In Merck KGaA -v- Merck Sharp & Dhome Corpe  EWHC 3920 (Ch) Mr Justice Nugee considered what order should be made as to costs after a claimant had succeeded on a trial of a preliminary issue. The judge held that there was nothing in the defendant’s submissions that persuaded him that the court should depart from the normal principle that the (losing) defendant should pay the (successful) claimant’s costs in full.
The claimant succeeded on a preliminary issue on the governing law of a contract (see the judgment here). The next question was what costs order should be made.
Mr Justice Nugee:
- I have handed down my judgment on the preliminary issue this morning and now have to deal with the costs. The parties have not attended but have filed helpful written submissions by reference to a draft Order put forward by the Claimant.
- There are two points on the draft Order. The first is whether I should order the Defendants to pay the Claimant’s costs of the issue, as the Claimant seeks, or should order either that costs be in the case or award the Claimant a percentage of its costs as the Defendants seek.
- The starting point under CPR r 44.2(2)(a) is that if the Court decides to make an order about costs the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. I have no doubt that for the purposes of this rule the Claimant is the successful party. It has succeeded in the only issue which was heard and decided. It does not matter for this purpose that its success does not by itself establish that it has any claim for breach of contract or otherwise against the Defendants.
- Under the general rule therefore the Defendants would be ordered to pay the Claimant’s costs. Under CPR r 44.2(2)(b) the Court may however make a different order. Mr Hollingworth relies on a number of matters in support of his submission that the Court should order costs in the case.
- The first is that the issue which I have decided, that of the proper law of the 1970 Agreement and 1975 Letter, only arises because of the claim for breach of contract and is only one aspect of that claim. Success on the preliminary issue does not therefore mean that the Claimant will ultimately establish any claim in contract at all, and the incidence of costs should therefore be the same as if it had been tried as part of that claim.
- I do not think that this is a reason for departing from the general rule. The Defendants asked for a preliminary issue. They did so because it was thought to be helpful to the parties, and to the Court, for the question of proper law to be determined as a discrete issue. I agreed, which is why I acceded to their application. But the corollary of this is that the question did not arise as part and parcel of the trial but was tried separately. That necessarily involved a separate hearing with separate preparation and the incurring of separate costs on that issue. It is in general a salutary principle that those who lose discrete aspects of complex litigation should pay for the discrete applications or hearings which they lose, and should do so when they lose them rather than leaving the costs to be swept up at trial. Nor do I regard it as particularly helpful to consider what order for costs might have been made in relation to the proper law issue had it been tried as part and parcel of the main trial: that is in any event an impossible inquiry to give a clear answer to, as it would depend on all the circumstances. In some cases a trial judge might think it appropriate to make an issue-based order in relation to an issue such as proper law whereas in others he might think it more appropriate to apply the general rule. But I have not heard this issue as part of the trial; I have heard it as a standalone issue. Mr Hollingworth is right that if at the end of the day it turns out that the Claimant’s claim for breach of contract fails, it will be seen that these costs need not have been incurred. But it can equally be said that the costs would not have been incurred at all if the Defendants had not pleaded that the proper law was New Jersey law.
- Second, Mr Hollingworth says that neither side can be said to have been unrealistic or unreasonable in contending for alternative governing laws. I agree, but this is not by itself any reason not to apply the general rule. An order for costs, at any rate on the standard basis which is all that is sought, is not a penalty for unreasonable behaviour; it is an ordinary and well-understood risk that attaches to losing a hearing, however reasonable the argument might have been. Costs are always in the discretion of the Court but it is helpful to litigants if they are reasonably predictable, and the mere fact that a reasonable argument with realistic prospects is advanced does not justify departing from the usual consequences if the argument fails.
- Third, Mr Hollingworth suggests that much of the work represented work required in any event and of ongoing utility in relation to the ultimate determination of the breach of contract issue. I rather doubt how much of the work done is in fact work that continues to be relevant, as the inquiry into the history from the 1890s through the first world war to 1932 and on to 1943 and 1945 would seem to be likely to be at best of tangential relevance to the issues remaining for trial. But I am not in a position to judge this as the Defendants have not yet pleaded to the Claimant’s German law case and I do not know to what extent there will be an issue of interpretation between the parties or, if there is, the extent to which German law would regard the preceding history as relevant to that question. I accept therefore that there may be some overlap. But I do not regard this as justifying a departure from the general rule. The order sought only relates to the costs of the preliminary issue. If there are costs which have been incurred which would have been incurred anyway it is a matter for assessment, in default of agreement, as to whether those costs can be recovered in whole, in part or not at all. It is not a matter for me.
- Fourth, Mr Hollingworth refers to the fact that the Defendants succeeded on the “issue-within-an-issue” of what may be called compendiously the federal law point. I accept that in some cases the court can take the view that a party that has succeeded overall should not recover all its costs if it has lost on some sub-issues. But there is a limit to which this principle can be taken. I do not regard it as appropriate in this case to drill down below the overall issue of “what is the proper law” to “does the agreement have any connection with New Jersey law or only federal law” ? If that were to be done, the Claimant could equally well say that I largely, although not wholly, accepted its position on the various matters addressed by the experts eg whether the District Court was applying State law in any meaningful sense, or would have applied federal choice-of-law rules. Any issue of any complexity is likely to involve sub-issues and sub-sub-issues on which one side or other has the better of the argument: this is not by itself a reason for departing from the general rule. In any event it is not a good reason for ordering costs in the case.
- Fifth, Mr Hollingworth refers to a number of detailed points leading to a submission that the costs claimed are disproportionately high and disproportionately broad. These are all points that may or may not have some validity (they are all contested in the Reply sent this morning by Mr Brandreth) but they all seem to me to go the quantum of costs that should be allowed on assessment. I do not regard them (even if I were in a position to assess them which I am not) as going to the principle of making an order.
- Mr Hollingworth in the alternative seeks a percentage order. I do not see that any of the points raised justify taking this course either.
- In my judgment therefore this is not a case for departing from the general rule, either by way of ordering costs in the case or by way of a percentage order, and I will order the Defendants to pay the Claimant the costs of the preliminary issue, to be assessed on the standard basis if not agreed.
- There appears to be no issue as to interest on costs and I will order interest on costs as sought in the Claimant’s draft Order.
- The second point on the draft Order is as to the quantum of an interim payment. CPR r 44.2(8) requires the Court to order payment of “a reasonable sum” on account of costs unless there is good reason not to do so. It is not suggested that there is any good reason not to make such an order. The Claimant has served a schedule of costs in the sum of just under £440,000, not including the costs of the post-hearing expert evidence, and seeks an order of 50% of that sum. These are significant sums but the issue was hard fought with extensive historical inquiry and the deployment of legal teams of the highest calibre. The Defendants’ own costs for the hearing come to some £326,000, including very similar amounts for counsel’s fees. I am quite prepared to assume that the various points urged by the Defendants may result in a significant discount to the grand total claimed; but I regard a figure of 50% as a realistic and reasonable sum even allowing for such discount and will order the Defendants to pay £220,000 on account as asked.