ANOTHER EXAMPLE OF A SUCCESSFUL DEFENDANT NOT RECOVERING ALL OF ITS COSTS (AND OF THE ADVANTAGES OF A PART 36 OFFER)

In Altus Group (UK) Limited -v- Baker Tilly [2015] EWHC 411 (Ch) HH Judge Keyser QC (sitting as a High Court Judge) made various orders in relation to the Defendant’s costs.  The Defendant did not recover all their costs of defending the action.  However a well placed Part 36 helped the Defendant.

THE CASE

The defendants had been successful in defending a professional negligence action.  The judge found a breach of duty but that the claimant had not proved that it would have taken the course of action on which it relied.

KEY POINTS

  • The Defendant had succeeded on an issue of fact. Many of the technical arguments the Defendant ran were unsuccessful.
  • The Defendant was awarded 50% of costs up to the relevant date for a Part 36 offer.
  • Although considerable “unnecessary” costs had been run up at trial it was not unjust to award the Defendant 100% of their costs as the Defendant had made an offer which the Claimant should have accepted.

THE ORDER AS TO COSTS

Costs

The award of costs

  1. The defendants seek an order for the payment of all their costs of the action, except the costs attributable to the expert evidence relating to the duties of a tax adviser They have submitted a schedule of costs in the sum of £517,011.50. The costs of the expert evidence relating to the duties of a tax adviser comprise £17,455 on that schedule.
  2. The principles are familiar. Costs are in the discretion of the court. 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. However the court may make a different order. In exercising its discretion the court will have regard to all the circumstances, including among other things the conduct of the parties, whether a party has succeeded on part of its case, even if it has not been wholly successful, and any admissible offers of settlement. See CPR 1998, r. 44.2. Although I do not doubt that general guidance may be obtained by considering how different judges have paraphrased the rules (I was referred, for example, to dicta of Arnold LJ in Hospira UK Ltd v Novartis AG [2013] EWHC 886 (Pat)), none of them can be regarded as establishing additional legal tests. It suffices to apply the rules.
  3. The general principles are subject to the operation of CPR 1998, Part 36. In particular, and for present purposes, the effect of r. 36.14 is that, where a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer, the court will, unless it considers it unjust to do so, order that the defendant is entitled to costs from the date after the expiry of 21 days from the date of the offer and to interest on those costs. In considering whether it would be unjust to make such an order, the court must take into account all the circumstances of the case, including the terms of the offer, the stage of proceedings and the time at which the offer was made, the information available to the parties when the offer was made, and the conduct of the parties with regard to the provision of information for the purpose of enabling the offer to be made or evaluated.
  4. In the present case, two matters are not in contention:

1) The defendants were the successful party.

2) The judgment in favour of the defendants was less advantageous to the claimant than the terms of a Part 36 offer made on 13 October 2014 and having effect from 4 November 2014.

  1. The defendants submit that, apart from the element of expert costs that I have already mentioned, they should receive all their costs. No deduction should be made on account of their failure on the issue of breach of duty at trial, because the costs of the trial properly attract the favourable costs consequences of r. 36.14. No deduction ought to be made on account of their mixed fortunes regarding the technical tax issues, because the outcome of those issues simply reflects “the ebb and flow characteristic of litigation of this nature”, and because none of those issues can appropriately be described as “suitably circumscribed” so as to justify depriving the defendants of the costs of those issues (cf. Hospira UK Ltd v Novartis AG, supra, at [2]).
  2. The claimant submits that the defendants ought properly to be awarded 30% of their costs, save that they ought to have no costs in respect of the liability reports. It submits that the point on which the claim failed, namely primary causation, can have contributed only minimally to the amount of the defendants’ costs. Of the defendants’ technical tax challenges, the only one that succeeded to any extent that was material to the value of the claim, namely the section 54 challenge, was not dealt with in the expert reports. The other technical point, namely adjustment of the price under transfer pricing rules, would have had an almost negligible impact on the award of damages. A further matter on which the defendants succeeded, namely the chance of a challenge to the earlier years, would have reduced the damages award by only about £40,000 and can have involved the defendants in nothing more than minimal costs. The defendants submit that it is only just that costs incurred after 4 November 2014 should reflect the parties’ relative success on the issues contested at trial.
  3. I am conscious that these short summaries of the detailed written submissions made by counsel do little justice to the excellence of the arguments raised on both sides. However, I have had regard to those arguments in reaching my conclusions.
  4. As the defendants were the successful party, prima facie they should recover their costs of the claim.
  5. It is rightly acknowledged that the costs of the experts on breach of duty ought not to be recoverable. That deduction, reflecting the claimant’s success on a discrete issue, has to be borne in mind when considering whether any further deduction ought to be made and, if it ought, what is the appropriate extent of such a deduction.
  6. I accept Mr Turner’s submission that the court should avoid being sucked into an exercise in counting trees. Such an exercise would be both difficult and only speciously scientific, because without a detailed assessment the court is not well placed to identify precisely how much by way of costs is attributable to specific issues, and the court is discouraged from making an order with a view to such a fine assessment; see r. 44.2 (6) and (7). It is necessary to take a broader view, having regard to the extent of the parties’ success and failure on particular issues at trial.
  7. After deduction of the costs of the expert liability reports, the remainder of the defendants’ costs schedule amounts to almost £500,000. Of this, a total of about £200,000 is the costs of trial preparation (£114,452) and the trial (£74,079) and matters post-trial (£10,093). Therefore about £300,000 relates to the stages before trial preparation. Of that latter figure, about £165,000 is accounted for by the expert reports on the technical tax issues, which include Mr Sayers’ report from September 2014, the costs of which were reserved to me by a previous order.
  8. If, with Mr Turner, one “step[s] back” and looks at “the big picture” the claimed costs for the pre-trial stages are fairly remarkable. What drove the costs in this case was the technical challenge to the New LLP Proposal; that is why the costs in respect of experts are so high. The defendants won this case on a short factual point, which turned on analysis of the claimant’s evidence; naturally the defendants did not adduce evidence on primary causation. Their only really significant technical victory, albeit only a partial victory, was on the section 54 argument; and that was a point that turned on legal submissions, not on expert evidence. The defendants had a small success on transfer-pricing (though whether it was worth the candle is another matter) and another in relation to challenges to previous years, on which only minimal costs can have been incurred. They lost on IR35, section 1263, Heastie v Veitch, and the main transfer pricing issues. (They also lost on the remaining liability issue, but that has been dealt with separately and it is necessary to avoid taking it into account twice.) Although many of the non-expert components of the costs schedule would have remained largely the same in any event, an approach that focused on the points with merit rather than raising poor points would have reduced significantly the need for both parties—the claimant, as well as the defendants—to incur costs. To put the point another way: the defendants’ costs do not reflect success on the issues for which they were incurred.
  9. It is important not to lose sight of the starting-point, that the defendants were successful. But I have no doubt that, at least as regards the period before the Part 36 offer became effective, they should only recover a proportion of those costs. Looking at the big picture, and having regard to the matters raised above and discussed more minutely in the written submissions, I consider that the proper award is 50% of the defendants’ costs. For the avoidance of doubt, this includes the reserved costs of Mr Sayers’ report of September 2014.
  10. However, I have come to the conclusion that it is not unfair to allow the defendants their entire costs after 4 November 2014, pursuant to r. 36.14. The Part 36 offer was by no means an offer to dispose of the litigation on a nuisance basis; it represented a serious and substantial offer, amounting to a large part of the claim, albeit significantly less than either its full value as advanced before me or the award of damages that would have been made if the claimant had succeeded on primary causation. The offer was in clear terms and the claimant was well able to assess its merits. On the basis of my judgment, the offer ought to have been accepted and the trial ought to have been avoided. It is true that significant time at trial was taken dealing with points that went against the defendants; my best estimate, which does not accord with that of either party, is that the trial would have taken three to three-and-a-half days if it had been restricted to matters on which the defendants had a measure of success. However, in the light of the offer that was made under Part 36 I do not consider it unjust to place the additional costs on the claimant, which well knew the likely length and cost of the trial and chose not to settle the case when it had the opportunity.
  11. Accordingly, the order that I shall make is that:

1) Subject to paragraph 2 below, the claimant shall pay 50% of the defendants’ costs until and including 4 November 2014 and 100% of the defendants’ costs after 4 November 2014; such costs to be subject of a detailed assessment on the standard basis if not agreed. (I understand that these are the appropriate dates. If I am a day out, the parties will no doubt tell me.)

2) There shall be no order as to the costs of Ms Dyson’s report dated 20 June 2014 and of the “Second Independent Expert Report of David Sayers” dated 18 July 2014.

Interest on costs

  1. It is agreed that the claimant should pay interest on the defendants’ costs at 1% over the Bank of England base rate from time to time, pursuant to r. 44.2(6)(g), and that such interest should run until the date of this judgment. The issue is as to the time from which interest should run.
  2. It seems to me that, as a matter of principle, and in the absence of good reason to the contrary, interest should run from the time when the receiving party was out of pocket, that is, from the date when the costs were paid. I do not see that this should occasion any difficulty; it is simply necessary to identify the date of payment in respect of each costs invoice and apply the appropriate discount to the payment.

Payment on account of costs

  1. It is agreed that I should make an order for payment of a reasonable sum on account of costs, pursuant to r. 44.2(8). The defendants’ total costs are well within its approved costs budget of £632,017, and the likelihood is therefore that they are both reasonable and proportionate. Of the £500,000 remaining on the defendants’ schedule, a cautious approach would be to assume that £400,000 related to costs preceding the operation of the Part 36 offer (of which, therefore, up to £200,000 would be recoverable) and £100,000 related to costs thereafter. I am confident that on a detailed assessment the defendants will recover more than £225,000, which is roughly three-quarters of the total on this cautious basis, and I shall order a payment on account in that amount.

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