A Settlement Offer With Consequences: The Part 36 Decision for Small Businesses

Most settlement correspondence is read as an invitation to negotiate. A Part 36 offer is different. It is made under the Civil Procedure Rules and carries consequences that are, in substance, automatic unless the court considers it unjust to apply them. For a small business weighing whether to accept or reject one, the question is not simply whether the sum on offer is attractive. It is whether the offer, once the costs of continuing are brought into the calculation, is one that can safely be refused.

What makes a Part 36 offer valid

A Part 36 offer must be in writing and must state on its face that it is made under Part 36. It must specify a period of at least 21 days within which the defendant will be liable for the claimant's costs if the offer is accepted. It must also make clear whether it relates to the whole of the claim or only part of it, and whether it takes account of any counterclaim. For a monetary offer, the offer should state whether it is inclusive of interest. These are not decorative requirements. An offer that fails them may not attract the costs consequences that give Part 36 its force.

The 21-day period is often misunderstood. It is not a deadline after which the offer disappears. A defendant's Part 36 offer remains open for acceptance after the 21 days unless it is withdrawn, but the costs protection changes. A claimant's Part 36 offer can be accepted after the 21 days only in certain circumstances, and the claimant may then be entitled to costs only from the date of acceptance. The date on which the offer expires for costs purposes is therefore a critical date, not a date on which the proposal simply lapses.

The genuine offer requirement

A valid offer is not necessarily a genuine one. The courts have repeatedly emphasised that Part 36 is a tool for settlement, not a tactical device for shifting costs. An offer that is derisory, or that is made without any real expectation of acceptance, may be treated as not being a genuine attempt to settle. The court retains a discretion to disapply the consequences where it would be unjust to impose them.

That discretion is not a safety net for the careless. A low offer can still be genuine if it reflects a realistic assessment of a weak claim. The test is whether the offer is a genuine attempt to settle the proceedings, not whether it is generous. A small business that assumes a low offer can be ignored because it is 'not serious' may find that the court takes a different view.

What happens if the offer is refused

The consequences depend on who made the offer.

If a defendant makes a Part 36 offer and the claimant refuses it, the claimant must obtain a judgment that is more advantageous than the offer. If the claimant fails to do so, the claimant will normally be ordered to pay the defendant's costs from the date on which the offer could have been accepted, together with interest on those costs. In plain terms, the claimant may win the case but lose the costs argument, and the costs can consume the damages.

If a claimant makes a Part 36 offer and the defendant refuses it, and the claimant then obtains a judgment that is at least as advantageous as the offer, the defendant will normally be ordered to pay the claimant's costs on the indemnity basis from the date of expiry. The claimant may also recover enhanced interest on damages at up to 10 per cent above the base rate, and an additional amount calculated as a percentage of the damages awarded, subject to the statutory cap. These are not minor adjustments. They are designed to make refusal of a reasonable offer expensive.

The arithmetic that matters

The decision to accept or reject a Part 36 offer should be made on a net basis. The headline figure is only the starting point. A small business should ask what it will actually recover or pay after costs, interest and the risk of an adverse costs order. That requires an honest assessment of the strengths and weaknesses of the case, the likely timetable to trial, the cost of expert evidence and the commercial value of management time.

The comparison is not between the offer and the best possible outcome. It is between the offer and the expected outcome, discounted for risk. A claimant who rejects a £40,000 offer because it hopes to recover £80,000 at trial may find that the judgment is £45,000, that costs exceed the damages, and that the Part 36 consequences turn a modest win into a net loss. A defendant who refuses a claimant's offer may find that the judgment is only slightly worse than the offer but that indemnity costs and enhanced interest make the final bill substantially higher.

Practical steps before responding

• Check the form of the offer. Confirm that it is expressed to be a Part 36 offer, that it specifies the 21-day period and that it addresses interest and any counterclaim.
• Diarise the date on which the 21-day period expires. That date governs the costs consequences, even if the offer remains open.
• Calculate the net position. Model the offer against the likely judgment, the costs incurred to date, the costs to trial and the risk of losing.
• Take advice on prospects. A Part 36 decision is a legal and commercial judgment, not a matter of instinct.
• Respond in writing. Silence is not acceptance, but it is also not a strategy. A clear response preserves the position and avoids later argument about whether the offer was understood.
• Consider a counter-offer. A counter-offer does not necessarily extinguish the original Part 36 offer, but it may affect the costs position. Take advice before making one.

The bottom line

Part 36 offers are designed to encourage settlement by making refusal risky. For a small business, the danger is not only that a reasonable offer is refused. It is that the offer is refused without the arithmetic being done. The sum on the table may look modest. The costs of saying no may not. In 2026, with litigation costs continuing to rise, the business that treats a Part 36 offer as an ordinary negotiating letter is the business most likely to discover, too late, that it was something else.