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A Comparative Review of Offers toSettle—Would an Emerging SettlementCulture Pave the Way for theirAdoption in Continental Europe?

Pablo Cortés*

Licenciado, LLM, PhD, CSET Lecturer in Civil Justice, Universityof Leicester

Civil law; Comparative law; Costs; Ireland; Part 36 offers; Settlement; Spain;

United States

Abstract

The imposition of legal costs on litigants who have refused a reasonable offer (i.e.one that has not been improved by a final judgment) is increasingly used as a

successful leverage to contain costs and expedite the resolution of civil disputes.This is perceived to be an effective technique, which is particular to common law jurisdictions, for encouraging settlements between two litigants. This articlecompares the English Pt 36 of the Civil Procedure Rules (CPR) on offers to settlewith the equivalent rules employed in Ireland and United States, and it poses thequestion of why such rules are absent from the civil procedures in continental Europe. Accordingly, it examines how these procedures can operate, if at all, inarbitration and in civil law jurisdictions; this analysis is primarily undertakenwith reference to the Spanish civil procedure. It is the contention of the article

that while higher costs in litigation and a culture of court settlements have onlytriggered their adoption in common law jurisdictions, the emerging practice of Alternative Dispute Resolution (ADR) techniques may pave the way for embracing cost sanctions in continental Europe.

Introduction

In common law jurisdictions settlement is perceived to be the best possible outcome

of a dispute, where the recourse to the civil courts often represents not only a more

costly and time-consuming option, but also “the failure of social, commercial or

public relations and mechanisms.”1 Accordingly, one of the roles of the civil procedure is to provide incentives for parties to reach an amicable agreement; this

* Some of the latter research for this article was made possible by the support given by the University of Leicester in granting study leave during the 2011–12 academic year, for which I am most thankful. I am also grateful to mycolleagues Dr Carla Crifò and Professor Robin White for reading a draft of this article and commenting on it. Anyerrors or oversights remain, of course, my responsibility.

1 N. Andrews, English Civil Procedure, Fundamentals of the New Civil Justice System (Oxford: Oxford UniversityPress, 2003), p.132. Also, N. Andrews, The Modern Civil Process, (Mohr Siebeck, 2008) p.193.

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role is self-evident in the fact that the immense majority of civil disputes are settled

without the need for a trial.2 The encouragement for settlement has been accentuated

in England and Wales with the Woolf Reforms, which reshuffled the civil process

changing its goal from preparing parties for trial to directing them towardssettlement.3 Amongst the incentives employed by the courts in most common law

jurisdictions are the encouragement of ADR, the cost-shifting rule by which the

losing party is liable to pay the legal costs of the winning party, and offers to settle.

This paper focuses on the last one.

Offers to settle were introduced in many common law jurisdictions with the

purpose of encouraging early settlements, thus speeding up the resolution of

disputes and reducing the crippling legal costs of litigation. In money claims, offers

to settle are considered formal economic settlement proposals; these are frequently

made by one of the parties after a legal action has started with the purpose of reaching an agreement, resulting in the stay of the claim.4 These offers have an

additional incentive; if the offeree refuses to accept the offer to settle, and the case

continues all the way to a judgment which ends up being less favourable than the

previous offer; in such an event the offeree will have to pay the legal costs of the

offeror from the moment the offer was made. As to non-monetary claims, the trial

judge must compare the terms of the offer with the judgment and decide whether

the claimant has achieved a more favourable result than what was stipulated in the

offer.

If the offer is accepted, the claimant generally recovers his costs from the

defendant up to the date the offer was made. Importantly, in England as well as

in many other common law jurisdictions with the notable exception of United

States, these offers are not an admission of liability and they are not communicated

to the trial judge until all issues of liability and quantum have been decided.5 Thus,

once an offer to settle is made, it cannot be presented as evidence to the judge,

unless within a proceeding to determine the costs. This is to prevent trial judges

from believing that the defendant has admitted the claim. If this requirement is

not respected the judge has discretion to recuse himself and order a new trial, yet

this may not happen if the premature disclosure could only operate against the

party who has disclosed the offer.6

This article aims to provide an analytical overview of offers to settle in a number

of common law jurisdictions, particularly in England and Wales, which have

recently experienced important developments. The article first examines how Pt

36 of the CPR is employed in England and Wales with particular attention to the

impact made by Jackson Report on Costs and the new amendments.7 Secondly,

2 M. Galanter and M. Cahill “‘Most Cases Settle:’ Judicial Promotion and Regulation of Settlements” (1996) 46Stan. L. Rev. 1339.

3

Interim Report, Access to Justice (HMSO, London, 1995) II, pp.5, 16. See also M. Cappelletti, “AlternativeDispute Resolution Processes within the Framework of the World-Wide Access-to-Justice Movement” (1993) 56(3)M. L. R. 287 ff. Cf. H. Genn, The Hamlyn Lectures 2008: Judging Civil Justice (Cambridge: Cambridge UniversityPress, 2010) criticising settlement at all costs and arguing that access to justice can only be achieved by the courtsallocation of legal rights. See also E. Thornburg, “Reaping What We Sow: Anti-Litigation Rhetoric, Limited Budgets,and Declining Support for Civil Courts” (2011) 30 C.J.Q. 74.

4 Civil Procedure Rules (England and Wales) 1999 (CPR) r.36.15.5 See, e.g. CPR r.36.12(2).6 Other factors are the delay and the cost that a new trial may cause to the parties. See Garratt v Saxby (Practice

Note) [2004] EWCA Civ 341; [2004] 1 W.L.R. 2152.7 R. Jackson L.J., Review of Civil Litigation Costs: Preliminary Report , May 8, 2009; and R. Jackson L.J., Review

of Civil Litigation Costs: Final Report , December 21, 2009.

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the English Rules are compared with the equivalent procedures operating in Ireland

and the United States, and it considers how offers to settle could be employed in

arbitration and in Continental Europe, using the Spanish civil procedure as a case

study. Thirdly, the paper argues that high litigation costs and an established cultureof settlement—cardinal features of common law traditions—have provoked the

development of costs sanctions in their procedures. The article further argues that

currently a settlement culture is being promoted in many civil law jurisdictions as

a matter of policy; this new approach to dispute resolution paves the way for the

adoption of offers to settle, in particular for those cases where settlement would

be more desirable than final judgments, for instance in cross-border litigation. The

ultimate goal of this paper is therefore to share a comparative approximation on

offers to settle that could spark the discussion amongst proceduralists on the

desirability of employing offers to settle in continental Europe and in internationallitigation.

I. Offers to settle in England and Wales

From payments into court and Calderbank letters to offers to settle

Judges have generally the obligation, or at least the prerogative, to encourage

settlements between the parties during the proceedings. In so doing, common law

jurisdictions first introduced payments into court, which besides the additional

requirement of lodging the money in the court, had the same costs consequences

as offers to settle. The Court of Appeal later allowed parties to obtain the same

cost protection with the use of offers when the payment into court was considered

inappropriate. This was decided in the case of Calderbank v Calderbank ,8 a divorcecase, where the Court of Appeal decided to confer the same effects as the payment

into court to a “without prejudice letter save as to costs.” When an offer is made

without prejudice save as to costs, it means that the offer ceases to be confidential

once the judge rules on the substantive issues, which allow parties to introduce

the offer as evidence in front of the judge in order to sway his decision on the

allocation of costs. The purpose of Calderbank offers and payments into court isto encourage the settlement of disputes in a faster and cost-efficient manner. This

is achieved by putting at a financial risk the party who refuses to accept an adequate

offer; as that party will be penalised by restricting the recovery of their legal costs

or to pay the legal costs of the other party.

Originally offers to settle were only available to one party, the defendant, but

the CPR was introduced with the aim of bringing greater substantive equality to

civil procedure. Indeed, offers to settle gained teeth once they were codified in Pt

36 of the CPR 1998. The previous rules limited the discretion of the judge by

making presumptive the allocation of costs when a Pt 36 payment was lodged inthe court. Hence, the main difference between Pt 36 offers and other offers is the

discretion given to the judges at the time of allocating costs. Zuckerman observes

that:

8 Calderbank v Calderbank [1975] 3 All E.R. 333.

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“Failure to improve on a CPR 36 offer will result in certain adverse costs

consequences, unless the court decides that these consequences would be

unjust. Failure to improve on an offer that is outside CPR 36 will not have

the CPR 36 consequences unless the court decides that it is just to imposethem.”9

While r.44.1 gives discretion to the court when deciding costs, Pt 36 limits that

discretion allowing the court to depart from the cost sanctions only in the

eventuality of causing an unjust outcome—a high bar to jump.10 Conversely, even

when the trial judge’s discretion is unlikely to be reviewed,11 the Court of Appeal

has recently stated that under normal circumstances courts should not grant the

same cost sanctions as laid down by Pt 36 to offers that do not comply with the

strict terms set in Pt 36—an equal high bar requirement.12

When Pt 36 cost consequences apply in favour of defendants, they are entitledto costs on the standard basis13 together with interest; while when Pt 36 applies in

favour of claimants, as they would already be entitled to recover their standard

basis costs for succeeding in the claim, Pt 36 entitles the claimant to receive in

addition indemnity basis costs,14 and additional interest up to 10 per cent above

the base rate on both the damages and the legal costs;15 hence the rule of

proportionality of costs is here displaced.

Offers to settle were introduced in the fast-track and in the multi-track with the

purpose of encouraging early settlements. They can be made at any time, including

before the commencement of legal proceedings and during the course of an appeal.16

A major amendment to Pt 36 occurred in 2007 as a response to the criticism on

9 Zuckerman on Civil Procedure Principles of Practice, 2nd edn (London: Sweet & Maxwell, 2006), p.961.10 The courts would take into consideration when making this assessment the terms of the offers, the stage in the

proceedings when the offer was made, the information available to the parties, and the conduct of the parties infacilitating information in order to make or evaluate the offer. See CPR r.36.14(4) and LG Blower v Reeves [2010]EWCA Civ 726; [2010] 1 W.L.R. 2081. It should be noted that English courts have significant discretion whenawarding legal costs; according to r.44 CPR courts need only to consider two issues: the success of the party’scontentions and their conduct during the proceedings. Although, the first issue may sometimes be more complicated

to assess when there are counterclaims and where litigants succeed only in part of their contentions, the courts oftenresolve the conundrum by considering who must pay the outstanding balance and whether any of the claims wasexaggerated. See Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd (No.7) [2008] EWHC 2280 (TCC);122 Con. L.R. 88 at [72]. The second issue consists mainly about examining the behaviour of the parties in followingthe directions of the court, and when appropriate in resolving amicably their dispute before (with the pre-action protocols) and during the proceedings.

11 Factortame Ltd v Secretary of State for the Environment, Transport and the Regions [2002] EWCA Civ 932;[2002] 3 W.L.R. 1104 at [28]. See also Andrews (2003) supra p. 570.

12 In F&C Alternative Investment (Holdings) Ltd v Barthelemy [2012] EWCA Civ 843 Davis L.J. stated that thecourts should treat Pt 36 as a self-contained code and offers made outside Pt 36 should not be entitled to costsconsequences by analogy.

13 Costs on a standard basis are pre-determined on a scale of costs set in the procedural rules. Normally, the loser party pays the successful party standard costs, which on average are around 75 per cent of the actual cost incurred by the successful party. See University of Oxford Questionnaire on Funding, Costs and Proportionality (2009) p. 5.

Available at: http://www.csls.ox.ac.uk/documents/ENGLAND.DOC [Accessed October 28, 2012).14 Indemnity costs are imposed by the courts as a punishment to one of the parties for bringing forward a vexatiousor frivolous claim and are also applied under certain circumstances when offers to settle have been rejected. If indemnity costs are awarded the loser pays all or nearly all of the costs incurred by the successful party. See Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson Unreported June 12, 2002 CA.

15 CPR r.36.14. See also Diageo North America Inc v Intercontinental Brands (ICB) Ltd (Costs) [2010] EWHC172 (Pat). Other common law jurisdictions have similar rules. See e.g. the claimant’s recovery on an indemnity basisin personal injury cases in the State of Victoria, Australia. Supreme Court General Civil Procedure Rules 2005r.26.08(2).

16 The same cost penalties may apply when mediation is unreasonably refused by the other party. See Burchell NF V Mr & Mrs Bullard [2005] EWCA Civ 358; [2005] C.P. Rep. 36. See also D. Cornes “Commercial Mediation: TheImpact of the Courts” (2007) 73(1) Arbitration 17.

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the requirement of lodging the money in court.17 Criticisms had come mainly from

solvent entities (particularly insurance and public bodies) that were dealing with

many legal actions at any given time having to tie up large amounts of money for

months in the courts. The Court of Appeal then decided to take a more flexibleapproach to Pt 36 by removing the requirement to deposit the money in court as

long as the offeror was considered to be solvent.18 In order to reduce legal

uncertainty and satellite litigation in matters related to the new Pt 36, the

Government issued a consultation paper which resulted in the reform of April

200719; the main change was the removal of the requirement to make the payment

in the court, as already foreseen in the first Woolf Report, thus changing from a

system of payments into court to a system of offers to settle.20 Under the new rules

offers were deemed to be inclusive of interest, and a standard form21 was created

to assist offerors in ensuring that they include the necessary information for achieving the desired cost consequences.

Part 36 offers must be open for acceptance for at least during 21 days (the

so-called relevant period) designed to stop undue pressure being imposed on the

offeree. Once made, the offeror cannot withdraw the offer, during the relevant

period of 21 days, unless the offeror proposes better terms for the offeree or the

court gives its permission.22 To obtain court permission without informing the trial

judge, the offeror must make an application under Pt 23 to another judge (if made

after the commencement of proceedings) unless both parties agree that the same

judge should deal with the application. After the expiry of the relevant period the

offeror may withdraw the offer or propose a less advantageous offer without the

permission of the court by serving a notice to the offeree or his legal representative.

This may happen after expert reports are released and the strength of the case is

elucidated. If a Pt 36 offer is withdrawn, then it will not have its automatic cost

consequences. However, if a Pt 36 offer is rejected by the offeree and the offeror

does not expressly withdraw the offer in writing, then according to the Court of

Appeal in Gibbon v Manchester , the offer can still be accepted, even contrary tothe wishes of the offeror, anytime before the commencement of the trial.23 Courts

17 Civil Procedure (Amendment No.3) Rules 2006. This is a requirement still existing in most common law jurisdictions, such as Ireland, US and Australia.

18 In The Maersk Columbo the Court of Appeal decided in 2001 that a Pt 36 offer does not have to be followed bya payment in court, providing the eventual payment could be warranted. See Southampton Container Terminals Ltd v Hansa Schiffahrts GmbH [2001] EWCA Civ 717; [2001] 2 Lloyd’s Rep. 275. The Court of Appeal developed this proposition in the 2004 case of Crouch v Kings Healthcare NHS Trust . In this case the court stated that the NHSTrust did not need to make the payment in court before acceptance because the NHS Trust was “bound to be goodfor the money”. See Crouch v King’s Healthcare NHS Trust [2004] EWCA Civ 1332; [2005] 1 W.L.R. 2015.Furthermore, the court recognised that it was in the public interest not to retain valuable public resources in court for long periods of time if they could meanwhile be better employed. Subsequently, in 2005 the Court of Appeal in TheTrustees of Stokes Pension Fund v Western Power Distribution gave four conditions for recognising a Pt 36 offer made by a defendant to have the desired cost consequences. These conditions applied even when the defendant has

not made the payment to the court. See Stokes Pension Fund Trustees v Western Power Distribution (South West) Plc [2005] EWCA Civ 854; [2005] 1 W.L.R. 3595. The four conditions were as follow: The offer must be expressedin clear terms; it cannot be a sham; it must be opened for acceptance for at least 21 days; and the defendant must begood for the money at the time when the offer was made. Cf. D. Ward, “New Carrots and Sticks: Proposals for Reformof CPR Part 36” (2007) 70 M. L. R. 293.

19 “Part 36 of the Civil Procedure Rules: Offer to Settle Payments into Court”Civil Procedure (Amendment No.3)Rules 2006 (SI 2006/3132).

20 Civil Procedure News, June 6, 2008, p.6.21 See form N242A available at: http://www.hmcourts-service.gov.uk [Accessed October 28, 2012].22 CPR r.36.3(5).23 Gibbon v Manchester City Council [2010] EWCA Civ 726; [2010] 1 W.L.R. 2081. See commentary by D. Regan,

“Is it or isn’t it” (2012) 162 N.L.J. 7501.




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thus regain their own discretion for deciding the allocation of costs only when

offers are withdrawn.24 Initially there was some concern on whether this could lead

to tactical offers being made and promptly withdrawn;25 the practice has however

shown that this is not often the case. Once the offer is accepted the proceedingswill be stayed and the court will issue a Consent Order under the terms of the

agreed settlement.26

The acceptance of the offer generally commits the defendant to pay the claimant’s

costs.27 If the defendant wishes to avoid the costs consequences and expressly

excludes the offer from having some of the effects of Pt 36, then he risks losing

also its benefits.28 The terms of the offer may remain confidential if one of the

parties requests a Tomlin Order.29 If payment is not made within the 14 days after the acceptance, then the claimant may request a judgment for the amount offered,

and the defendant will automatically lose the costs protection contained in Pt 36.30

The Carver case and the impact of Jackson on Pt 36

The courts and the legislature have developed the interpretation of this rule through

time. The 2007 amendment introduced a new wording stating that cost

consequences will be triggered when the offeree fails to obtain a “more

advantageous” judgment. In Carver v BAA Plc the claimant beat marginally thedefendant’s Pt 36 offer, which was £51 below the court decision, and yet the Court

of Appeal ordered the claimant to pay defendant’s costs.31 According to the court

the construction of the new provision must take into account, not only hardnumbers, but a “more wide-review of all the facts and circumstances of the case

in deciding whether the judgment, which is the fruit of the litigation, was worth

the fight.”32 It would be expected that if on the contrary, the offer to settle were

nominally higher than the amount awarded in the judgment, then the judge would

not have hesitated in granting legal costs in favour of the offeror.33 The result would

be however different if the circumstances have changed since the moment the offer

was made. In Jones v Associated Newspapers Ltd the claimant obtained £1 morethan his Pt 36 offer, but the court held that he was not entitled to the costs benefits

in Pt 36 because, according to the court, the circumstances of the case were different(and less advantageous to the claimant) at the precise moment the Pt 36 offer was

made.34 Furthermore, in LG Blower the Court of Appeal decided to narrow theratio decidendi in Carver by refusing to weigh the emotional burden of litigation

24 CPR rr.36.14(6) and 44.3. See Johnsey Estates 1990 Ltd v Secretary of State for Environment, Transport and the Regions [2001] EWCA Civ 535; [2001] L. & T.R. 32; Straker v Tudor Rose (A Firm) [2007] EWCA Civ 368;[2007] C.P. Rep. 32; and Aspin v Metric Group [2007] EWCA Civ 922; [2008] 2 Costs L.R. 259.

25 S. Atherton, “Dispute Resolution: Part 36 Offers — New Provisions” College of Law of England and Wales,LNTV times, Programme 1292, May 25, 2007, p.17.

26 CPR r.36.11. In a Consent Order, as opposed to a judgment, parties may agree not to establish liability, but just

compensation to the claimant in exchange for putting an end to a civil suit.27 CPR r.36.10.28 F&C Alternative Investment [2012] EWCA Civ 843.29 See the origin in Dashwood v Dashwood [1927] W.N. 276; 64 L.J.N.C. 431; 71 Sol. Jo. 911 and Practice Direction

Judgments and Orders (2001), PD 40B para.3.30 CPR r.36.11(7).31 J. Sorabji, “Costs: CPR Part 36 — When Success is not to Your Advantage — Carver v BAA Plc and Multiplex

Construction (UK) Ltd v Cleveland Bridge UK Ltd” (2009) 28 C.J.Q. 15.32 Carver v BAA Plc [2008] EWCA Civ 412; [2009] 1 W.L.R. 113 at [30]–[31]. Cf. Morgan v Ups [2008] EWCA

Civ 1476; [2009] 3 Costs L.R. 384.33 CPR rr.36.10 and 36.14(6)(a).34 Jones v Associated Newspapers Ltd [2007] EWHC 1489 (QB); [2008] 1 All E.R. 240 at [16].

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with the additional amount recovered (£661).35 Although, this interpretation of Pt

36 encouraged courts to be unsympathetic to those who refused an offer for

technical or other trivial reasons—encouraging settlements and greater

proportionality of costs36

—it introduced a higher degree of uncertainty byempowering courts with greater discretion in the allocation of costs.

Sir Rupert Jackson in his Report on Costs highlighted Pt 36 as a key element

to promote settlement, reduce costs, and one of the most successful changes brought

forward by the Woolf Reforms.37 It however recommended that Carver should bereversed because it had put too much pressure on claimants to settle with offers

that may not be high enough.38 This view was shared by many practitioners who

since Carver had found it more difficult to advise their clients on whether to acceptan offer to settle, as it was not enough to achieve a judgment which is economically

more advantageous, but it had to be in the eyes of the court sufficiently moreadvantageous than the offer to settle.

It is debatable whether settlements occur because there is simply an offer or due

to the fear of having to pay the costs of the other party. In commercial disputes, it

may well be that offers to settle provide a neutral forum for parties to put forward

offers without the initiating party appearing weak.39 Nonetheless, when there is

inequality of economic power between the parties, the risk of having to pay the

costs may be too burdensome for a less affluent offeree, who may be left with too

little choice, but to accept the offer.40 Conversely, it can be argued that this

additional pressure aims to avoid disproportional results that may not be justified

by a nominal difference.41 This goal may have been in the mind of the court in

Carver when Ward L.J. stated:

“This was a small claim in which the defendants admitted liability within

months of the accident. To have incurred about £80,000 in costs to contest a

claim under £5,000 fills one with despair.”42

Proponents of court discretion argue that courts should take into account the parties’

attempts to negotiate. For instance, if there is an offer which in the eyes of the

offeree is close to a reasonable settlement, then the offeree would be expected to

respond with a counteroffer.43 Notwithstanding, in certain types of disputes, such

as personal injury claims, it may be too difficult to assess the value of the

compensation before the claimant’s evidence and expert’s reports are produced.

35 See LG Blower v Reeves [2010] EWCA Civ 726; [2010] 1 W.L.R. 2081. Cf. K. O’Sullivan, “Winning at WhatCost?” (2010) 160 N.L.J. 1042.

36 Sorabji, “Costs: CPR Part 36 — When Success is not to Your Advantage — Carver v BAA Plc and MultiplexConstruction (UK) Ltd v Cleveland Bridge UK Ltd” (2009) 28 C.J.Q. 15, 17.

37 Lord Woolf himself described is a key element of the new CPR. See Petrotrade [2001] 4 All E.R. 853.38 See R. Jackson L.J., Review of Civil Litigation Costs, Preliminary Report , May 8, 2009, p.476. R. Jackson L.J.,

Review of Civil Litigation Costs: Final Report , December 21, 2009, p.423.39

T. Parkes, “The Civil Procedure Rules Ten Years On: The Practitioner’s Perspective” in D. Dwyer (ed.), TheCivil Procedure Rules Ten Years On (Oxford: Oxford University Press, 2009) p.445.40 O. Fiss, “Against Settlement” (1984) 93 Yale L. J. 1076.41 A similar approach has been adopted in Scotland under Pt 35 ECCPR (the equivalent to the English Pt 36). See

Jackson L.J., Review of Civil Litigation Costs, Preliminary Report , May 8, 2009, p.643.42 Carver [2008] EWCA Civ 412; [2009] 1 W.L.R. 113 at [30]. In a similar vein, Ward L.J. previously stated in

Egan v Motor Services (Bath) [2007] EWCA Civ 1002; [2008] 1 W.L.R. 1589 at [53]: “What I have found profoundlyunsatisfactory, and made my views clear in the course of argument, is the fact that the parties have between themspent in the region of £100,000 arguing over a claim which is worth about £6,000. In the florid language of theargument, I regarded them, one or other, if not both, of them, as completely cuckoo to have engaged in such expensivelitigation with so little at stake.” See also Whitecap Leisure Ltd v John H. Rundle Ltd [2008] EWCA Civ 1026 at [8].

43 Multiplex Constructions [2008] EWHC 2280 (TCC); 122 Con. L.R. 88 at [72].




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In these cases a Pt 36 offer is no more than an educated guess aiming to achieve

a lower settlement than what would be otherwise obtained once the expert reports

are available.

Offers to settle are of general application to most types of civil claims, but theyare more usually employed in personal injury claims because these claims are

often disproportionate, with average costs higher than the awarded damages.44Part

36 offers are also commonly used in cases where one party has entered into a

conditional fee agreement, particularly in cases of medical malpractice where, on

average, costs are four times higher than the awarded damages.45 Disproportionality

on costs may nonetheless be attenuated once the government, following Jackson’s

recommendations, stops the recovery of the conditional fee agreements’ success

fee and the after-the-event insurance and sets fix costs for the fast track.46

Zuckerman observed that the original purpose of Pt 36 offers is to make litigationcosts foreseeable for the parties,47 and this is incompatible with substantial court

discretion as to costs. Jackson’s consultation confirmed that the lack of legal

certainty was not appropriate and put claimants in a disadvantageous position. The

government was finally persuaded and decided to overrule Carver .48 The newamendment clarified the meaning of “more advantageous”, which now means that

an amount of money, however small, will be construed by the courts as “more

advantageous.” Jackson also acknowledged that Pt 36 was more beneficial to

defendants and it did not provide sufficient incentives for claimants to use it.49 For

this reason he recommended that when an adequate offer (one that is not improved

by the judgment) is refused by a defendant, the claimant should, in addition to

recovering the legal costs, recover an uplift of 10 per cent over the damages (instead

of over the legal costs) awarded by the court.50 This recommendation aimed to

balance the claimants’ position, thus counterpoising Jackson’s additional proposals

of restricting the recovery of success fees in conditional fee agreements and the

introduction of contingency fee agreements.51

The Government has already announced that from 2013 an amended Pt 36 will

increase claimants’ recovery to an additional 10 per cent on the value of the claim,52

except for claims that are not for damages,53 which calculation will likely be based

on costs. Moreover, the government stated that a new test of proportionality test

would be employed to ensure that costs are proportional to the value, importance

44 Sorabji, “Costs: CPR Part 36 — When Success is not to Your Advantage — Carver v BAA Plc and MultiplexConstruction (UK) Ltd v Cleveland Bridge UK Ltd” (2009) 28 C.J.Q. 15, 18. See also Association of British Insurers“Analysis of Personal Injury Legal Costs” Research Brief, (January 2009) p. 4.

45 Medical Defence Union “Put An End to Excessive Legal Costs” 9 February 2009. For full report see (2009)25(1) MDU Journal .

46 Jackson L.J., Review of Civil Litigation Costs: Preliminary Report , May 8, 2009, p.94.47 Zuckerman on Civil Procedure Principles of Practice (2006), pp.959, 963.48 CPR (Amendment No 2) Rules 2011 (SI 2011/1979). 57th Update to the Civil Procedure. The amendments came

into force on 1 October 2011. See also Ministry of Justice, Impact Assessment on Reform on Part 36 (15 November 2010) p. 7 par. 1.15.49 Jackson L.J., Review of Civil Litigation Costs: Preliminary Report , May 8, 2009, p.426.50 Jackson LJ sets a ceiling of half million pounds above which the percentage might be reduced. Ibid p. 42.51 Jackson L.J., Review of Civil Litigation Costs: Preliminary Report , May 8, 2009, p.94. Conditional fee agreements

are contracts between the legal counsels and their clients by which the counsels will not charge their clients (or willcharge a reduce fee) in the event of not succeeding in the claim, but will charge a premium (up to twice the amountof the regular legal fee) in the event of succeeding. By contrast, contingency fee agreements are those whereby thelegal counsels are paid out of their clients’ compensation only in the event of succeeding in the claim.

52 Ministry of Justice, Impact Assessment on Reform on Part 36 (November 15, 2010).53 Ministry of Justice, “Reforming Civil Litigation Funding and Costs in England and Wales — Implementation

of Lord Justice Jackson’s Recommendations” The Government’s Response (March 2011), paras 12 and 149.

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and complexity of the cases.54 The challenge the government now faces will be to

draft clear legislation that ensures a consistent approach by the courts while

minimising the risks for satellite litigation.55

II. Comparative overview: selected case studies

This part compares how offers to settle are employed, if at all, in arbitration and

under national courts of other jurisdictions, namely Ireland, the US and Spain. The

choice of these jurisdictions was based on the fact that different approaches to

offers to settle are used in these jurisdictions. While Ireland still requires lodgements

in court, in the US, the so-called offers of judgment are rarely used, and in Spain

costs sanctions are not applied for refusing settlement offers. In arbitration, of

course, it will depend on the law of the seat of the arbitration and which rules have

been contractually agreed between the parties.

Ireland

Comparing the English offers to settle with its Irish counterpart

Similarly to the old Pt 36, in Ireland Ord.22 (r.6) of the Rules of Superior Courts

(RSC) provides for cost sanctions against those claimants who failed to obtain a

judgment that is higher than a sum of money lodged in court by the defendant in

satisfaction of a cause of action.56 Inferior courts also use lodgements in courtswith cost consequences under their own rules.57 In Ireland lodgements may be

made either by admitting or without admitting liability, except lodgements regarding

questions of title to land that can only be carried out when the defence admits

liability.58 The scope of application of these lodgements in Ireland is more restricted

than the English offers to settle. The most striking differences between Ord.22 and

Pt 36 are as follows. First, in Ireland only defendants may benefit from the effect

of lodgements in court while in England claimants may benefit too from using

offers to settle. Secondly, Ord.22 requires the defendant to lodge the sum of money

in the court, thus the written offer per se is not sufficient. Thirdly, under Ord.22there are more circumstances where the leave of the court is needed before the

lodgement can be made. Lastly, the cost consequences of Ord.22 start having effect

after the defendant has notified the claimant of the lodgement, while as discussed

above, under Pt 36 the effect takes place when the relevant period of 21 days has

expired.

54 Ministry of Justice, “Reforming Civil Litigation Funding and Costs in England and Wales — Implementationof Lord Justice Jackson’s Recommendations” The Government’s Response (March 2011), para.30.

55 J. Sorabji, “Solomon and Oliver and the Interaction between CPR 36 and CPR 44 and 45” (2012) 31 C.J.Q. 135.56 Order 22 of the Rules of the Superior Courts (as amended by the Rules of the Superior Courts (No.3) 1990 (SI

1990/229); Rules of the Superior Courts (No.2) 1993 (SI 1993/265); Rules of the Superior Courts (No.1) 1997 (SI1997/52); and Rules of the Superior Courts (No.5) (Offer of payment in lieu of lodgement) 2000 (SI 2000/328).

57 See District Court Rules (SI 2001/510) Ord.41(5) and Circuit Court Rules (SI 1997/93) Ord.15(15).58 Order 22 r.1(3). Section 29 of the Defamation Act 2009, (SI 2009/31), removed the exception in defamation

cases.




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Late lodgements in court

In Ireland, one of the issues most discussed by the courts is their own discretion

in deciding whether late lodgements are allowed. Back in 1967, the court in Ely v Dargan found that it was a matter of public policy to avoid litigation whenever this is possible and reasonable.59 In this case the court let the defendant increase

the lodgement previously made in court. Nevertheless, Irish courts are also aware

of the tactical element and abuses that this may create. In Brennan v Iarnród Éireann, after two failed attempts of the parties to reach a settlement, the defendantsought the leave of the court to make a lodgement,60 but the court denied this on

the grounds that the defendant should not be allowed to take advantage of

information disclosed by the claimant during previous settlement meetings. This

restriction reveals the court’s concern about the potential dangers of mixing offers

to settle and negotiations, since in these cases defendants may be able to make a

tight offer. However, Irish courts will allow lodgements in court and consensual

ADR methods, as long as there is no evidence of parties going to ADR in bad

faith, i.e. with the main purpose of gaining information on the strength of the other

party’s case.61 Although ADR processes do not require parties to discuss evidence

for reaching an agreement (but rather focus on finding a workable agreement) one

of the common objectives of the negotiations is to discover the bottom line offer

of the parties, hence facilitating settlements.

Other examples of costs sanctions

In addition to the RSC, there are other legal provisions in Ireland that provide for

cost penalties. Section 17 of the Civil Liability Act 2004 encourages settlements

in personal injury claims; this provision states that the court when determining

costs must consider written offers of settlement made by the claimant.62 The amount

of money offered, unlike the one made under Ord.22, does not have to be lodged

in court and does not carry automatic cost consequences. These offers follow the

English Calderbank formula of offers to settle “without prejudice save as to costs”,63

though its legal standing in Ireland, unlike in other common law countries suchas in Australia,64 is unsettled because there is a lack of authority outlining under

which circumstances they may be used.65 Lyons observes that these types of offers

59 Ely v Dargan [1967] I.R. 89.60 Brennan v Iarnród Éireann [1992] 2 I.R. 167.61 In Noble v Gleeson McGrath Baldwin, the court did not follow the ratio in Brennan and distinguished it by

stating that in the present case the parties had been negotiating in good faith, therefore the principles set out in Elywere followed. Unreported February 19, 2000 HC. Cf. subsequently, in Kearney v Barrett the court departed fromthe Brennan decision and held that it was not unjust to allow the defendant to make a lodgement in court knowingthe strength of the claimant’s case. [2004] 1 I.R. 1.

62

Civil Liability and Courts Act 2004 (SI 2004/31).63 Calderbank v Calderbank [1976] Fam. 93.64 In Australia there are two types of offers to settle: offers of compromise, which are regulated by the court rules

(Pt 5 of the UCRP) and Calderbank offers regime. The latter will only take place by default, in other words, whenthe offers of compromise are not accepted in court. The rejection of a successful offer (not beaten in court) maysupport an order of indemnity costs. However, two requirements must be met for that to happen. First, the offer must be genuine and not have just the single purpose of triggering costs sanctions; factors to prove whether the offer isgenuine are the value of the offer, the time the offer was open for acceptance, the clarity of the offer and the actualcircumstances of the case. Secondly, the rejection must be considered unreasonable taking into account the informationthat the offeree had at the time of the refusal.

65 See O’Neill v Ryanair (No.3) [1992] 1 I.R. 166. P. Lyons, “Recent Developments Relating to Lodgments andTenders” (2005) 1(2) Journal of Civil Practice and Procedure 6.

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to settle are only used after the time for a lodgement in court has expired.66

Furthermore, these offers carry a number of similarities with Pt 36 offers. For

example, it can be done at any stage of the proceedings without permission of the

court; it must be communicated to the defendant in writing; and it must be lodgedin court (only the actual offer terms and not the amount of money) without

informing the judge until the judgment are decided.67

A further cost rule is used to discourage legal actions challenging the awards

decided by the Personal Injuries Assessment Board (PIAB). PIAB assessments

are not binding on any of the parties, thus claimants and respondents may

commence a legal action at any time. There will, however, be cost consequences

for a claimant who rejects a PIAB assessment that has been accepted by the

respondent if the claimant fails in a subsequent judicial proceeding to obtain more

than the amount awarded by the PIAB assessment.68

In such a case, a claimant willnot be entitled to their legal costs, and the court in its discretion may also award

costs against the claimant.69 It must be noted that this provision will apply only as

a default of Ord.22 and s.17 of the Civil Liability Act.70

United States

Offers of judgment under federal law

Offers to settle in the US civil procedure, called offers of judgment, are an exception

to the American cost rule where each party pays its own costs. Offers of judgment

were first adopted in state practice and later in federal law as a tort reform under

r.68 of the Federal Rules of Civil Procedure (FRCP).71 These offers have been

described as a “riddle”72 for having very little impact in the federal jurisdiction

given that the cost-shifting is typically limited to certain items (such as copies and

court reporter charges) and rarely include attorneys’ fees.73 There are in addition

two important limitations that hamper the promotion of settlement: (i) its lack of

symmetry, whereby only defendants can benefit from its use; and (ii) unlike private

settlements, once an offer is accepted, it is entered into a judgment becoming a

public admission of wrongdoing?in other words, they are not confidential and donot typically exclude the recognition of liability by the defendant.74

The US Supreme Court examined this rule on two occasions delivering two

paradoxical landmark judgments that shaped its scope. In the first case, , theSupreme Court employed a literal interpretation when construing the meaning and

scope of r.68 (which requires the plaintiff, i.e. the US claimant, to obtain less thanwhat the defendant has offered to him) and held that, although the cost

consequences apply when the plaintiff has not been able to beat the offer in

66 Lyons, “Recent Developments Relating to Lodgments and Tenders” (2005) 1(2) Journal of Civil Practice and Procedure 6.

67 Section 17(3) and (4).68 See s.51A of the Personal Injuries Assessment Board Act (PIAB) (Amendment 2007) Act 2003 (SI 2007/35).69 Section 51A(3) PIAB 2007.70 Section 51A(6).71 R. Bone “To Encourage Settlement: Rule 68, Offers of Judgment, and the History of the Federal Rules Of Civil

Procedure” (2008) 102 Northwestern University Law Review 1561.72 R. Simon Jr., “The Riddle of Rule 68” (1985) 54 George Washington Law Review 1.73 Wright, Miller and Marcus, Federal Practice and Procedure (West Publishing, 1997), Vol.12, para.300174 FRCP Symposium (2006) p.754.




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judgment, it will not operate when the defendant had prevailed completely in the

case.75 Indeed, it seems anomalous that “a defendant may obtain costs under Rule

68 against a plaintiff who prevails in part but not against a plaintiff who loses

entirely.”76

The US Supreme Court rejected this compelling argument based on“the language of the Rule and its clear purpose.”77 Arguably, this spectacularly

narrow interpretation of the rule was justified because, unlike the English Pt 36,

the court did not have a discretion in restricting the application of the cost sanction

in the event of delivering an unfair outcome,78 as seemed to be the situation in this

civil rights case. The restriction that the Supreme Court brought to r.68 in this case

is quite significant since defendants are no longer motivated to make an offer of

judgment in cases where the defendant believes that they may have a watertight

case.79

By contrast, only a few years later, the Supreme Court invigorated the Rule in , giving defendants an additional incentive to use it.80 In this case the SupremeCourt established that when a statute allows the prevailing party to recover the

attorney’s fees (e.g. in a civil rights action), the same restriction would apply when

a judgment offer has successfully been entered. In other words, the plaintiff will

not be entitled to his attorneys’ fees when he had prevailed in court without beating

the offer.

According to r.68 an offer must be made 14 days before the trial begins,81 but

unlike the English Pt 36, the offer is considered rejected and deemed withdrawn

after the 14th day.82 Equally to the English Pt 36, when the judgment is less

favourable than the offer, the offeree will not be able to recover any costs and

would not receive any interest on the awarded amount from the moment the offer

was made.

The main limitation of r.68, and the greatest difference with Pt 36, is that the

successful defendant would only recover nominal costs. Hence, this Rule does not

provide a robust incentive to settle a case, particularly when a settlement would

usually require the defendant to pay all the costs. Conversely, as we are going to

see below, the picture is quite different in some states where this rule carries more

weight, especially in those states where as part of the costs sanctions reasonable

attorney’s fees are included.

Another important difference is that in the United States the cost consequences

of offers of judgments would not affect the parties’ contingency fee agreements,83

while in England the Pt 36 regime at the time of writing includes as part of the

costs the payment of premium fees when conditional fee agreements are used.

Furthermore, in the event that the UK Government decides to follow the

recommendation made by Jackson and scraps conditional fee agreements in favour

of introducing contingency fee agreements, it would be expected that such a reform

75 Delta Air Lines Inc v August 450 U.S. 346 (1981).76 Delta Air Lines 450 U.S. 346 (1981) at 362.77 Delta Air Lines 450 U.S. 346 (1981) at 356 (majority opinion).78 J. Horowitz “Rule 68: The Settlement Promotion Tool That Has Not Promoted Settlements” (2010) 87 Denver

University Law Review 486, 510.79 Rule 68 Symposium (2006) pp.743, 755.80 Marek v Chesny 473 U.S. 1 (1985). See also Chesny v Marek 720 F.2d 479 (7th Cir. 1983) where Posner J.,

noted that the Rule was “little known and little used”.81 Committee Notes on Rules — 2009 Amendment , where the time limit was extended from 10 to 14 days.82 Rule 68(e).83 Rule 68(f) NRS.

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will be accompanied by the 10 per cent increase84 of the claimant’s recovery when

the defendant had rejected the claimant’s offer.85 Overall, it is plain that Pt 36 offers

are much more compelling than its American counterpart, this has been particularly

the case since Pt 36 has been fuelled by the English costs rule and the ever unpredictable nature of legal costs in England.86

Reasons for the lack of success of offers of judgment

Empirical research has shown the limited impact that r.68 has in promoting

settlement.87 Bone argues that the original purpose of the federal Rule is not to

promote settlement, but just to discourage unreasonable plaintiff behaviour.88 The

question is whether there are enough economic incentives to achieve this general

purpose. Bone observes that:

“The Rule is written in a way that makes it an extremely poor tool for

settlement promotion. Four aspects are particularly noteworthy: its small

penalty, asymmetric application, requirement of a formal judgment, and

timing limitations.”89

Hence, if the purpose of this rule is thus the promotion of settlement, then it would

be beyond debate that these four deterrents should be removed. Firstly, only when

there are attorneys’ fees involved, defendants will have an economic incentive in

employing them. Secondly, unlike with the confidential settlements under the

English Pt 36, when the defendant enters an offer of judgment, there will be anactual public judgment setting out the liability of the defendant, i.e. it is equivalent

of losing the case in the final judgment90; hence the rule should shift from offers

of judgment to offers of (confidential) settlement. Thirdly, not only defendants,

but also plaintiffs should have the opportunity to make these offers—as it appears

clear that the stronger the economic incentives are, the more symmetric the cost

rule should be; otherwise it will impose greater risks on plaintiffs than on

defendants.91 Finally, the time limitations restriction of submitting offers 14 days

prior to trial also weakens its settlement promotion power. Although certain

discretion could also be left to the court in order to restrict possible harsh

84 The final figure remains to be fixed by the UK Ministry of Justice.85 Jackson (2010) p.427.86 Zuckerman on Civil Procedure Principles of Practice (2006), p.957 bb. Yoon and T. Bakerbigation: Ales have

in promoting settlement. nd the rules employed by the parties. This part n common law c87 A. Yoon and T. Baker, “Offer-of-Judgment Rules and Civil Litigation: An Empirical Study of Automobile

Insurance Litigation in the East” (2006) 59 Vanderbilt L.R. 155; H. Lewis and T. Eaton, “Rule 68 Offers of Judgment:The Practices and Opinions of Experienced Civil Rights and Employment Discrimination Attorneys” (January 2007),available at: http://ssrn.com/abstract=959675 [Accessed October 28, 2012].

88 Bone “To Encourage Settlement: Rule 68, Offers of Judgment, and the History of the Federal Rules Of CivilProcedure” (2008) 102 Northwestern University Law Review 1561.

89

Bone “To Encourage Settlement: Rule 68, Offers of Judgment, and the History of the Federal Rules Of CivilProcedure” (2008) 102 Northwestern University Law Review 1561, 1566 c f . Horowitz “Rule 68: The SettlementPromotion Tool That Has Not Promoted Settlements” (2010) 87 Denver University Law Review 486, 511.

90 Bone “To Encourage Settlement: Rule 68, Offers of Judgment, and the History of the Federal Rules Of CivilProcedure” (2008) 102 Northwestern University Law Review 1561 and Symposium, “Revitalizing FRCP 68: CanOffers of Judgment Provide Adequate Incentives for Fair, Early Settlement of Fee-Recovery Cases?” (2006) 57Mercer L. R. 749. [Hereinafter FRCP Symposium].

91 Bone “To Encourage Settlement: Rule 68, Offers of Judgment, and the History of the Federal Rules Of CivilProcedure” (2008) 102 Northwestern University Law Review 1561, 1562. It must be noted that the Supreme Courthas not ignored the possibility of making Rule 68 a two-way rule. Amendments to Rule 68 proposed by the StandingCommitteein 1983 and in 1984 addressedthis specific issue, but left the rule unchanged. Preliminary Draft of ProposedAmendments to the Federal Rules of Civil Procedure (1983) 98 F.R.D. 337, 353.




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outcomes,92 the English Pt 36 has shown us that too much discretion would risk

unleashing satellite litigation.93

Offers of judgment under state law

There is a wide disparity amongst the procedural law of the individual states.

Although they operate similarly to the Federal system in that an accepted offer is

entered into a judgment, some states have emphasised the function of settlement

promotion by naming them “offers of settlement” instead of “offers of judgment”.94

While some states have adopted robust offers of judgment, others have implemented

“weaker rules” that are less persuasive in motivating litigants to settle earlier.95 It

is however possible to see some trends; for instance in the last four decades a

number of states have enacted legislation including the symmetric application of

judgement offers, allowing also plaintiffs to submit offers of judgment, and

strengthen the cost sanction by including attorneys’ fees.96 Furthermore, in states

such as Connecticut, New Jersey and Wisconsin, courts may add a substantial

amount of interest on top of the amount awarded in the judgment.

While a number of state courts can require one party to pay the other party’s

attorneys’ fees, others such as Alaska, Arizona, California, Colorado, Florida, and

Texas, include attorney’s fees within the meaning of shiftable costs (i.e. only under

fee shifting statutes).97 Some states have in addition introduced into the calculus

an element of reasonableness, permitting their courts to employ their discretion in

awarding costs including attorney’s fees.98 Other states have opted for restrictingthe application of this rule, such as the case in Maryland, where the offer to settle

applies only to medical malpractice, while in Georgia courts require that the

decision is at least 25 per cent more favourable, in order to give effect to the

payment of the attorney’s fees to the successful offeror.

The cost rule: the American and the English approaches

The American rule of costs, unlike the English rule which is the most prominent

one in common law jurisdictions, provides that each party must cover its own

92 Horowitz “Rule 68: The Settlement Promotion Tool That Has Not Promoted Settlements” (2010) 87 Denver University Law Review 486, 506.

93 Sorabji, “Solomon and Oliver and the Interaction between CPR 36 and CPR 44 and 45” (2012) 31 C.J.Q. 135,140.

94 For example, Colorado employs the term “offer of settlement.” Colo. Rev. Stat. § 13-17-202 (2009). Other states,such as California, refer to their rule as “Offers by a Party to Compromise.” Cal. Civ. Proc. Code para. 998 (West2009). See Horowitz (2010) supra 485, 504.

95 Yoon and Baker, “Offer-of-Judgment Rules and Civil Litigation: An Empirical Study of Automobile InsuranceLitigation in the East” (2006) 59 Vanderbilt L.R. 155.

96 See, e.g. Alaska Stat. para.09.30.065 (2010); Ariz. R. Civ. Proc. 68; Cal. Civ. Proc. Code. para 998; Colo. Rev.

Stat. para.13-17-202(1)(a); Fla. Stat. Ann. para.768.79(1) (West 2009); N.J. R. Ct. 4:58-2; Tex. Civ. Prac. & Rem.Code Ann. § 42.004 (Vernon 2009); Wis. Stat. Ann. § 807.01 (West 2009). See FRCP Symposium (2006); Lewisand Eaton, “Rule 68 Offers of Judgment: The Practices and Opinions of Experienced Civil Rights and EmploymentDiscrimination Attorneys” (January 2007), available at: http://ssrn.com/abstract=959675 [Accessed October 28,2012]; Yoon and Baker, “Offer-of-Judgment Rules and Civil Litigation: An Empirical Study of Automobile InsuranceLitigation in the East” (2006) 59 Vanderbilt L.R. 155; D. Glimcher, “Legal Dentistry: How Attorney’s Fees andCertain Procedural Mechanisms Can Give Rule 68 the Necessary Teeth to Effectuate Its Purposes” (2006) 27 CardozoL. R. 1449.

97 American College of Trial Lawyers, Survey of State Offer of Judgment Provisions, Survey conducted by theAmerican College of Trial Lawyers, Federal Civil Procedure Committee, October 2004.

98 Horowitz “Rule 68: The Settlement Promotion Tool That Has Not Promoted Settlements” (2010) 87 Denver University Law Review 486, 505.

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costs. The American rule has only two exceptions. First, it does not apply when

the parties agree by contract before litigation; and secondly, it will not be used if

a specific legal provision states otherwise. It has been widely argued that this

system contributes towards making the United States a litigious society, while theEnglish rule potentially hinders access to justice by increasing the economic risks

of litigation.99 This is because the English rule encourages parties to spend whatever

is necessary to ensure the case is won and the fees recovered, thereby increasing

the overall costs of litigation. On the continent, by contrast, the costs rule

interestingly takes a half way solution allowing the fixed recovery of costs in

proportion to the value of the claim.100

There are a number of studies on law and economics that examine the impact

that a rule on cost allocation may have in promoting settlement.101 The economic

conflict theory has argued that when one of the parties is a public institution that party does not have an economic interest in running up the bill, hence they may

not be equally motivated in settling early. This view has, however, come into

question by some empirical studies that found that public defendants make more

offers than private ones.102 Economic studies also take into consideration the

perception that litigants have on the strength of their cases and how this perception

affects the likelihood of settlement. For instance, according to Spier, where both

parties know the compensatory value of the damage, but they are optimistic in

determining the probability of winning a case, the cost penalties attached to offers

to settle would increase litigation and discourage settlement.103 The mainstream

economic literature also suggests that the offer of judgment rule might be

counterproductive for settlement when the compensatory value of the damage is

unclear, but the likelihood of the plaintiff prevailing in the case is high.104 In these

types of cases offers to settle would be ineffective in reducing the litigation, and

they could indeed increase the adversarial position of the parties.105

Indeed, offers to settle are not a panacea; in fact there are some drawbacks in

promoting offers to settle when they are not appropriate, particularly in issues

where a judgment on the substantive issues would be more suitable, e.g. matters

of public policy,106 when it creates an imbalance on the final outcome, or when

weaker parties are pressurised into withdrawing their legal rights.107 Furthermore,

a claimant with significantly less resources than the defendant will be at risk of

being out of pocket in the event of refusing an offer to settle from a defendant who

is represented by a more expensive legal team.108

99 The different approaches and goals in the allocations of legal costs have been discussed for quite some time. Cf.A. Goodhart, “Costs” (1929) 38(7) Yale L. J. 849. See also D. Root, “Attorney Fee-Shifting in America: Comparing,Contrasting, and Combining the American Rule and English Rule” (2004–2005) 15 Indiana International and Comparative Law Review 583 (arguing that both rules have their pitfalls).

100 See for example Civil Procedure Rules in Germany and Spain.101

See G. Miller, “An Economic Analysis of Rule 68” (1986) 15 Journal of Legal Studies 121 and K.E. Spier “Litigation” in A.M. Polinsky y S. Shavell, Handbook of Law and Economics (Elsevier, 2007), Vol.1.102 FRCP Symposium (2006), pp.743, 756.103 Spier “Litigation” in Polinsky y Shavell, Handbook of Law and Economics (2007), p.304.104 Spier “Litigation” in Polinsky y Shavell, Handbook of Law and Economics (2007). See also F. Cabrillo and S.

Fitzpatrick, The Economics of Litigation (Northampton: Edward-Elgar, 2008), pp.121–130, and B. Main and A. Park,“The Impact of Defendant Offers into Court on Negotiation in the Shadow of the Law: Experimental Evidence”(2002) 22 International Review of Law and Economics 189.

105 See also Miller, “An Economic Analysis of Rule 68” (1986) 15 Journal of Legal Studies 121, 122.106 H. Edwards “Alternative Dispute Resolution: Panacea or Anathema?” (1986) 99 Harv. L. R. 668, 672.107 Fiss, “Against Settlement” (1984) 93 Yale L. J. 1076.108 Fiss, “Against Settlement” (1984) 93 Yale L. J. 1076, 1077.




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Arbitration

The modern concept of offers to settle has its precedent in the sealed offers

employed in arbitration.

109

There are a number of ways in which they can be used: parties can agree to use sealed offers in a contractual clause, the institutional arbitral

rules under which the arbitration takes place could provide for them, and they may

be presented to the other party as an offer with the Calderbank formula, i.e.“without prejudice save as to costs.”

According to Derains and Schwartz, parties participating in arbitrations provided

by the International Chamber of Commerce (ICC) increasingly claim for the

reimbursement of legal costs due to the high costs of international arbitration.110

The cost-shifting rule is favoured by the fact that the majority of institutional

arbitral procedures allow the tribunal to decide the allocation of costs with the

only guidance of expecting the unsuccessful party to bear part or all the costs of

the winning party.111 Although the allocation of costs seems quite inconsistent112

with the practice of those countries that follow the American rule of costs, it is

often the case that the costs paid by the losing party include the costs of the legal

representation of the successful party. In the event that the prevailing party succeeds

only in part of their contentions then the award of costs will often follow the civil

law approach, i.e. pro rata.113

The use of sealed offers in international arbitration is more likely to be employed

when the arbitration takes place in a common law jurisdiction that follows the

English cost rule, such as in Hong Kong, Australia and Canada.114 Ansjomshoaadistinguishes the two main methods for employing sealed offers in arbitration with

the effect of cost sanctions are the bifurcation of the award and the submission of

a sealed offer.115 Bifurcation is a request made to the tribunal by which the arbitral

award takes place in two phases: the first one deals with the substantive issues and

the second one with the allocation of costs. Thus, if one party has submitted to the

other party a sealed offer “without prejudice save as to costs” (i.e. a Calderbank offer) then the tribunal may take this into account when deciding the allocation of

costs. If the arbitration takes place in England, the more similar the sealed offer

is to the form and content of Pt 36, the more likely will be that the arbitral tribunalwould give the offer the same effect. The problem with this method is that the

offeree may oppose the bifurcation and argue that the tribunal should reject the

motion on grounds of delay and additional costs.

109 See J. O’Hare and K. Browne, Civil Litigation (Sweet and Maxwell, London, 2009), p.447.110 Derains and Schwartz, A Guide to the ICC Rules of Arbitration, 2nd edn (Kluwer Law International, 2005),

p.370.111 See s.61 of the English Arbitration Act 1996. See also art.31 of the ICC Rules of Arbitration 1998; r.28 of the

ICSIDArbitration Rules; art.31 of theAAA International ArbitrationRules 2005 and arts 38 and 40 of the UNCITRALArbitration Rules 1976.

112Y. Gotanda, “Awarding Costs and Attorneys Fees in International Commercial Arbitration” (1999) 21 Michigan Journal of International Law 2.

113 M Moses, The Principles and Practice of International Commercial Arbitration (New York, CambridgeUniversity Press, 2008) p. 188.

114 P. Anjomshoaa, “Cost Awards in International Arbitration and the Use of “Sealed Offers” to Limit Liabilityfor Costs” (2007) 10 International Arbitration Law Review 39. See Hong Kong Order 22, 73 of the Rules of the HighCourt; Australia Rule 42, 20 of the New South Wales Uniform Civil Procedure Rules; Canada, Rule 49 of the Rulesof Civil Procedure of Ontario.

115 Anjomshoaa, “Cost Awards in International Arbitration and the Use of “Sealed Offers” to Limit Liability for Costs” (2007) 10 International Arbitration Law Review 39

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The alternative method is to submit a sealed offer and request the tribunal to

open the envelope after the substantive issues are decided and before the decision

of costs is taken. Anjomshoaa suggests that this method is less desirable since the

tribunal might deduce the identity of the offeror, which might create a biassuggesting that the offeror admits liability. He however observes that this request

may not necessarily influence the view of the tribunal as it must take into account

the legitimate interest of the offeror to limit the risks of costs regardless the merits

of the claim.116 Therefore, it would be advisable for those who would like to rely

on offers to settle to stipulate the bifurcation in the arbitration clause,117 as the use

of offers to settle would be better suited to a process where costs are decided

separately.118

Cost sanctions in civil law jurisdictions: the Spanish procedure asa case study

The Spanish procedural rules do not contemplate offers to settle, thus this section

explores how the Spanish courts respond to lodgements in court by defendants

and the impact, if any that these lodgements may have at the time of allocating

legal costs to the parties.

Under the Spanish Code of Civil Procedure (CCP) a party may lodge an amount

of money in court in two different processes: conciliatory proceedings ( jurisdicciónvoluntaria) and in adversarial proceedings ( juicio contencioso).119 Unlike in thecommon law jurisdictions, these lodgements are not confidential, so the judge will

be aware of them. In conciliatory proceedings defendants may lodge an amount

of money but claimants are neither required nor encouraged to accept a partial

payment for the settlement of the claim.120 In adversarial proceedings the CCP

provides that the claimant shall pay all the legal costs if he does not inform the

defendant in advance of initiating a legal action. This will only occur when the

defendant admits and pays the debt with the response to the claim. But, if the

defendant lodges in court a partial amount of the claim (the amount that the

defendant considers to be owed) and the court awards the same amount lodged or

less, then the court will likely not make an award on costs on the grounds that theclaim was partially recognised. Notwithstanding, in the case that the defendant

had previously started a conciliatory proceeding, and offered the same amount or

more than the one awarded by the judge in an adversarial proceeding, then the

judge may consider the claimant as a vexatious or unreasonable litigant.121 This,

however, would be very unusual in practice as the courts construe this rule in a

strict fashion.

In the Spanish jurisdiction like in most civil law jurisdictions the loser pays all

the costs, but there are important restrictions in the recovery of costs that aim to

116 Anjomshoaa, “Cost Awards in International Arbitration and the Use of “Sealed Offers” to Limit Liability for Costs” (2007) 10 International Arbitration Law Review 39, 41–43.

117 Anjomshoaa, “Cost Awards in International Arbitration and the Use of “Sealed Offers” to Limit Liability for Costs” (2007) 10 International Arbitration Law Review 39, 43.

118 N. Ulmer “The Cost Conondrum” (2010) 26 Arbitration International 221, 245.119 See Ley de Enjuiciamiento Civil 2001 for the juicio contencioso and Ley de Enjuiciamiento Civil of 1881 for

the jurisdicción voluntaria.120 In this proceeding the court will not issue a judgment but only a resolution (auto) which will state whether the

parties have reached an agreement or not. This resolution does not include a decision on costs.121 See art.394.2 of the CCP. See also the French CCP.




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deliver a cost-efficient civil justice.122 According to art.394 of the CCP, the party

who had succeeded in all their claims may apply for an award on costs,123 which

may not exceed one third of the value of the claim. In reality most awards are

between 10 and 20 per cent of the value of the claim, and very rarely go over thisrange. This limit may only be overcome when the court considers that the losing

party has acted in bad faith, such as vexatious litigants or when the claim was

made recklessly.124 Furthermore, the court has discretion not to allocate costs in

favour of the prevailing party when it is considered that there was a claim that

contained a reasonable doubt in law or in fact.

When parties succeed in their claims partially, each party pays his own costs

and both parties share the payment of common expenses. There are however certain

litigants who are excluded from paying the costs of the other party; these are

litigants that benefit from free legal aid and public prosecutors—since Spain, asa civil law jurisdiction, allows criminal and civil actions to be dealt with together

within the same proceedings.

Although settlement is an axiomatic feature in the adversarial system of common

law jurisdictions, it does not yet form part of the proceedings in many civil law

jurisdictions.125 While the adversarial procedure in common law jurisdictions have

traditionally put greater emphasis on rectitude of decision, the “inquisitorial” or

“non-adversarial” approach in civil law jurisdictions have taken a more

cost-efficient approach to civil litigation—this is because on the continent litigation

is not as expensive, which shows the conventional emphasis on access to justice

rather than “justice on the merits” at all costs.126 Indeed, civil law jurisdictions have

fewer incentives to settle once proceedings have started as the cost savings would

not be as high as in common law jurisdictions. For instance, in Spain the claim is

an elaborated document, and once submitted claimants would have already incurred

about half of the total fee that legal counsel can charge for their services.127

Traditionally, the calculation of the legal costs is based on the value of the claim

and counsel would not normally charge per hour.

The status quo is now starting to change as many civil law jurisdictions are

introducing conciliatory requirements in their civil procedures through the

implementation of the Mediation Directive. In addition a number of EU Directives

in specific sectors either encourage or require Member States to make provision

for adequate and effective ADR procedures.128 In the case of Spain, like in many

other jurisdictions, ADR is set to take a more relevant role in the next few years,

particularly once the Mediation Act, which implements the Mediation Directive,

122 See the German example. Cf. see A. Zuckerman, “Lord Woolf’s Access to Justice: Plus ça Change” (1996) 59M. L. R. 773, 787–896.

123

Ley de Enjuiciamiento Civil 1/2000 of January 7.124 CCP art.394.3.125 Cf. discussion below on the Spanish Mediation Act 2012.126 A. Zuckerman, Civil Justice in Crisis—Comparative Perspectives of Civil Procedure (Oxford: Oxford University

Press, 2001).127 The legal fees are in proportion of the claim and most legal bars recommended lawyers to charge of 50 per cent

after the submission of the claim. See the recommend scale of Law Bar of Madrid, p.18, available at http://www.icam.es/docs/ficheros/200706140002_6_4.pdf [Accessed October 28, 2012].

128 For directives encouraging ADR procedures see for example art.14 of the Financial Marketing of FinancialServices Directive 2002/65art.14(2) of the Timeshare Directive 2008/122 and E-Commerce Directive 2000/31. For directives requiring that ADR schemes are put in place see Consumer Credit Directive 2008/48 and the PaymentServices 2007/60.

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is not only transposed for cross-border cases, but for domestic cases too.129 Unlike

the initial Bill,130 the Spanish 2012 Mediation Act, does not make it mandatory for

all litigants in monetary claims to attempt mediation131; yet it promotes the use of

mediation through a number of measures: (i) when the dispute escalates to thecourt the cost of mediation will be added to the total legal costs 132; (ii) parties

entitled to legal aid will be informed about mediation133; (iii) the prescription period

stops while parties attempt mediation134; (iv) confidentiality is ensured in the

mediation process135; (v) mediated settlements may be formalised by court annexed

processes and through a public deed136; and (vi) the courts may stay proceedings

when there is contractual clause requiring parties to attempt mediation.137

Similarly Italy has issued a Mediation Act, but, unlike the Spanish counterpart,

it has included compulsory conciliation for many civil disputes, and importantly,

it has also introduced costs sanctions as incentives for settling disputes.138

Accordingto the new Act, at the end of the conciliation the third neutral party will make a

proposal of settlement; if only one of the parties refuses it, but does not obtain a

more favourable judgment, then the court will automatically penalise the claimant

to pay all the costs, plus an additional fine.139 Although the approach appears to be

similar to the English Pt 36, a main distinction should be highlighted: in Italy the

court will be aware of the contents of the offer. It is thus more similar to the method

employed in Ireland for resolving personal injury claims.140 Given the length of

civil cases in Italy is still too early to assess how effective this rule will be in

practice,141 but it can be observed that while the main goal of the English Pt 36 is

to reduce the costs employed in resolving disputes, the main goal in Italy is to

reduce the time involved in resolving civil disputes.

III. Why offers to settle have not been employed in civil law jurisdictions

Offers to settle are a key feature of the civil procedure in some common law

jurisdictions, such as in England where they have proven to be a very effective

way of encouraging settlement. This begs the question of why have they not been

introduced in civil law countries? Although costs vary greatly, even within the

129 Spanish Mediation Act of March 5, 2012 (Real Decreto-ley 5/2012 de la Mediación para Asuntos Civiles yMercantiles) implementing Directive 2008/52 of the European Parliament and of the Council of May 21, 2008 onCertain Aspects of Mediation in Civil and Commercial Matters [2008] OJ L.136 3.

130 Disposición adicional primera para.10.3. of the Spanish Mediation Bill (2010). Cf. A.E. Vilalta “ContrataciónTransnacional y Acceso a la Justicia: Mecanismos de Resolución Electrónica de Disputas” 732 (2012) Revista Críticade Derecho Inmobiliario forthcoming.

131 See Alassini and others v Telecom Italia (C-317/08) March 18, 2010 at [67] where the European Court heldthat mandatory mediation prior litigation does not breachEU law. For the situation in England seeM. Ahmed, “Implied

Compulsory Mediation’ (2012) 31 C. J. Q. 151.132 Article 18(3).133 Spanish Mediation Act 2012 Disposición Segunda 2.134 Article 4.135 Article 9.136 Article 24.137 Disposición Final Segunda.138 Decreto Legislativo March 4, 2010. See in particular arts 13–14.139 Article 14.140 See PIAB Act 2003.141 See generally V. Varano, “Symposium: Civil Procedure Reform in Comparative Context — Civil Procedure

Reform in Italy” (1997) 45 The American Journal of Comparative Law 657–674.




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European Union,142 there are a number of conceivable reasons that may explain

why civil law jurisdictions have not implemented offers to settle in their procedures.

This part of the paper examines these intertwined reasons, which I argue, are

broadly related to the cost of litigation and a “culture of settlement” based on itsadversarial tradition. However, a renewed interest in promoting settlement is now

taking place in many civil law jurisdictions with the implementation of the

Mediation Directive and legislation that require the establishment of ADR schemes

for settling consumer complaints,143 coupled with the desire for developing a more

cost-efficient civil justice system. This part accordingly argues that the time is ripe

for considering offers to settle as an additional mechanism to promote settlement

in cross-border litigation and in civil law jurisdictions.

The cost of litigation

The role of the parties in civil litigation

Litigation in common law courts has been inspired by the English civil procedure,

which was, and still is, often regarded as expensive and elitist. 144 The high cost is

partly due to its traditional adversarial nature, where it is the role of the parties to

research the law, to present the case complying with strict rules of pleading and

to fund and produce wide expert evidence. By contrast, in civil law jurisdictions

courts have traditionally employed a less adversarial approach by appointing

experts and conducting the interrogation of witnesses,145 thus assisting the parties

in finding the truth. Although some of the differences in approaches have been

diluted in England and in other common law jurisdictions with an increasingly

interventionist role of the judge,146 there are some features still remain inherent in

the adversarial nature of the common law tradition contributing to high legal

costs—from the jury trial (though its use in England has almost disappeared, except

for libel cases)147 to the use of disclosure (and more so the discovery in the United

States).148

Hourly rates of counsel and the impact of technology

In a similar vein, an essential element that increases the cost in common law

countries, particularly those following the English rule of costs, is the payment of

hourly rates to legal representatives—a feature that is now becoming more common

in large firms in civil law jurisdictions. But importantly, legal fees in common law

142 See Hoche, Demolin, Brulard Barthelemy, Consultancy Study for the European Commission: Study on theTransparency of Costs of Civil Judicial Proceedings in the European Union: Final Report (2007), available at http:

//ec.europa.eu/justice/civil/document/index_en.htm [Accessed October 28, 2012].143

See the Mediation Directive 2008/52 and the Proposal for a Directive on Consumer ADR 2011/0373 (COD).144 See Zuckerman on Civil Procedure Principles of Practice (2006), pp.773, 774 and C. Hanycz, “More Accessto Less Justice: Efficiency, Proportionality and Costs in Canadian Civil Justice Reform” (2008) 27 C.J.Q. 98, 105–108.

145 H. Kötz, “Civil Justice Systems in Europe and the United States” (2003) 13 Duke Comparative & Int. L. 61,63–64.

146 O. Chase et al., Civil Litigation in Comparative Context (US, Thomson West, 2007), p.592.147 Kötz, “Civil Justice Systems in Europe and the United States” (2003) 13 Duke Comparative & Int. L. 61, and

S. Gross, “The American Advantage: The Value of Inefficient Litigation” (1987) 85 Mich. L. Rev. 734. See generallyS. Lloyd-Bostock and C. Thomas, “Decline of the “Little Parliament”: Juries and Jury Reform in England and Wales”(1999) 62 Law & Contemp. Probs. 7.

148 K. Foss, “Reducing Civil Litigation Costs by Promoting Technological Innovation: Adopting Standards of Reasonableness in E-Discovery” (2012) 63 Hastings L.J. 1167.

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jurisdictions do not generally use a capping system and are set regardless of the

value of the claim with the exception of low-value claims.149 According to

Zuckerman these rates give financial incentives to legal representatives to tell their

clients that the more money they invest in their cases the more chances they willhave in winning the case and recovering their costs, which lead to unpredictability

and high legal fees.150 Disproportionate costs have in turn led to a restriction in

access to justice as legal aid is reduced and more and more individuals with legal

needs cannot afford to bring or defend claims.151

Conversely, the present way of calculating fees is progressively changing with

the growth of technology and a higher demand for cost-efficient legal services.

Richard Susskind in The End of Lawyers? argues that technology will play a keyrole in the delivery and “commoditization” of legal services.152 Technology delivered

legal services (including legal representation) also known as e-lawyering, areincreasingly used in jurisdictions such as the US, where unbundling legal services

is a growing industry.153 The search for competitive legal services is not only

pursued by consumers looking for bargains, but also by large corporations that are

increasingly in the business of opening tenders for allocating legal work to law

firms with the relevant expertise at the most competitive cost. The same trend is

now seen in the procurement of legal services, which are now going online using

disruptive platforms.154 This trend will only augment in the United Kingdom once

Alternative Business Structures start getting a share of the legal market.155

Caps in the recovery of legal costs

Civil law countries have more stringent caps in the recovery of legal costs than in

most common law jurisdictions.156 The risk of high costs makes offers to settle a

useful tool for controlling costs, particularly in personal injuries cases and in cases

where parties are more likely to incur significant amounts in legal fees. In fact the

cost of legal representation if a case reaches the trial is such that it would not be

unusual to end up with disproportionate legal costs, especially when conditional

fee agreements are employed,157 to the extent that in the event of a claimant failing

to obtain a judgment more advantageous than a Pt 36 offer, the claimant may have

149 Rule 44.4(1). The rule that “costs follow the event” without caps is observed only in Multi-Track. It is thereforenot applied in the Small Claims Track where only limited costs, such as fixed court fees, are usually awarded. TheUK Government has announced that they will follow Jackson’s recommendation of fixing costs also in the Fast Track (i.e. claims of a value of £ 25,000 or less which can be resolved in one day at trial).

150 Zucker