In Sugar Hut Group Limited -v- AJ Insurance Services  EWCA Civ 46 the Court of Appeal overturned an award of costs made against a successful party.
“The Claimants’ recovery exceeded the Part 36 offer by a comfortable margin and in any event there is no longer a “near-miss” rule. There is no basis upon which it is appropriate to deprive the Claimants of their costs after 13 June 2014, still less to require them to pay the Defendant’s costs. The Claimants’ failure to succeed on all of their claim is adequately reflected in the Judge’s Order depriving them of 30% of their costs”
“… it cannot be misconduct, or unreasonable conduct, simply to pursue a claim in an amount greater than that at which it is valued by the opponent party. Something more is required to render pursuit of the claim unreasonable”
- An offer made by the defendant which was beaten at trial was wrongly taken into account by the trial judge when he made the claimant pay the defendant’s costs after that offer.
- The claimant’s unsuccessful pursuit of certain heads of damages was dealt with by the judge awarding the claimant 70% of their costs.
- The appropriate award was for the claimant to recover 70% of their costs throughout.
- The claimant recovered £1,090.021.02 at trial. Leaving a further £277,021 to pay after interim payments were taking into account
- Both parties had made Part 36 offers and Calderbank offers. None were effective.
- The defendant had made an offer to pay an additional £250,000 on 23rd May 2014.
- The judge allowed the claimant 70% of the costs of quantum up to the 13th June 2014.
- The judge ordered that the defendant pay the claimant’s costs after 13th June in relation to the assessment of interest.
- The judge ordered that the claimant pay the defendant’s costs after the 13th June (except for the costs relating to the assessment of interest).
THE REASON FOR THE JUDGE ORDERING THE CLAIMANT TO PAY THE DEFENDANT’S COSTS
The judgment on this point is explored in detail in a previous post Offer to settle has major impact on costs. Those reasons, essentially, related to what the judge viewed as the unreasonable conduct of the claimant in pursuing heads of damages which had no evidential basis.
THE JUDGMENT IN THE COURT OF APPEAL
The Court of Appeal considered the judge’s decision to award the defendant its costs.
“11. This is a substantial document which it is unnecessary to set out in full. For present purposes, it is sufficient to note that it was made “without prejudice save as to costs” and on its face states that it is a Part 36 Offer and is intended to have the consequences of Section I of Part 36 of the Civil Procedure Rules. The Letter expresses certain observations on various parts of the claim advanced on behalf of the claimants including the claim for BI losses and interest. Towards its end, the Letter states as follows:
“… our client is therefore prepared to base the Offer on lost profit of £600,000 gross less agreed 35% reduction and interest at 2.5% per annum.
After allowing for the interim payments already received and after applying the agreed 35% reduction in this Part 36 Offer results in a total further payment of £247,272.53, which our client has rounded up to £250,000. Our client will offer your clients in full and final settlement of this matter the total further sum of £250,000 inclusive of interest, plus your clients’ costs of the quantum action, to be assessed on the standard basis, if not agreed.”
12. It is common ground that the claimants “beat” the actual Part 36 Offer made in that letter. On that basis, Mr Piper accepted that the defendant cannot rely on this Part 36 Offer for the automatic consequences that ordinarily follow from a successful Part 36 Offer. In particular, he accepted (rightly in my view) that the consequences do not apply in this instance because the offer was made inclusive of interest such that although it was just shy of the claimants’ interest inclusive recovery, a “near-miss” cannot trigger the Part 36 regime.”
It was Mr Piper’s submission before the Judge, as it was before us, that had the Claimants accepted the figure of £600,000 for Business Interruption losses, the need for a three day hearing on quantum would have been obviated together with all the attendant expenditure of trial and the preparation therefor. Interest could have been dealt with in half a day or less. Mr Piper pointed to the ensuing correspondence which revealed, he suggested, that whilst the Claimants had not rejected the offer out of hand, they had nonetheless continued to insist upon an unrealistic figure, valuing their Business Interruption loss claim in their letter of 30 May 2014 at £862,024, a figure repeated in a letter of 30 September 2014. Mr Piper submitted that the Claimants should in consequence be deprived of any of their costs following a period of 21 days after 23 May 2014 and that similarly the Defendant should have its costs from that date.
“(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;
. . .
(d) whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.”
The Judge rightly observed that the offer of £250,000 inclusive of interest contained in the letter of 23 May falls within sub-paragraph (4)(c) but equally accepted that the fact that the offer was based on a figure for lost profit i.e. Business Interruption losses of £600,000 gross, was not of itself “an admissible offer to settle” on that basis. There was no free-standing offer, capable of acceptance by the Claimants, to pay £600,000 in respect of the Business Interruption aspect of the claim. The Judge also pointed out that a valid offer in that form could have been made pursuant to CPR 36.2(2)(d) – now 36.5(1)(d). Nonetheless, he concluded that “given the terms of the [23 May] letter” it was not reasonable for the Claimants to pursue a claim for Business Interruption losses of £862,024. Indeed, the logic of the Judge’s position is that it was unreasonable to pursue that claim for a figure in excess of £600,000. The essence of the Judge’s reasoning is to be found in his paragraph 20, as follows:-
“20. In considering whether or not such insistence was reasonable, I bear in mind the following matters:
i) CPR Part 44.2(5)(d) expressly provides that the conduct of the parties which the Court will have regard to under CPR Part 44.2(4)(a) includes whether “a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim”. The present case is, in my view, a paradigm example of one where the overall claim and certain individual components were indeed very much exaggerated. In that regard, the conclusions set out in my main Judgment speak for themselves.
ii) As submitted by Mr Piper, this is a case where the claimants dragged their heels on disclosure and the defendant was eventually obliged to make a disclosure application to secure quantum documents. The disclosure process was conducted on the part of the claimants slowly and on a piecemeal basis throughout. Fresh documentation was still being disclosed just 2 months prior to trial and as appears from my main Judgment, there were, even at trial, significant gaps in the disclosure and evidence provided by the claimants. Further, the Letter and subsequent correspondence makes plain that these matters caused real difficulties to the defendant in taking appropriate precautions to protect its position. This is a legitimate factor to take into account in considering what order to make: see for example, Ford v GKR Construction  1 WLR 1397 in particular per Lord Woolf MR at p1403 F-G.
iii) It is plain from the relevant correspondence following the Letter that so far as the parties were concerned the proper value to be attributed to the BI losses was the main issue which divided the parties. So much appears plain, for example, not only from the claimants’ solicitors’ letter dated 30 May 2014 but also their later letter dated 30 September 2014 where they asserted that “… we consider that the value your client attributes to Business Interruption Loss to be unduly low and falls far short of any conclusion which the court is likely to reach“. I readily accept that the mere fact that such prognosis ultimately proved incorrect by a large margin does not, of itself, necessarily mean that the position adopted by the claimants was unreasonable. However, given the matters already stated above and the specific conclusions which I reached in my main Judgment, that is exactly how I would characterise the conduct of the claimants, in particular, following the receipt of the Letter.”
The Judge has effectively characterised as misconduct the Claimants’ pursuit of a claim for Business Interruption losses in excess of £600,000 after receipt of the Defendant’s letter of 23 May 2014. In doing so, as Mr Andrew Post QC for the Claimants submitted, he converted what was not an offer to compromise the claim in respect of Business Interruption losses at £600,000 into just such an offer. That this is what the Judge has done is underscored by his different treatment of the costs relating to the assessment of interest. The Judge has treated the letter of 23 May as containing distinct offers in relation to (i) Business Interruption losses and (ii) interest, and has treated the Claimants on the footing that they could and should have accepted (i), notwithstanding his acknowledgement that (i) could not in fact be accepted without acceptance also of (ii). That with respect is an approach which is wrong in principle. The Defendant had made no offer to that effect capable of acceptance by the Claimants. Furthermore it cannot be misconduct, or unreasonable conduct, simply to pursue a claim in an amount greater than that at which it is valued by the opponent party. Something more is required to render pursuit of the claim unreasonable. The Judge so recognised at paragraph 20(iii). However, he regarded the matters set out in paragraphs 20(i) and 20(ii), when taken with the specific conclusions which he had reached in his main judgment, as justifying the characterisation of the Claimants’ conduct as unreasonable. I do not agree.
The Judge suggests at paragraph 20(i) that the conclusions set out in his main judgment are themselves indicative that the overall claim and certain individual components were very much exaggerated. Nowhere in his main judgment does the Judge describe the claim or any part thereof as “exaggerated”. It is true that significant parts of the Business Interruption claim failed for the reasons which I have briefly summarised. But that does not mean the claim was exaggerated. The P2 exercise was potentially relevant, and contemplated by the policy, but failed for the reasons explained. The undoubted downturn in turnover at Fulham and Hertford after the fire could not on the basis of the evidence be established to be properly attributable to the fire. However in the happy phrase once coined in this context by a distinguished maritime arbitrator, the question is whether the claim exceeded the bounds of permissible optimism. In my judgment the Judge made no findings upon the basis of which it could be said that it did.
Moreover it is plain that the conduct which the Judge here took into account as justifying his unusual order so far as concerns costs incurred after 13 June 2014 is the same as the considerations which had informed the withholding from the Claimants of 30% of their costs incurred prior to 13 June 2014, viz, the total failure of aspects of the Business Interruption claim. There is therefore in my view justification in the Claimants’ complaint that they have been twice penalised for the same shortcoming.
The reference to the Claimants’ conduct of the disclosure exercise is I think something of a makeweight. We were taken through the history by Mr Piper. It is true that the Claimants failed to comply with the initial standard disclosure order, in consequence of which the Defendant was forced to issue an application for specific disclosure. That application had not been heard by the time liability was compromised in Summer 2013. A split trial had been ordered and there was therefore no date fixed for the determination of the quantum issues. A CMC took place on 4 October 2013 at which directions were given for the quantum trial. An order for specific disclosure was made against the Claimants and they were ordered to pay in any event the Defendant’s costs related to the request for additional disclosure. There was substantial compliance with that order such that, in Mr Piper’s words, the Defendant “finally got a decent tranche of disclosure” in November 2013. As he also put it, “as at May 2014 we had enough to value the claim”. Manifestly the Defendant did, since its figure of £600,000 exceeded the ultimate recovery by a margin of only £30,000 or so. It was plainly a well-judged valuation with a sensible margin for error. Thus the Judge’s comment that the delay in giving disclosure “caused real difficulties to the Defendant in taking appropriate precautions to protect its position” is only justified insofar as earlier disclosure might have enabled the Defendant to make its offer earlier than it did. That may be so, but it cannot be inferred that an earlier offer would have resulted in a saving of costs.
Mr Piper also complains of late disclosure concerning interest. However the Judge rightly disregarded as irrelevant evidence of the rates of interest paid by the various companies within the Claimant Group and based his award upon reports published by the Bank of England relevant to the critical question, what rate of interest would generally be payable by a company like the Sugar Hut Group Ltd. Such reports may have been produced by the Claimants only on the second day of the trial but the Defendant could have had access to them earlier as they were in the public domain.
Mr Piper did not seriously press a point raised by Respondent’s Notice to the effect that the Judge’s Order could be justified by reference to the Defendant’s Calderbank letter of 23 September 2014. That letter offered £297,000 net damages, inclusive of interest, but only offered to pay the Claimants’ reasonable costs incurred until 13 June 2014. Although the Claimants’ ultimate recovery in damages and interest fell short of this figure by just under £20,000, the costs incurred by the Claimants between 13 June and 23 September substantially exceeded £20,000. Indeed, their costs were at least £79,000. Thus the value to the Claimants of the offer made on 23 September was significantly lower than the value of the offer made on 23 May.
Mr Piper suggested that the real relevance of the 23 September letter was in indicating a preparedness on the part of the Defendant to negotiate. I agree, but equally the correspondence shows a similar preparedness on the part of the Claimants. The Claimants’ response to this letter was a preparedness to accept the Defendant’s offer of interest at 4% and indeed everything else in the offer save the indicative figure of £600,000 for Business Interruption Losses and of course the question of costs incurred since 13 June 2014. As to that Mr Piper submitted that the Claimants’ refusal to recognise the Defendant’s valuation of the Business Interruption claim as reasonable was itself unreasonable. The Judge had, he said, rightly looked at the negotiations as a whole and had contrasted the parties’ attitudes. I have already dealt with this point. The Judge’s judgment provides no material on the basis of which the Claimants’ conduct can be regarded as unreasonable. The Claimants were simply mistaken as to the strength of their case.
For all these reasons I am satisfied that the Judge came to a decision which was outside the bounds of reasonable decision-making which was moreover in large part based upon an error of principle, treating the 23 May letter as containing a free-standing offer to compromise the Business Interruption claim at £600,000. In those circumstances paragraphs 2 and 3 of the Judge’s Order of 19 November 2014 must be set aside and we must re-exercise the Judge’s discretion afresh. The Claimants’ recovery exceeded the Part 36 offer by a comfortable margin and in any event there is no longer a “near-miss” rule. There is no basis upon which it is appropriate to deprive the Claimants of their costs after 13 June 2014, still less to require them to pay the Defendant’s costs. The Claimants’ failure to succeed on all of their claim is adequately reflected in the Judge’s Order depriving them of 30% of their costs. I would simply amend paragraph 1 of the Judge’s Order by deletion of the words “up to and including 13 June 2014” so that that paragraph now reads “the Defendant shall pay 70% of the Claimants’ costs of the assessment of damages on the standard basis, to be assessed if not agreed”.