COSTS OF £7 MILLION: PART 36 BITES HARD ON CLAIMANTS WHO CLEARED A FIRST HURDLE BUT FELL AT THE SECOND

If anyone ever needed a lesson on the risks of litigation they should read the judgment of Mr Justice Eder in Ted Baker plc -v- Axa Insurances UK Plc [2014] EWHC 4178 (Comm).

THE CASE

There had been a preliminary trial on liability (part 1) in which the claimants succeeded in establishing a potential liability. There was a second trial on damages (part 2) at which the judge concluded.

  1. For one or more of the reasons stated above, it is my conclusion that the claim advanced by the claimants in these proceedings must be rejected in their entirety; and the counterclaim falls away.

The defendants had made a Part 36 offer of £250,000 very early in the proceedings. This was, of course, £250,000 more than the claimants, in fact received.

THE KEY POINTS

1. If a claimant fails to beat a Part 36 offer there is a presumption that the claimant will be paying the costs in relation to the action in accordance with Part 36.

2. That presumption can be varied if a claimant has succeeded on a preliminary or discrete issue. However the Part 36 provisions still have a major impact on the case.

3. The claimant was ordered to pay the defendant 25% of the costs of the trial (in which the claimant succeeded) and all of the costs thereafter.

4. It may well be slightly barking mad to run up costs of £7 million in a case worth £904,000 (the judge didn’t actually say that but I have inferred it).

THE COSTS INVOLVED

  1. In paragraph 32 of that last Judgment, I noted that the costs in the case had spiralled both in absolute terms and out of all proportion to the amount which was then in dispute. As there stated, although the claim had reduced, until at least shortly before the trial of Part 2, to some £904,000, I was told that up to 16 June 2014 excluding the costs of the appeal and ignoring the costs of that trial, after that date, the claimants’ costs were some £2.53m and the defendants’ costs some £1.8m. On that basis, I said that together with the costs of that trial, I would guess that the total combined costs bill will probably exceed £5m. I was wrong. In fact, it now appears that that figure is an under-estimate. I have now been informed that together with VAT the total combined costs bill in these proceedings excluding the costs of the appeal exceed £6m and are probably nearer to £7m. As I stated in paragraph 32 of my third Judgment, I regard this as an appalling state of affairs which brings no credit to modern commercial litigation.

THE ARGUMENTS AS TO COSTS

  1. As to the issues which now arise with regard to costs, the parties are (as ever) far apart. On behalf of the defendants, Mr Nicholson QC submitted that the claimants should pay the defendants’ costs of the proceedings in particular because:

i) The defendants are the successful parties in the proceedings. The claimants’ claims have been dismissed; and the claimants have not succeeded on any part of their case to any useful effect.

ii) Moreover (as described below), the defendants made reasonable offers of settlement under CPR Part 36 and/or CPR 44.2(4)(c) at an early stage of the proceedings and before the preliminary issues trial; and the claimants have failed to obtain a judgment more advantageous than any of those issues.

  1. Further, Mr Nicholson submitted that the costs of the proceedings have been substantially larger than they should have been because of what he submitted was the claimants’ unreasonable conduct and that this should be reflected in an order for costs on the indemnity basis in respect of (i) the co-insurance issues; and (ii) disclosure of documents and information which was the subject matter of previous applications. Finally, Mr Nicholson submitted that the claimants should also pay, in accordance with the CPR (i) interest on the defendants’ costs of the proceedings incurred after 29 July 2010 (21 days after the date of the defendants’ first Part 36 Offer on 8 July 2010); and (ii) a reasonable sum on account of the defendants’ costs in the sum of £1.5m (representing approximately 50% of the defendants’ total costs including VAT).
  2. In large part, the orders sought by the defendants are disputed by the claimants. In particular, Mr Cogley QC on behalf of the claimants submitted that the claimants should be entitled to the costs of Part 1 because they were the “successful party” in respect of such “event”; and that there should be a substantial percentage reduction of the defendants’ costs in relation to Part 2. Certain of the other matters are also disputed as referred to below.
  3. So far as material, the relevant CPR provisions (Part 36.14) are as follows:

(1) … this rule applies where upon judgment being entered –

(a) a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer; …

(1A) For the purposes of paragraph (1), in relation to any money claim or money element of a claim, “more advantageous” means better in money terms by any amount, however small, and “at least as advantageous” shall be construed accordingly.

(2) … where rule 36.14(1)(a) applies, the court will, unless it considers it unjust to do so, order that the defendant is entitled to –

(a) costs from the date on which the relevant period expired; and

(b) interest on those costs.

(4) In considering whether it would be unjust to make the orders referred to in paragraphs (2) … above, the court will take into account all the circumstances of the case including –

(a) the terms of any Part 36 offer;

(b) the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;

(c) the information available to the parties at the time when the Part 36 offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

(5) Where the court awards interest under this rule and also awards interest on the same sum and for the same period under any other power, the total rate of interest may not exceed 10% above base rate(GL). …

Under Part 44 Rule 2:

(1) The court has discretion as to –

(a) whether costs are payable by one party to another;

(b) the amount of those costs;

(2) If the court decides to make an order about costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b) the court may make a different order.

(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including –

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and

(c) any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply.

(5) The conduct of the parties includes –

(a) conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction – Pre-Action Conduct or any relevant pre-action protocol;

(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c) the manner in which a party has pursued or defended its case or a particular allegation or issue;

(8) Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so.

Under Part 44 Rule 3:

(1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess those costs –

(a) on the standard basis; or

(b) on the indemnity basis,

but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount.”

10.As referred to above, the defendants made various offers of settlement in the course of the proceedings. In particular, on 8 July 2010, the defendants made an offer under CPR 36 in the sum of £50,000 (the “first offer”). This carried with it an offer to pay the claimants’ costs to which the claimants would have been entitled under CPR 36.10(1) if they had accepted it. This offer was made at an early stage of the action: less than five months after commencement of the action on 23 February 2010 and some 8 months before the order for preliminary issues made on 18 March 2011. Mr Nicholson submitted that this provided the defendants with protection against the whole of the costs of the preliminary issues i.e. Part 1.

  1. On 7 October 2011, the defendants made a further offer under CPR 44 in the sum of £250,000 plus the claimants’ costs (the “second offer”). This offer was expressed to be open for 7 days but, at the claimants’ request, was subsequently extended by a further 14 days and was thus open for a total of 21 days.
  2. On 28 December 2011, the defendants made a further offer under CPR 36 in the sum of £250,000 (the “third offer”). This last offer carried an offer to pay the claimants’ costs in the same way as the first offer. (I should mention that a separate settlement was reached on 3 February 2012 between the claimants and another of the original insurers, NIG (whom the claimants never joined to the proceedings) involving payment by NIG to the claimants of £50,000 in respect of all claims for damages, interest and costs. However, I do not consider that this affects any of the issues which now arise for consideration.)
  3. Although the claimants succeeded in relation to the preliminary issues which were the subject of Part 1, there is no doubt that the result of Part 2 is that the claimants ultimately failed to obtain a money judgment more advantageous than any of the defendants’ settlement offers referred to above. As submitted by Mr Nicholson, the claimants’ success on Part 1 resulted in no ultimate financial benefit to the claimants at all i.e. they have received not a penny from this litigation; and, indeed, there can be little doubt that the financial outcome of these proceedings would have been enormously better for the claimants if they had accepted any of these offers – having regard to not only the settlement amounts that they would have received, but also management time, their own legal costs and disbursements and their (potential) liability for the defendants’ legal costs and disbursements. On this basis, Mr Nicholson submitted that the claimants’ failure to obtain a judgment more advantageous than the defendants’ Part 36 offers means that, pursuant to CPR 36.14(2)(a), the Court should order the costs of the proceedings in favour of the defendants from 29 July 2010 (the date of expiry of the relevant period of the first offer); that there are no grounds on which that order could be considered unjust; and that it was, in effect, unnecessary to consider the factors which would otherwise need to be taken into account under CPR Part 44.2. Indeed, I understood Mr Nicholson to submit that given the offers that had been made (in particular, the first offer), the position under CPR 36 was “in practical terms, conclusive“.
  4. Mr Cogley QC disputed this analysis. In particular, he submitted (at least initially as set out in his skeleton argument) that the correct approach is still, even where Part 36 applies, to firstly identify the issues on which the offeror lost. In that connection, he relied on two authorities viz Sycamore Bidco Limited v Sven Breslin & Andrew Deacon [2013] EWHC 583 (Ch) and AW Group Ltd v Taylor Walton [2013] EWHC 2610 referring to the White Book note at CPR 36.14.2 to the effect that “his costs” means costs he would have been awarded under CPR Part 44.2. Thus, Mr Cogley submitted that the Part 36 offer regime and consequences do not apply to those issues. I accept that that submission derives support in particular from certain passages in the (extempore) judgment of HH Judge Hodge QC in the latter case. I also recognise that given (i) the breadth of the wording of CPR 36(4) (which provides that in considering whether it would be unjust to make the orders referred to, in particular, in paragraph (2), the court will take into account “… all the circumstances of the case …” including the matters expressly specified there) and (ii) similar introductory wording in CPR 44.2(4) (which provides that in deciding what order to make about costs, the court “will have regard to all the circumstances …” including the matters expressly specified there), there is an argument to the effect that reference to “all the circumstances” in the former should, simply as a matter of language, be read as including all the matters expressly specified in the latter.
  5. However, in my view, such submission fails to have proper regard to the overall scheme of Part 36.14 and, in particular, to the requirement in effect that where a claimant fails to beat a defendant’s Part 36 offer, the Court will make the order there specified “unless it considers it unjust to do so. In this context, I would respectfully agree with and adopt the observations of Briggs J in Smith v Trafford Housing Trust [2012] EWHC 3320 at [13]:

a) The question is not whether it was reasonable for the claimant to refuse the offer. Rather, the question is whether, having regard to all the circumstances and looking at the matter as it affects both parties, an order that the claimant should pay the costs would be unjust: see Matthews v Metal Improvements Co. Inc [2007] EWCA Civ 215, per Stanley Burnton J (sitting as an additional judge of the Court of Appeal) at paragraph 32.

b) Each case will turn on its own circumstances, but the court should be trying to assess “who in reality is the unsuccessful party and who has been responsible for the fact that costs have been incurred which should not have been.”: see Factortame v Secretary of State [2002] EWCA Civ 22 , per Walker LJ at paragraph 27.

c) The court is not constrained by the list of potentially relevant factors in Part 36.14(4) to have regard only to the circumstances of the making of the offer or the provision or otherwise of relevant information in relation to it. There is no limit to the types of circumstances which may, in a particular case make it unjust that the ordinary consequences set out in Part 36.14 should follow: see Lilleyman v Lilleyman (judgment on costs) [2012] EWHC 1056 (Ch) at paragraph 16.

d) Nonetheless, the court does not have an unfettered discretion to depart from the ordinary cost consequences set out in Part 36.14. The burden on a claimant who has failed to beat the defendant’s Part 36 offer to show injustice is a formidable obstacle to the obtaining of a different costs order. If that were not so, then the salutary purpose of Part 36 in promoting compromise and the avoidance of unnecessary expenditure of costs and court time, would be undermined.

  1. Thus, where a claimant fails to beat a defendant’s Part 36 offer, the Court is, in effect, required to make the order specified with regard to costs and interest unless it considers it unjust to do so; and although there is no limit to the types of circumstances which may, in a particular case, make it unjust that the ordinary consequences set out in Part 36.14 should follow, the burden of showing such injustice is a “formidable obstacle”.
  2. It follows that the real question, in my view, is whether the claimants can show any relevant “injustice” so as to displace the general rule, bearing fully in mind that the burden of doing so is a “formidable obstacle”. In this context and without seeking to lay down any hard and fast rules, it seems to me that where a claimant fails to “beat” a Part 36 offer made by a defendant, the mere fact that such defendant may fail on certain issues would not necessarily of itself make it “unjust” to displace the general rule under Part 36 and to require the claimant to pay the costs from the date on which the relevant period expired and interest on such costs under Part 36.14(2). However, on the other hand and, as submitted by Mr Cogley, it seems to me that the fact that a defendant may make a Part 36 offer does not give such defendant carte blanche to run any defence whatsoever so as to entitle such defendant necessarily to expect that the CPR Part 36 consequences will automatically to apply to those issues on which such defendant lost.
  3. Bearing these observations in mind and having regard to the particular circumstances of the present case, it seems to me that the mere fact that the defendants lost on the main issues which were the subject of Part 1 and on certain of the issues which were the subject of Part 2 would not necessarily render it unjust to disapply the general rule in Part 36.14.
  4. However, certainly in the context of Part 1, it does seem to me that it would, indeed, be unjust within the meaning of Part 36 to require the claimants to pay the entirety of the costs of Part 1. I reach this conclusion because, in my view, the central issue in Part 1 concerned the proper construction of the successive insurance policies which could and, in my strong view, should have been dealt with during a short trial of perhaps 1-2 days. Instead, the defendants pursued an approach which, as submitted by Mr Cogley, left “no stone unturned” and seemed to ignore all sense of proportionality. In particular, the defendants sought to raise a wide range of issues which went far beyond the question of construction – in particular, matters of what was said to be admissible as part of the “factual matrix”, alleged evidence of “market practice” and discrete allegations of estoppel, rectification and non-disclosure. As a result, the trial took an inordinate 7 days (instead of 1-2 days) with some 16 factual witnesses and 2 expert witnesses although, as appears from the first Judgment, it was my conclusion that much of this evidence was, in truth, inadmissible on the question of construction; and that, as I stated, the defences of estoppel and rectification both failed in limine.
  5. It is for these reasons that I consider that it would be unjust to order the claimants to pay the entirety of the costs of Part 1 notwithstanding the offers (in particular, the first offer) made by the defendants. In my view, the just course is to reduce the amount of the costs to which the defendants are entitled by a substantial amount to reflect the very exceptional circumstances which I have described. Whilst recognising that any assessment of such reduction involves an exercise which is necessarily imprecise and somewhat broad-brush, the conclusion which I have reached is that the defendants should be entitled to 25% of their costs of Part 1 (including the hearing which led to my second Judgment) assessed on a standard basis together with interest on such costs from 29 July 2010.
  6. As to the further costs incurred following my second Judgment in respect of Part 2, it is right that the claimants won on certain issues. On this basis, Mr Cogley submitted that the Court should adopt an issue based approach to these costs. In particular, he submitted that the defendants won on the condition precedent point on a basis which was not argued by them; that the defendants lost on the “MUD” clause; and that the expert evidence on quantum could only be described as a “score draw”. In relation to other areas of expertise, Mr Cogley further submitted that the evidence of the defendants’ expert loss adjuster, with the exception of the reasonableness of item 7 (with which the claimants’ expert agreed) was rejected; that the claimants’ expert evidence on stock control was accepted wholesale without that witness having to be called; and that Mr Emery’s stock control evidence, insofar as not accepted as being demonstrably wrong in the joint statement of stock control experts fed into the score draw of quantum evidence. On this basis, Mr Cogley submitted that the appropriate order should be that the claimants should pay only a proportion of the defendants’ costs. As to the quantum experts (i.e. Mrs Britten, Mrs Rawlins and Mr Emery), Mr Cogley submitted that those costs should lie where they fall. This would, submitted Mr Cogley, be a proper reflection of the Court’s findings not only as to the utility of the expert evidence but also as to the “swamp” which that evidence became as a result of the conduct of the defendants’ experts.
  7. As to these submissions, it is right to say, as I have already noted, that the claimants succeeded on at least some of the issues in relation to Part 2; and I readily accept that in the context of the exercise of the Court’s discretion under CPR Part 44.2 an issue based approach is often appropriate – although as appears from the notes in CPR 44.2.7, this is not necessarily so even under CPR Part 44.2. However, the fact is the claimants lost on the three main issues in Part 2 viz (i) the claims co-operation clause (albeit on a limited basis); (ii) the excess; and (iii) the overall presentation of the quantum, all of which necessitated both factual and expert evidence. In my judgment, the fact that the claimants won on certain issues does not of itself make it “just” to displace the general rule under CPR Part 36 in the circumstances of the present case bearing in mind, in particular, that (i) in order to recover a monetary judgment in their favour, the claimants had to succeed on each of the three issues just stated – which they failed to do for the reasons set out in my third main Judgment; and (ii) the evidence in relation to the issues on which the claimants won overlapped to a considerable degree with the issues on which they lost.
  8. For the avoidance of doubt, I should mention that I have considered whether it would be just to make some deduction by reason of what Mr Cogley submitted was the unreasonable conduct of the defendants in relation to Part 2. However, it seems to me that much criticism can be levied at both sides in this case and, in the event, I remain unpersuaded that it would be just to make any deduction. It is, of course, a matter of huge regret that the parties have incurred such large costs; but the simple truth is that these were all avoidable and could and would have been avoided if the claimants had accepted the defendants’ first offer. That is the bottom line. As stated by Briggs J in Smith v Trafford Housing Trust in the passage quoted above, the salutary purpose of Part 36 is to promote compromise and the avoidance of unnecessary expenditure of costs and court time. In my judgment and unlike the position in respect of Part 1, the claimants have (in the context of Part 2) failed to overcome the “formidable obstacle” to displace the general rule which lies at the centre of the Part 36 regime; and for this Court to make any order otherwise than in accordance with such general rule would, in my view, fail to have proper regard to the offers made by the defendants (in particular, the first offer) and, indeed, undermine, such regime.
  9. For these reasons, it is my conclusion that the defendants are entitled to an order in their favour with regard to all their costs following my second Judgment in respect of Part 2 to be assessed on a standard basis and interest on such costs.
  10. As a discrete matter, Mr Nicholson submitted that there had been specific unreasonable conduct on the part of the claimants which had very substantially increased the costs on both sides. In support of such submission, Mr Nicolson relied, in particular, on the matters set out in some detail in the witness statements of his instructing solicitor, Mrs Macgregor of 14 and 18 November 2014. On this basis, Mr Nicholson further submitted that this should be recognised by an order for some of the costs payable to the defendants to be assessed on the indemnity basis viz (i) the costs in respect of the co-insurance issues (as referred to in the Order of the Court made on 29 June 2012; and (ii) the costs in respect of the four applications for disclosure and certain related matters as referred to in a draft order provided by Mr Nicholson.
  11. As to these matters, Mr Cogley accepted that there should be an order for costs on the indemnity basis in respect of the co-insurance issues. As to the other matters, these were addressed in the witness statement of Ms Evans dated 18 November 2014 and also in some detail in Mr Cogley’s skeleton argument. I do not consider that it is necessary to analyse these matters in detail. For present purposes, it is, I believe, sufficient to express my overall conclusion viz that although I accept certain of the criticisms advanced by Mrs Macgregor, I am not persuaded that it would be just or appropriate to make any special order as to costs.
  12. In addition, it is my conclusion that the claimants should make an interim payment on account of the defendants’ costs in the sum of £1m to be paid by 5pm on 15 January 2015.

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