be made pursuant to the provisions of Part 36 of the Civil Procedure Rules 1998 (as amended). Your Clients’ offer of settlement is expressed to relate only to part of our Clients’ Claim.
We write on behalf of our Clients to confirm their acceptance of your Clients’ offer of settlement comprised in your letter under reply.
We further confirm that, upon acceptance of your Clients’ offer of settlement, our Clients have abandoned the balance of their Claim.
Please be advised that we intend to write to you shortly with our clients’ proposals, including a draft order and directions to be made at the forthcoming CCMC, as to how these Proceedings and this matter should now, in the circumstances, continue.”
The letters referred to CPR Part 36. Part 36 was substantially amended by the Civil Procedure (Amendment No. 8) Rules 2014 (SI 2014/3299) with effect from 6 April 2015, which was after the dates of the relevant letters in this case. Accordingly, this case is governed by the former provisions of Part 36 before those amendments. The former provisions are to be found in the White Book for 2014.
The arguments before the Deputy Master
In their skeleton argument, the Claimants referred to “the Part 36 offer” and its acceptance and stated that the court needed to deal with matters consequential on the offer and acceptance. They said that no directions were needed in relation to the claims since the claims not dealt with by the offer and acceptance were abandoned. However, directions would be needed in relation to the Counterclaim which remained extant. The Claimants made detailed submissions on the pleadings and submitted that the Defence was “obfuscatory” because it did not set out what the Defendants admitted was due to Artemis. Further, the Claimants submitted that they were only concerned with obtaining the monies due from the Defendants and it did not matter which of the Defendants made a payment to which of the Claimants. The Claimants referred to the draft Amended Claim Form and Particulars of Claim, stated that it was “perhaps” unnecessary to have an order formally granting permission to amend but insofar as this was necessary permission to amend was sought. The Claimants then turned to CPR r. 36.10(2) dealing with costs. They submitted that they were entitled to all of the costs of the claim (and not just the costs of the amended part of the claim as asserted in the offer letter) unless the court ordered otherwise. They submitted that there were compelling reasons why they should receive all of the costs of the claim.
The Defendants’ skeleton argument also referred to the Defendants’ “Part 36 offer” and said the offer was in accordance with r. 36.10(2). They submitted that the Claimants’ abandonment of some of their claims was a discontinuance of those claims so that r. 38.6 applied so that the Claimants should pay the Defendants’ costs of those claims. It was further submitted that there was no basis for an order against Mr Saunders as his position had been vindicated; similarly, there was no basis for the Claimants to be given their costs of the partnership claim which was not pursued. As to the amendments, it was submitted that the Claimants should bear those in the usual way.
The first judgment
(1) stated that the Claimants had made a Part 36 offer which had been accepted by the Defendants (this was common ground at the hearing before him);
(2) gave permission to the Claimants to amend the Claim Form and the Particulars of Claim, said that he was not required to decide whether permission was necessary but later said that an order granting permission was not required;
(3) summarised the submissions of the parties;
(4) held that the matter came within Part 36 and not within Part 38, even by analogy;
(5) held that although the letter of 17 February 2015 was carefully drafted and intended to produce the result for which the Defendants contended it did not produce that result;
(6) held that the Defendants had invoked Part 36 and had not made a simple without prejudice offer;
(7) held that the Defendants had to accept the costs consequences pursuant to r. 36.10(2) so that the starting point was that the Claimants were entitled to the costs of their claim and any different order depended on the court being satisfied that there were sufficient grounds to depart from that starting point;
(8) held that the Defendants had not made a clear acknowledgment that one of them was under a duty to account for monies received;
(9) concluded as follows:
“Taking a step back from the minutiae of the argument it seems to me that the consequence of the Defendants making an offer under Part 36 and the Claimants accepting that offer is that the Claimants have succeeded in recovering a significant sum which they are content to accept in settlement of their claim. In those circumstances, and having due regard to all the submissions made to me, I am not persuaded that I should make any different order as to costs from that provided by Part 36.10(2). I therefore conclude that the Claimants are entitled to their costs down to the date of serving notice of acceptance that is 10th March 2015.”
The second judgment
The Deputy Master released a draft of his judgment in advance of the hearing on 8 May 2015. Counsel then acting for the Defendants emailed the Deputy Master raising three points which the Deputy Master dealt with in a further judgment delivered on 8 May 2015, following the hand down of his first judgment. In this second judgment, the Deputy Master rejected a submission that Mr Saunders should not be held personally liable for the Claimants’ costs; he reasoned that the offer letter did not distinguish between the Defendants. He rejected a further submission that the Claimants should not recover their costs of the claim in relation to certain shares which had been pleaded in the original Particulars of Claim; he reasoned that r. 36.10(2) applied to all of the Claimants’ claims. He accepted a third point put forward on behalf of the Defendants that the Claimants should not recover their costs of amending their pleadings; he reasoned that such an order was the usual order in relation to a party amending its pleadings.
The Deputy Master then made an order to give effect to his two judgments and to give effect to the terms of settlement proposed in the offer letter. He made further consequential orders and he gave directions in relation to the Counterclaim. He ordered the Defendants to pay the costs of the hearing on 30 March 2015 but he reserved the costs of the hearing on 8 May 2015.
The relevant provisions of Part 36 (at the relevant time)
“A Part 36 offer must –
(a) be in writing;
(b) state on its face that it is intended to have the consequences of Section I of Part 36 “;
(c) specify a period of not less that 21 days within which the defendant will be liable for the claimant’s costs in accordance with rule 36.10 if the offer is accepted;
(d) state whether it relates to the whole of the claim or to part of it or to an issue that arises in it and if so which part or issue; and
(e) state whether it takes into account any counterclaim.”
(a) a defendant’s Part 36 offer relates to part only of the claim; and
(b) at the time of serving notice of acceptance within the relevant period the claimant abandons the balance of the claim,
the claimant will be entitled to the costs of the proceedings up to the date of serving notice of acceptance unless the court orders otherwise.”
“If a Part 36 offer which relates to part only of the claim is accepted –
a) the claim will be stayed as to that part upon the terms of the offer; and
b) subject to rule 36.10(2), unless the parties have agreed costs, the liability for costs shall be decided by the court.”
Was the offer a Part 36 offer?
(1) the letter did not conform to r. 36.2(2)(d); and/or
(2) the letter did not conform to r. 36.2(2)(c).
It can be seen that the Defendants’ case on this appeal is a new case and different from the case they ran before the Deputy Master where they accepted that the letter was a Part 36 offer. The Claimants do not contend that this new case is not open to the Defendants. The letter in question was headed “Part 36 offer” but the Claimants do not argue that the Defendants are estopped from contending otherwise. Accordingly, I must deal with the new case on its merits.
(1) Part 36 is a carefully structured, highly prescriptive and self-contained code: Gibbon v Manchester City Council  1 WLR 2081;
(2) if a party makes an offer which is objectively speaking intended to be an effective Part 36 offer and a point arises as to the objective construction of the language of the offer and if one possible interpretation would produce the result that the offer is an effective Part 36 offer and another possible interpretation would produce the result that the offer is not an effective Part 36 offer, then the former interpretation is to be preferred: C v D  1 WLR 1962 per Rix LJ at , per Rimer LJ at  and per Stanley Burnton LJ at ;
(3) there are limits to the proposition set out in (2) above; if the offer letter fails to comply with a mandatory requirement of Part 36 it will not be construed as if it had complied just because the offer was headed “Part 36 offer” and was objectively speaking intended to be a Part 36 offer: C v D  1 WLR 1962 per Rimer LJ at , Carillion JM Ltd v PHI Group Ltd  EWCA Civ 588,  C.P. Rep. 37 and Shaw v Merthyr Tydfil County Borough  PIQR P8.
The offer letter stated that it related to the Claimants’ proposed claim by amendment for an account based on an agreement. It is clear that the letter referred to the claim which was the subject of the amendment (or the proposed amendment) in paragraph 20A of the Amended (or draft Amended) Particulars of Claim. That claim was plainly not “the whole of the claim” within r. 36.2(2)(d). The question then is whether that claim was part of the claim or an issue which arose in the claim. It seems to be accepted by the Defendants that if, on or before 17 February 2015, the Particulars of Claim had been effectively amended to include paragraph 20A, then that claim was part of the claim within r. 36.2(2)(d). Accordingly, the question becomes: had the Particulars of Claim been effectively amended before 17 February 2015 to include the claim in paragraph 20A. The answer to that question turns on the effect of the Defendants’ letter of 30 July 2014.
The background to the letter of 30 July 2014 includes the provisions of CPR r. 17.1(2) and the order of Master Teverson on 11 July 2014. R. 17.1(2) allows a party to amend a statement of case with the written consent of all the other parties or with the permission of the court. The fact that a party may amend a statement of case with the consent of all the other parties, and without an order of the court, no doubt explains Master Teverson’s order of 11 July 2014 which required the Defendants to tell the Claimants whether they accepted the amendments proposed by the Claimants and why the Master’s order only referred to the Claimants applying for permission to amend if the Defendants did not accept the proposed amendments. However, the terms of the Master’s order do not affect the meaning and operation of r. 17.1(2). In particular, the Master’s order did not direct that a letter from the Defendants which complied with paragraph 2 of his order which told the Defendants that they accepted the proposed amendments would necessarily suffice to satisfy the requirements of r. 17.1(2). The matter therefore turns on whether the Defendants’ letter of 30 July 2014 amounted to a written consent for the purposes of r. 17.1(2).
I have already set out the terms of the letter of 30 July 2014. The letter stated that the Defendants saw no value in opposing the proposed amendment. The letter went on to refer to the Claimants “moving your Amendment in front of the court on the next occasion”. The quoted words are somewhat unusual in this context but I consider that the Defendants were referring to the Claimants applying to the court for permission to amend. Of course, the Claimants would not need to apply to the court for permission to amend if permission had already been obtained pursuant to the written consent of all other parties for the purposes of r. 17.1(2). It might be possible to argue that the letter of 30 July 2014 was indeed a written consent for the purposes of r. 17.1(2) and that the Defendants’ solicitors had misunderstood the rule and wrongly thought that it was still necessary for the court to give permission to amend. However, I consider that the overall sense of the letter was that the Defendants were not giving a consent at that point but instead expressed the intention that there would only be a permission to amend when the court granted it on a future occasion, at which time the Defendants would raise “no issue” i.e. not oppose the grant of permission. This reading of the letter is strengthened by the consideration that the letter did not say anything about the costs of and occasioned by the amendment. It is well known by solicitors that it is standard practice when the court gives permission to amend for it to direct that the costs of and occasioned by the amendment be paid by the amending party in any event. If the Defendants had wanted to say that the Claimants should have permission to amend as a result of the terms of the letter alone and without there being any need for the Claimants to obtain an order from the court granting permission, then one would have expected the letter to state that the proposed amendment was permitted on the usual terms as to the costs of the amendment, or some similar provision. The fact that the letter is silent as to costs is consistent with a reading of the letter expressing the intention that the question of permission was to be the subject of a court hearing; at that court hearing, the Defendants would be in a position to ask for the usual order as to costs and it is to be expected that the court would make such an order. I conclude that the letter of 30 July 2014 was not a written consent for the purposes of r. 17.1(2).
It follows from the above reasoning that the proposed claim in paragraph 20A of the draft Amended Particulars of Claim was not a part of the claim on 17 February 2015 so that the offer in the letter did not relate to part of the claim, nor to an issue that arose in the claim, as at that date. Accordingly, prima facie, the letter did not conform to r. 36.2(2)(d).
The Claimants sought to avoid this prima facie result by relying on r. 36.3(2) which provides that a Part 36 offer may be made at any time, including before the commencement of proceedings. The offer letter in this case was not sent before the commencement of proceedings so that this rule has no direct application in this case. However, it was argued that if it were right that it is possible to make a Part 36 offer in relation to a claim before proceedings are commenced then it followed that for the purposes of r. 36.2(2)(d), the references to the whole of the claim or to part of the claim included references to a claim which had not been brought when the offer was made but which was subsequently brought. It was then submitted that (on the basis of my findings as to when the amendment to the claim was made in this case) the offer was made in relation to a part of the claim which although it was not part of the claim at the date of the offer, it later became part of the claim when the Deputy Master granted permission to amend. It was said that what had happened was essentially what was covered by r. 36.3(2). I do not accept that argument. R. 36.3(2) does not in terms cover this case. To deal with the circumstances of the present case, there would need to be a further provision which extended that rule to a case like the present. As Part 36 is a highly prescriptive and self-contained code, it does not seem to me to be right to add in further provisions on the basis that they would have an analogous effect to the express provisions of Part 36.
For the sake of completeness, I will consider the second point made on this appeal to the effect that the offer letter did not conform to r. 36.2(2). It was said that the letter did not conform to r. 36.2(2)(c), which I have set out above. This argument is in the alternative to the first argument as to the requirements of r. 36.2(2)(d) and so, in order to consider the second argument, I will proceed on the basis that the letter did conform to r. 36.2(2)(d) and so the offer in the letter did relate to a part of the Claimants’ claim.
R. 36.2(2)(c) required the Defendants to specify a period of not less than 21 days within which they would be liable for the Claimants’ costs “in accordance with rule 36.10 if the offer is accepted”. If the letter had been a Part 36 offer in other respects, then the Claimants’ entitlement under rule 36.10, on acceptance of the offer would have been as follows:
(1) r. 36.10(1), which conferred an entitlement to all of the costs of the proceedings (up to the date of acceptance of the offer), would not apply because the offer did not relate to the whole of the claim;
(2) r. 36.10(2) did not apply in every case but only applied in a case where, at the time of accepting the offer, the Claimants abandoned the balance of the claim which was not the subject of the offer;
(3) in a case where r. 36.10(2) applied, then the Claimants would be entitled to all of the costs of the proceedings (up to the date of acceptance of the offer) unless the court ordered otherwise;
(4) in a case where r. 36.10(2) did not apply, the position was governed by r. 36.11(3) so that the liability for costs was to be decided by the court.
If the offer letter had said: “If accepted within 21 days from the date of receipt, your clients will be entitled to their costs in accordance with r. 36.10”, then the offer letter would have conformed to r. 36.2(2)(c). The question therefore is whether the different wording used in the actual offer fell short of what was required.
“This offer is made without prejudice to the existing claims and counterclaims of the parties made in these proceedings. It is a matter for your clients as to whether they want to pursue their existing claim. It is a matter for [Liquid] as to whether it wishes to pursue its existing counterclaim.”
When the offer letter referred to “their existing claim”, this was a reference to what r. 36.10(2) refers to as “the balance of the claim”. Accordingly, the offer letter was saying to the Claimants that it was a matter for them whether or not to go on with the balance of the claim. If the offer letter was a Part 36 offer and if the Claimants decided to abandon the balance of the claim at the time of acceptance of the offer, they would be entitled to all of the costs of the proceedings up to that time, unless the court ordered otherwise. If the offer letter was a Part 36 offer and if they did not abandon the balance of the claim at the time of acceptance of the offer, then costs would be decided by the court under r. 36.11(3).
The offer letter stated that the offer was “intended to have the consequences of Section I of CPR Part 36”. R. 36.10 is within Section I of Part 36. The offer letter did not contain a full and accurate description of what the position as to costs would be if the offer were accepted. Indeed, the authorities show that it is usually better not to complicate the offer by including detailed terms as to costs as distinct from simply saying, as contemplated by r. 36.2(2)(c), that costs will be dealt with in accordance with r. 36.10. What the offer letter did say was that the Claimants would be “entitled” to their costs of the claim to be introduced by amendment. If the Claimants had not abandoned the balance of the claim, then the Claimants would not have been “entitled” under the rules to such costs as they would be dealt with by the court under r. 36.11(3); however, the offer letter might be taken to be a concession in the Claimants’ favour on that point. The offer letter did not address what the position would be if the Claimants had abandoned the balance of the claim. The offer letter made it clear that it did “not relate to any other part of the claim”. Therefore the offer letter did not purport to explain the position under r. 36.10(2). However, r. 36.2(2)(c) does not require a Part 36 letter to explain the costs consequences of an acceptance; instead it requires the offeror to specify the period within which the offeror will be liable for the offeree’s costs in accordance with r. 36.10 if the offer were accepted.
The requirements of r. 36.2(2)(c) were considered in Carillion JM Ltd v PHI Group Ltd (cited above) and Howell v Lees-Millais  EWCA Civ 786  4 Cost LR LO 456. In Carillion, it was held that it was not part of the mandatory requirements of the rule, once the relevant period was specified, to state expressly that this is the period “within which the defendant will be liable for the defendant’s costs in accordance with r. 36.10 if the offer is accepted”: see at . Conversely, if the offer identified a 21 day period for acceptance but with nothing more said, it seemed that this would not suffice: see at . In Howell, the offer letter offered the options of the other party recovering only a proportion of her costs of a fixed sum in respect of her costs; this offer specifically excluded the offeree from recovering all of her costs and was therefore contrary to the consequences specified in r. 36.10 and so was not a Part 36 offer.
The question whether the offer letter complied with r. 36.2(2)(c) is a difficult one. I conclude by a narrow margin that the offer letter did so comply. The offer letter stated that it was intended to have the consequences in Section I of Part 36, which includes r. 36.10. The offer letter specified a period of 21 days for acceptance. It did not refer to the possibility that the Claimants might abandon the balance of the claim but did state, in effect, that that was a matter for the Claimants. It did not say one way or the other what the consequences would be if the Claimants did abandon the balance of the claim. It did not specifically exclude the possibility that the Claimants would in such a case have the benefit of the default position as to costs specified in r. 36.10(2).
In the course of argument, the Claimants submitted that if I reached the conclusion that the offer letter was not a Part 36 offer then the true position was that the claim had not been settled after all. The argument seemed to be that there was a mis-match between the terms of the offer and the terms of the acceptance or there was a common mistake as to the effect of the offer as a Part 36 offer. This submission is simply not open to the Claimants. The order made on 8 May 2015 expressly recites that the parties have agreed to settle the claim and the Deputy Master’s order for costs was made on that basis. The Deputy Master could not have made his order for costs in favour of the Claimants if the claim remained alive. The Claimants have not appealed any part of the order and their Respondents’ Notice asks the court to uphold the order for costs in their favour on additional grounds.
The Deputy Master’s decision as to costs
The Deputy Master approached the case on the basis that r. 36.10(2) applied. He did so because at the hearing before him both sides agreed that that offer letter was a Part 36 offer. In the light of the new points taken on this appeal, I conclude that the offer letter was not a Part 36 offer. Accordingly, r. 36.10(2) does not apply. What applies instead are the general rules as to costs in CPR Part 44, in particular r. 44.2. There is a difference between the operation of r. 36.10(2) and r. 44.2. With the former, there is a presumption in favour of the offeree although the presumption can be overridden and the court can order otherwise. With the latter, there is no such presumption. In many cases, it may be that this difference will not affect the ultimate answer but in some cases it might do so. In the present case, the Deputy Master asked himself whether there were “sufficient grounds to depart from the starting point” i.e. the presumption in favour of the Claimants pursuant to r. 36.10(2). It follows that he did not approach the exercise of his discretion under r. 44.2 on the basis that there was no such starting point under r. 36.10(2). It follows that I now need to exercise my discretion under r. 44.2.
What order for costs should be made?
It is important for the purposes of r. 44.2 to identify the successful and the unsuccessful party or parties. In his first judgment, the Deputy Master did not distinguish between Mr Hertel and Artemis nor between Mr Saunders and Liquid. In his second judgment, he explained his decision not to distinguish between Mr Saunders and Liquid on the ground that the offer letter was on behalf of both Mr Saunders and Liquid. The Deputy Master was right about that but the reasoning ignores the fact that the offer made by Mr Saunders was an offer under which he had no liability to either Claimant.
As to the identity of the successful party, I consider that Mr Saunders was a successful party. He had been sued by two Claimants and in the event was not held to be liable to either of them. Before the Deputy Master and again on this appeal, the Claimants submitted that they were not concerned about which Defendant paid which Claimant; it was said that all that the Claimants together wished to achieve was a payment from someone. It remains to be seen whether a judgment against Liquid will result in a payment to Artemis. In any case, it is normally a matter of significance whether a judgment is obtained against a company with limited liability or against an individual defendant. I do not consider that the alleged attitude of the Claimants can affect the fact that they sued Mr Saunders and did not obtain any relief against him.
I do not think that there was anything in Mr Saunders’ conduct which would weigh against an order for costs in his favour. The Claimants alleged that there was a partnership or a joint venture between Mr Hertel and Mr Saunders. Mr Saunders denied that and the claim against him was abandoned. There was no onus on Mr Saunders to make any admissions about the position between Artemis and Liquid but, as it happened, the joint Defence and the Defendants’ further information pleaded that the relevant contract was between Artemis and Liquid and that was ultimately the basis on which the claim was settled.
I turn then to the position of Liquid. The original claim against Liquid was somewhat muddled. The Claimants pleaded there was a partnership or joint venture between Mr Hertel and Mr Saunders and seemingly Liquid was not a party to that arrangement. Instead, it was said that Liquid held certain monies on trust for itself and for the Claimants. The Claimants’ further information described the alleged trust as a constructive trust. The original claim also included a claim for damages on the basis that Mr Saunders and Liquid acted in breach of a duty of good faith to Mr Hertel but that claim was abandoned when the offer letter was accepted. Liquid appears to have accepted throughout that it would be in due course liable to make payments to Artemis. The Particulars of Claim pleaded a letter of 30 September 2011 in which Liquid accepted there was a contract between it and Artemis and that monies would be paid to Artemis following receipt by Liquid. Liquid maintained that stance in its Defence and in the Further Information of the Defence. The proposed Amended Particulars of Claim belatedly put forward that averment as to the relationship between Artemis and Liquid. There may have been a difference between them as to when Liquid was liable to pay Artemis but any such difference has not been determined. The passage of time is likely to have made that difference academic. It follows that the outcome of the case was in accordance with Liquid’s version of the arrangement, belatedly adopted by Artemis, and not in accordance with Artemis’ version of the arrangement. The Claimants submit that this does not matter. They submit that what Artemis wanted was an account and payment and it has obtained by settlement an order under which in due course it will be entitled to payment. The Claimants therefore submit that they have succeeded and Liquid has failed. I do not agree. In a case where Liquid has throughout accepted a basis for its liability which was not accepted by the Claimants who asserted a different claim against Mr Saunders and somewhat indirectly against Liquid, I consider that in relation to the original claim, the Claimants have failed against Liquid. Putting it another way, why should the Claimants recover against Liquid the costs of pleading a case which they have not sustained and a case which did not accept the arrangement put forward by Liquid. The Claimants also criticise Liquid’s conduct. It is said that its pleadings were “obfuscatory”. I was taken through the pleadings by both counsel. I do not regard them as obfuscatory. They pleaded an arrangement between Artemis and Liquid which the Claimants eventually adopted in their proposed amended pleading. Liquid did not admit that any money was presently due under the relevant arrangement but the time at which the money became due has not needed to be resolved in the event.
I referred earlier to the allegation in the original Particulars of Claim that Liquid was in some way at fault for failing to obtain shares in BR Gaming Ltd. It seemed to be common ground in the pleadings that Liquid did not obtain shares in BR Gaming Ltd. This was not the subject of any discussion at the hearing of the appeal. However, I note that in the offer letter there was a reference to shares which were recovered from BR Gaming Ltd as a result of an agreement. This point was not explained in the course of argument. In these circumstances, I do not think it would be right for me to conclude that Artemis had succeeded in obtaining a head of relief which it had sought in the original claim. In any case, the point appears to be a makeweight point at best and no one relied on it before me.
Taking the above matters into account, subject to a qualification based on the terms of the offer letter, I consider that the right order as regards Liquid is that the Claimants should pay Liquid’s costs of the claim. In any event, if I were minded to make some different order as between Artemis and Liquid, I would order Mr Hertel to pay Liquid’s costs of Mr Hertel’s claim against it. Mr Hertel made a claim against Liquid and in the result he has obtained no relief against Liquid.
The qualification to the order for costs in favour of the Defendants is as follows. In the offer letter, the Defendants offered to pay the Claimants’ costs, if any, relating to the part of the claim which, by amendment, they had indicated an intention to plead. I will give effect to that agreement in the order for costs but subject to that I will order the Claimants to pay the Defendants’ costs of the claim.
The Defendants submitted that even if the offer letter had been a Part 36 offer, the Deputy Master was still wrong to make the orders for costs which he made. It is strictly not necessary to consider this alternative submission. However, in case it assists the parties, I will briefly indicate my reaction to it. I consider that even if r. 36.10(2) applied in this case, the Deputy Master was wrong in principle in not distinguishing between the position of the individuals and the companies. If I had to exercise my discretion under r. 36.10(2) as to whether the court should order a result different from the starting point under that rule, I would have ordered otherwise in relation to the individuals. I would have ordered the Claimants to pay Mr Saunders’ costs and Mr Hertel to pay Liquid’s costs in relation to Mr Hertel’s claim against Liquid. The position would have been less straightforward as regards the claim by Artemis against Liquid. The position would have involved a consideration of whether, sitting as an appeal court, I should decline to interfere with the Deputy Master’s exercise of his discretion in relation to costs. I can see arguments either way and as I do not need to decide the point, I will not discuss it further.
RELATED POSTS ON PART 36
- How relevant are Part 36 offers to issue based orders?
- Knowing the risks and advantages for the claimant in the new Part 36.
- The costs consequences of Part 36 offers: do they always apply? The cases in detail.
- Costs consequences of Part 36 offers: some interesting examples
- Costs, conduct, Part 36 and the “Winning Party”.
- Interest and costs when a claimant beats their own Part 36 offer.
- Costs of £7 million: Part 36 bites hard on claimants who cleared a first hurdle but fell at the second.
- Claimant beats own Part 36 offer and receives an additional £75,000 in damages.
- The dangers of a Part 36 offer: Claimant pays three times more in costs than he receives in damages.
- Another example of a successful defendant not recovering all of its costs (and of the advantages of a Part 36 offer).
- Percentage costs orders after a claimant beats their own Part 36 offer: a High Court decision.
- Very important decision on Part 36 offers, assessment of costs and additional amounts when offers not beaten.
- Increased interest and costs after claimant beats its own Part 36 offer.
- Costs of £7 million: Part 36 bites hard on claimants who cleared a first hurdle but fell at the second.