There are now several posts on this blog considering the importance of an award for costs on an indemnity basis and cases where judges have considered this issue. Another example can be found in the decision of Stephen Jourdan QC (sitting as a High Court judge) in Richmond Pharmacology Limited -v- Chester Overseas Limited  EWHC 3418 (Ch). The judgment contains a succinct summary of the applicable principles in relation to indemnity costs in addition to a practical consideration of when, and how, these should be applied.
The judge had earlier given judgment for the defendant and ordered that the claimant pay the defendants’ costs. The defendants then made an application that the claimant pay the costs on the indemnity basis.
- The conduct of a case on an unreasonable or untenable basis can lead to an award of indemnity costs.
- In this case the claimant should have realised that the case was untenable after disclosure had been given and indemnity costs were awarded on an indemnity basis from the time that the claimant should have appreciation the tenuous nature of the case.
- Joinder of a party for costs; indemnity costs and comments on costs outside the budget
- Costs at the end of the case: the judge can make observations about matters outside the costs budget
- When will indemnity costs be ordered? A High Court decision considered?
- No general principles apply to award of indemnity costs: Court of Appeal decision.
- Indemnity costs against funders: who pays what for when?
- No indemnity costs: Gorgeous Beauty 2
- Indemnity costs, costs budgeting and witness statements
- The risk of indemnity costs: what are you going to tell your client?
- Costs budgeting, indemnity costs and payment on account.
- Anatomy of a post-Denton applciation for relief from sanctions: costs, indemnity costs and everybody is at risk as to costs.
THE JUDGMENT ON COSTS
“The applicable principles
- There are two differences between assessment of costs on the standard and on the indemnity basis in a case such as this, commenced before 1 April 2013:
(a) On the standard basis, the court will only allow costs which are proportionate to the matters in issue. On the indemnity basis, there is no such restriction, and so costs may be allowed even though they were disproportionate to the matters in issue.
(b) On the standard basis, the court will resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party. On the indemnity basis, any doubts which the court may have as to whether costs were reasonably incurred or were reasonable in amount will be resolved in favour of the receiving party.
- The Civil Procedure Rules themselves do not contain any guidance as to the basis on which the Court should direct assessment. However, there are many cases in which the Courts have considered that issue. I was referred to the principles set out in the judgment of Tomlinson J in Three Rivers District Council v Bank of England  5 Costs LR 714 at 731, and in the judgment of Sir Anthony Colman in National Westminster Bank Plc v Rabobank Nederland  3 CLR 396 at . I have also considered the subsequent summaries of the applicable principles by Morgan J inDigicel (St Lucia) Ltd v Cable & Wireless plc  EWHC 888 (Ch),  5 Costs L.R. 709, Gloster J in Euroption Strategic Fund Limited v Skandinaviska Enskilda Banken AB  EWHC 749 (Comm) at -, and Coulson J in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd  EWHC 1643 (TCC) at  as amplified by Akenhead J in Courtwell Properties Ltd v Greencore PF (UK) Ltd EWHC 184 (TCC),  2 Costs L.O. 289 at -.
- I consider that the applicable principles, in a case where indemnity costs are claimed on the ground that the paying party’s conduct was unreasonable, so far as relevant to this claim, are as follows:
(a) As the very word ‘standard’ implies, the standard basis will be the normal basis of assessment where the circumstances do not justify an award on an indemnity basis. For there to be an order for assessment on the indemnity basis, there must be some conduct or some circumstance which takes the case out of the norm. That is the critical requirement.
(b) Dishonesty or moral blame does not have to be established to justify indemnity costs. But indemnity costs are appropriate only where the conduct of the paying party was unreasonable to a high degree. “Unreasonable” in this context does not mean merely wrong or misguided in hindsight.
(c) The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it out of the norm in a way which justifies an order for indemnity costs.
(d) The discretion to award indemnity costs is a wide one and must be exercised taking into account all the circumstances and considering the matters complained of in the context of the overall litigation. Cases vary very considerably and each case is highly fact-dependent.
(e) It is important not to lose sight of the essential requirement of unreasonable or inappropriate conduct overall and not to treat examples of such which may amount to such conduct as necessarily constituting it. The essential question is whether the relevant conduct makes it just as between the parties to remove from the paying party the twofold benefit of an order on the standard basis, as compared with an order on the indemnity basis, that is to say, to enable the receiving party to recover its costs, reasonably incurred and reasonable in amount, with the benefit of the doubt being given to the receiving party and without the receiving party having to address (and persuade the court upon) the subject of proportionality.
(f) The pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, provided that the claim was at least arguable. However, the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may lead to such an order. InWates Construction Ltd v HGPGreentree Alchurch Evans Ltd  BLR 45 at  HHJ Coulson QC said: “I consider that to maintain a claim that you know, or ought to know, is doomed to fail on the facts and on the law, is conduct that is so unreasonable as to justify an order for indemnity costs.”
(g) If a claimant casts its claim disproportionately wide, and requires the defendant to meet such a claim, there may be no injustice in denying the claimant the benefit of an assessment on a proportionate basis or in the claimant forfeiting its normal right to the benefit of the doubt on reasonableness.
(h) The making of a grossly exaggerated claim may be a ground for indemnity costs.
(i) The rejection of reasonable attempts to settle will not normally, by itself, justify an award of indemnity costs. In Kiam v MGN Ltd (No. 2)  EWCA Civ 66,  1 WLR 2810 at , Simon Brown LJ said: “… it will be a rare case indeed where the refusal of a settlement offer will attract under Part 44 not merely an adverse order for costs, but an order on an indemnity rather than standard basis.” However, if coupled with other factors, it may do so: for an example see Barr v Biffa Waste Services Ltd (Costs)  EWHC 1107 (TCC); 137 Con. L.R. 268 (Coulson J).
- Mr Doctor argued that there is no requirement that the conduct of the paying party was unreasonable to a high degree; all that is necessary is that the conduct is enough to take the case out of the norm. I do not think that is right. I think it is clear from the authorities referred to above that, for the paying party’s conduct to be unreasonable enough to take the case out of the norm, it must be unreasonable to a high degree. I think that the reason for that is that there needs to very strong grounds for depriving the paying party of the twofold benefits of an assessment on the standard basis. Proportionality is an important safeguard; as Lewison J said in Easyair Ltd (t/a Openair) v Opal Telecom Ltd  EWHC 779 (Ch)  6 Costs L.R. 882 at , in refusing to order indemnity costs: “… the requirement of proportionality is a useful brake on the escalation of costs.” The direction that doubts as to reasonableness should be resolved in the paying party’s favour which applies where costs are assessed on the standard basis is inherently fair, as the receiving party is going to be much better placed than the paying party to enable the court to resolve such doubts.
The grounds on which the Defendants seek indemnity costs
- The Defendants contend that this claim had the requisite significant level of unreasonableness, for essentially three reasons.
- First, it was bound to fail. Mr Doctor argued that, on the major factual issues of importance, Richmond’s case was not merely weak, but simply unsustainable even on its own evidence.
- Second, it was pursued irrespective of the facts and what the Defendants said or did. When the allegations of loss caused by disclosure of confidential information were first made, the Defendants explained what had happened. Richmond did not accept the explanation, and simply pursued the claim to trial without any reasonable foundation. They pursued the claim despite disclosure which showed that the Defendants’ account of what had happened was accurate, and despite the making of a reasonable offer of settlement.
- Third, it was pursued in an unreasonable way. Four specific examples of unreasonableness were relied on by Mr Doctor:
(a) The Defendants wished to serve an Amended Defence and first sent it to Richmond on 29 August 2013. The Defendants had to chase for a response five times before finally getting agreement to the amendment.
(b) Richmond failed to review the disclosure documents requiring the Defendants to answer queries that could have been answered by reading the documents themselves.
(c) Richmond forced the Defendants to issue two applications to obtain copies of documents that should have been disclosed and were referred to in Richmond’s expert report and witness statements. To avoid a costs only hearing, the parties agreed that the costs of these two applications would be costs in the case.
(d) The Defendants’ solicitors had to manage the whole trial bundle process with limited input from EMW and were only reimbursed for a small proportion of the copying costs and EMW sent through a further bundle update containing a one-sided run of correspondence from the unfair prejudice proceedings requiring BLP to work late to insert the corresponding letters. None of these documents were referred to by Richmond at trial.
- I am satisfied that none of those four matters, individually or collectively, are sufficiently out of the norm to justify ordering indemnity costs. However, the contentions that the claim was bound to fail, and that it was pursued irrespective of the facts and of what the Defendants said or did, require more careful consideration. I think the best way of assessing the force of those contentions is by reviewing the relevant aspects of the history of this dispute chronologically, although I will do so as briefly as possible.
- As explained in my main judgment, in the course of the s.994 proceedings, in about November 2011, Chester disclosed some documents relating to the marketing process. The Founders regarded this as evidence that Chester had disclosed confidential information about Richmond to the market, thus causing damage to Richmond. They sought disclosure of documents in the s.994 proceedings, but this was successfully resisted. In support of its opposition to such disclosure, Chester served a witness statement made by its then solicitor , Jeremy Hershkorn, dated 23 January 2012, summarising what the sales process had consisted of. The Founders did not accept the accuracy of what was said in that statement. In fact, apart from some matters of detail, Mr Hershkorn’s summary was accurate and accorded with the findings in my main judgment.
- On 8 February 2012, Larry Levine sent an email to the Founders seeing to resolve the dispute. He said, among other things, that neither he nor Milton Levine could remember seeing a customer list or customer database, and no such document or list was ever included in reports which they saw.
- On 10 February 2012, Dr Lorch replied saying: “… if your approach is genuine, we would expect you to agree to our request for completion of standard and specific disclosure”. She pointed out that Larry Levine had, in fact, received updated client lists during each board meeting he chaired, and that in November 2009 he had requested Mark Vaughan to provide him with a study analysis by customers for 3 years.
- On 14 February 2012, Larry Levine replied, accepting he was wrong to have said he did not have a list of customers. He refused to make disclosure. He said: “… we are not obliged to provide you with copies of our documents on this subject before you have commenced proceedings against us, and we will not do so. Your attempt to argue that we must be hiding something, or that our legal representatives have gone out of their way to prevent you from receiving documents to which you are not entitled, is just nonsense. But if you genuinely believe it, you should get on with it. We will defend any such claim vigorously”.
- There would not have been any difficulty in Chester disclosing its own documents relating to the marketing process and authorising NWCF to make disclosure to Richmond of all documents relating to the marketing process, subject to Richmond agreeing to pay the costs of that disclosure exercise. I put this point to Mr Doctor, and accepted that was the case, but said that making disclosure would have made no difference, as is proved by the fact that, when full disclosure was made, the claim was nonetheless pursued. He said the Levines were familiar with the Founders and took the view that nothing would make any difference and that making disclosure would just encourage them to bring a claim. That may be so, but I think the relevant question is whether Richmond acted wholly unreasonably in commencing this claim in November 2012, having regard to the explanation given to Richmond in Mr Hershkorn’s statement as to the extent of the information provided to prospective purchasers during the marketing exercise, and Chester’s refusal to make disclosure.
- I asked Mr Deacon to explain the basis on which it was reasonable to commence this claim, despite that explanation. He said that the Founders believed that the very substantial fall in turnover experienced by Richmond must have been due to disclosure by the Defendants of confidential information far in excess of that described in Mr Hershkorn’s statement. They believed that the Defendants had given the impression to the market that the whole of Richmond was for sale and that once a rumour of that kind gets out it is very damaging. There was an example of Larry Levine making a statement in an email which the Founders could see was not true – he had claimed that he and Milton had never seen a customer list, but Larry Levine himself had asked for a customer list during the marketing process, and this meant that the Founders were justified in not simply accepting what Mr Hershkorn had said in his statement as accurate.
- In my view, there is enough in the points made by Mr Deacon to satisfy me that it was not wholly unreasonable for the Founders to refuse to accept Mr Hershkorn’s statement, based as it was on what he had been told by Larry Levine, as reliable in the absence of disclosure. I think that the Founders could reasonably have held the belief that there might well have been more information disclosed than stated by Mr Hershkorn and that the disclosure of that information might have contributed to the fall in turnover experienced by Richmond from mid-2010. I do not think that it would have been reasonable for them to believe that the whole of that fall was attributable to any such disclosure. As explained in my main judgment, there were many reasons which are recorded in Richmond’s own documents why the turnover fell which had nothing to do with the disclosure of confidential information by the Defendants. I do not think any reasonable person in the Founders’ position could have believed that the whole of the fall in turnover was due to the marketing exercise.
- The claim form was issued on 21 November 2012, and on the same date, Richmond served notice of funding, stating that the claim was being funded by a conditional fee agreement dated 9 February 2012, which provided for a success fee, and an insurance policy issued on 16 November 2012, providing cover of £600,000. No information about the premium was given, although it was stated that a discount of 55% was applicable if the case settled at any point up to mediation and a discount of 15% if the case settled thereafter but up to 7 days prior to the date listed for trial.
- I asked Mr Doctor whether it was relevant that an insurance company had been willing to insure against the risk of an adverse costs order – did not that afford some indication that the claim was not an obviously hopeless one? Mr Doctor said we knew nothing about the assessment made by the insurer or its business model and it would be wrong to make any inference that the insurer had considered the claim to be one with a real prospect of success. Those points seemed to me to have considerable force, and Mr Deacon did not invite me to place any reliance on the fact that an insurer had been willing to underwrite Richmond’s liability for costs. I have, therefore, given no weight to that fact.
- The original Particulars of Claim were served on 30 November 2012. The claim was pleaded very broadly indeed. It alleged that NWCF: “… with the authority of, and on behalf of the Defendants, and in full knowledge of the likely consequences, is believed to have approached 72 target buyers which included all current and major customers of the Claimant, its competitors and potential customers, whose names the Second and Third Defendants had obtained in their role as directors of the Claimant and passed on to NWCF” and “communicated highly confidential information, including the Claimant’s business plan and financial information … to the target buyers which included the Claimant’s competitors, customers and potential clients”. It said: “The extent of the Defendants’ breach will become apparent on disclosure”. It estimated the loss to Richmond as being a reduction in gross margin of £3,911,180, essentially treating the whole of the reduction in turnover experienced by Richmond in 2010-2012 as attributable to the alleged communication of highly confidential information.
- I think that the lack of particularisation of the extent to which information had been disclosed was inevitable, given the lack of disclosure. Although the estimate of the loss suffered was, in my view, substantially in excess of what a reasonable person would have considered realistic, overall I do not think that the commencement of the claim and the way it was pleaded was sufficiently unreasonable to deprive Richmond of the benefits of an assessment on the standard basis. In the absence of disclosure, it was inevitable that the claim would have to be broadly pleaded. The estimate of loss was higher than was reasonable, but I do not think it was unreasonable to a high degree to make such an estimate at that stage of the proceedings.
- On 28 March 2013, the Particulars of Claim were amended and further information was served. A new allegation was added, that the Defendants had approached target buyers with a brief sales document headed “Project Green” which said: “The executive management team, who are the founders, own 56% of the equity with the remaining 44% owned by an external investor. The highly experienced founders wish to continue to run the business” and alleged that this had the effect of “… wrongly implying that the founders had been forced to sell the whole company thereby seriously damaging the market’s perception of the Claimant”. I think that a reasonable person would have appreciated that it was improbable that such an implication could be extracted from that document, but I do not think it was unarguable.
- On 25 June 2013, the Defendants made a part 36 offer to settle the claim for £25,000. If that offer had been accepted, Richmond would, of course, have been entitled to its costs. It was not accepted. The offer was a modest one, and in the circumstances at the time, when disclosure had not taken place, and bearing in mind the principle summarised in paragraph 4(i) above, I do not think that Richmond’s failure to accept the offer at the time it was made is sufficient to justify an award of indemnity costs.
- Disclosure took place on 11 October 2013 and inspection 7 days thereafter. Following disclosure and inspection, Richmond raised numerous queries about the disclosure, which BLP answered.
- On 9 December 2013, just under two months after disclosure had been made, the Defendants sent a letter withdrawing the part 36 offer. The letter did not explain why this was done. Mr Doctor submitted it was because, if it was accepted, the Defendants ran a real risk that they would be liable for Richmond’s insurance premium, which is unknown but could be a significant proportion of the £600,000 cover. I do not think that for present purposes it matters why the offer was withdrawn. The fact is that it was open for acceptance for some time after disclosure was made, and it was always open to Richmond to make its own offer. In fact, on 26 June 2014, about a fortnight before the trial began, Richmond offered to settle the claim for £1 million plus costs.
- Mr Marsden’s report is dated 21 February 2014, and I infer was served shortly thereafter. Mr Marsden’s report was prepared on the basis of assumptions that he was instructed to adopt that the disclosure alleged in the Amended Particulars of Claim did occur, and that, but for that disclosure, the number of contracts and the average value of contracts would have remained the same as before that disclosure. Mr Marsden was not asked to investigate those matters or to express an opinion on them. His calculations did allow for a general reduction in the market in which Richmond operates, but did not allow in any way for any of the other factors which are referred to in Richmond’s own documents as explanations for the fall in turnover – see my main judgment at -. I make no criticism of Mr Marsden for following the instructions he was given, but I do regard those instructions as inevitably giving rise to an estimate of loss that was grossly exaggerated.
- The case put by Richmond at trial was, in the end, very much narrower than the pleaded case. I have explained in my main judgment how Richmond’s case was put. There was no allegation that the entries in the control schedule had been falsely created or altered in any respect. Dr Taubel, in his witness statement at [76-77] made it clear that he considered that the Defendants had not made full disclosure and was convinced that Hammersmith Medicines Research, a major competitor of Richmond’s, had been given confidential information about Richmond. However, no such case was put to the Defendants’ witnesses. This is not surprising, as there was no foundation for Dr Taubel’s belief on this subject.
- In my view, once disclosure had been made and inspection had taken place, it should have been clear to Richmond that this claim was unlikely to succeed, and that if it did succeed, the damages that would be recoverable would probably be modest. I think that it would have been clear to any reasonable person from the disclosed documents that care had been taken by the Levines to limit closely the amount of information given to prospective purchasers, and that it was very unlikely that the disclosure of the information which it was apparent had been disclosed had caused any loss. I think that any reasonable person who had considered the disclosed documents would have appreciated that the best that Richmond could realistically hope to do was to prove that some additional information had been communicated orally by Mr Altman or Larry Levine and that the communication of that information might have made some modest contribution to the fall in turnover. I do not think that the claim that some loss had been caused by the Defendants’ breaches of duty was unarguable, but I do think that, after disclosure, any reasonable person in the Founders’ position would have appreciated that the way the claim was put in the Amended Particulars of Claim, both as to the extent of the breaches, and the loss caused by them, was grossly exaggerated.
- In my judgment, after disclosure and inspection, and a reasonable period to review the disclosed documents, to continue with the claim in the way that Richmond did, with no narrowing of the scope of the claim, and with Mr Marsden’s report prepared on the basis that the whole of the reduction in turnover was attributable to the breaches committed by the Defendants, was unreasonable to a high degree. The Particulars of Claim said: “The extent of the Defendants’ breach will become apparent on disclosure.” That was an accurate forecast, but no attempt was made to narrow the claim once disclosure had been made. On the contrary, Mr Marsden was instructed on the basis that the pleaded allegations would be proved.
- Persisting after disclosure and inspection with the very widely pleaded allegations, and then serving an expert’s report which put the lost profits at £4,293,225, was a wholly disproportionate way of proceeding with the claim. It was likely to cause the Defendants to leave no stone unturned in seeking to defend themselves. In my view, it was sufficiently out of the norm to justify depriving Richmond of the twofold benefits of an assessment on the standard basis, in respect of the period beginning on 1 December 2013.
- It is not as if the only option for Richmond was to press on with the claim or to discontinue it. The part 36 offer showed that was scope to settle the claim in return for a modest payment of damages and costs. Mr Deacon emphasised that the offer had been withdrawn 2 months after disclosure and said things might have been different if it had been left open. However, it could have been accepted up to the time it was withdrawn and thereafter it was open to Richmond to make its own offer along similar lines.
- Mr Deacon said it was right to take into account the fact that Richmond did win on some of the issues. That is true, and I do take that into account. For the reasons I gave in my extempore judgment on 1 August 2014, I consider that the issues on which the Defendants lost did not cause any discrete costs to be incurred, which is why I ordered Richmond to pay all the Defendants’ costs. That being so, it does not seem to me to be a factor of great weight that the Defendants lost on the issue of liability and on a number of issues that had to be determined against them in order to determine that they were liable for breach of duty, to the extent determined by my main judgment.
- Overall, my assessment is that the pursuit of this claim by Richmond was not unreasonable to a high degree in the period up to 30 November 2013, but after that it was. I consider that the pursuit by Richmond thereafter of a claim based on allegations of breaches of duty far more extensive than those breaches which there was a reasonable basis for alleging, claiming damages of over £4 million which was far in excess of any reasonable estimate of loss, means that it is just that the Defendants should be entitled to recover costs they incurred after that date even though those costs may have been disproportionate, and that is also just that any doubts that the court may have as to whether the Defendants’ costs after that date were reasonably incurred or reasonable in amount should be resolved in the Defendants’ favour.
- Accordingly, I determine that the Defendants’ costs (if not agreed) should be assessed on the standard basis up to 30 November 2013, and that from 1 December 2013 on they are to be assessed on the indemnity basis.