“If there is an order for indemnity costs, then prima facie any approved budget becomes irrelevant”

In Lejonvarn v Burgess & Anor [2020] EWCA Civ 114 the appellant was awarded indemnity costs of not less than £725,000 against a budgeted sum of £415,000. The respondent argued that the court should not make an order for indemnity costs as this would provide the appellant with a way round her own approved costs budget. The Court of Appeal rejected this argument.

Lord Justice Coulson noted the difference between an approved budget, determined prospectively, and the retrospective final assessment of costs. While generally the approved costs budget will be the starting point for assessment, that does not detract from the underlying proposition that they are different figures produced by different considerations with different purposes.

In reviewing the applicable principles Lord Justice Coulson noted that “if there is an order for indemnity costs, then prima facie any approved budget becomes irrelevant” citing, amongst other cases, Denton and Others v TH White Limited [2014] EWCA Civ 906: “If the offending party ultimately loses, then its conduct may be a good reason to order it to pay indemnity costs. Such an order would free the winning party from the operation of CPR r.18 in relation to its costs budget”.

Indemnity costs – speculative/weak claims; unreasonable refusal to accept offers

When a Claimant discontinues, he/she is liable for the Defendant’s costs (CPR Part 38.6). By CPR Part 44.9(1)(c) “where a right to costs arises under… rule 38.6 (defendant’s right to costs where claimant discontinues), a costs order will be deemed to have been made on the standard basis”.

Sometimes a Defendant, in such circumstances, will seek indemnity costs relying on the principle that the conduct of litigation may justify such an award. This is what happened in Wates Construction Limited v HGP Greentree Allchurch Evans Limited [2005] EWHC 2174 (TCC) where the Claimant, alleging that the Defendant’s design of a roof was negligent, discontinued the claim on the first day of trial because it had known (for some time) that it had deviated from the Defendant’s design such that allegations which had looked, on their face, to be allegations of inadequate design were, in fact, allegations concerning the Claimant’s defective workmanship. The authorities, considered in Wates, pointed to the need for the conduct, justifying indemnity costs, to be unreasonable to a high degree (see, for example, Kiam II v MGN (No. 2) [2002] EWCA Civ 66). In Wates it was found that the Claimant maintained a claim which it knew was doomed to fail (on the facts and on the law) and that this was so unreasonable as to justify an order for indemnity costs.

In Excelsior Commercial and Industrial Holdings Limited v Salisbury Hammer Aspden and Johnson (A Firm) [2002] EWCA Civ 879, concerning an application for indemnity costs made by the successful defendant having beaten his own offer , it was said that “before an indemnity order can be made, there must be some conduct or some circumstance which takes the case out of the norm”.

It has long been the position that a defendant’s eventual defeat of a speculative, weak, opportunistic or thin claim can give rise to indemnity costs. In Three Rivers District Council v The Governor and Company of the Bank of England [2006] EWHC 816 (Comm) the following was said: “where a claim is speculative, weak, opportunistic or thin, a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails”.

In Mireskandari v the Law Society [2009] EWHC 2224 (Ch) the Law Society was entitled to indemnity costs following discontinuance because the claim was “from its inception a hopeless [case] and that [the claimant’s] conduct of the proceedings has throughout been unreasonable to a high degree”.

In Lejonvarn v Burgess & Anor [2020] EWCA Civ 114, an architect, providing free-of-charge help to her neighbours, was found, on a preliminary point, to owe her neighbours a duty of care. On appeal, in April 2017, the Court of Appeal upheld the finding while stressing its limitations: it applied only to services which the architect in fact provided; in other words, she could have no liability in respect of any alleged omissions. In fact, she had provided very few services and had not been negligent.

The neighbours pursued the case to trial and lost, and the architect claimed costs in the “eye-watering” sum of at least £724,265. The High Court ruled that the costs should be assessed on the standard basis. The architect sought indemnity costs before the Court of Appeal.

The Court of Appeal considered that the High Court had failed to address the speculative/weak nature of the claim, noting that the High Court found that, as the claim went to trial, it was not speculative. Lord Justice Coulson, in the Court of Appeal, said “[The judge in the High Court] appeared to consider that an order for indemnity costs was only appropriate where it could be shown with hindsight that costs had been unnecessarily incurred. I do not accept that this was the right approach as a matter of principle”.

The question which should have been asked (by the High Court) was “whether, at any time following the commencement of the proceedings, a reasonable claimant would have concluded that the claims were so speculative or weak or thin that they should no longer be pursued”. Lord Justice Coulson found that the neighbours, having considered the Court of Appeal decision in April 2017, would have known (or should have known) that their claim was likely to fail – “It was, in my view, out of the norm for these respondents to continue to pursue … these speculative/weak claims… beyond that date”.

The architect was awarded indemnity costs from 7 May 2017, being one month after the Court of Appeal judgement.

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1 in contrast with the position of a claimant who makes a Part 36 offer and then subsequently beats it, a defendant in the same position is not automatically entitled to indemnity costs

That’s a relief! Relief from sanctions for late budget

In Manchester Shipping Ltd v Balfour Shipping Ltd and Anor [2020] EWHC 164 (Comm) the Defendants, having failed to file and serve their costs budgets in time, were granted relief from sanctions.

The timetable is relevant: the CCMC was fixed for 17 January 2020; costs budgets were to be filed not later than 21 days before the CCMC (CPR Part 3.13(1)(b)); on 16 December 2019 the parties agreed a timetable of 19 pre-CCMC procedural steps (avoiding any ‘deadlines’ in the holiday period of 12 December 2019 to 6 January 2020); the timetable was silent as to the filing and exchange of costs budgets; the Claimant filed and served its costs budget on Christmas Eve.

The Defendants had assumed that the pre-CCMC timetable did not make provision for any costs management steps because, they understood, the Claimant intended that costs management be dispensed with. The Defendants filed their budget on 8 January 2020 – 13 days late.

By the time of the CCMC, on 17 January 2020, the Defendants had not made an application under CPR 3.9 for relief from sanctions.

The Claimant submitted that “it is incumbent upon a party seeking relief from the sanction to make a timeous application for relief from sanctions under CPR 3.9” and directed the Judge to BMCE Bank International Plc v Phoenix Commodities PVT Ltd & Anor [2018] EWHC 3380 (Comm) (“where there is a failure to comply with rules … an application for relief from sanctions should be made promptly, supported with evidence…”). The Judge, however, noted that the “Draconian” sanction provided by CPR Part 3.14 included a saving provision: “Unless the court otherwise orders, any party which fails to file a budget despite being required to do so will be treated as having filed a budget comprising only the applicable court fees” (emphasis added). The saving provision was considered in the guidance to the White Book (2019 Edition) at paragraph 3.14.2: “A party in default of r.3.14 need not make a separate application for relief from sanctions under r.3.9. Instead it may seek to invoke the saving provision in r.3.14 itself (“Unless the Court otherwise orders”) by seeking to persuade the court to adopt that course at the hearing convened for costs management purposes …”.

There is no doubt that reliance on the saving provision in CPR Part 3.14 is a very high-risk strategy (the Judge in fact stated that “There will no doubt be cases (BMCE being one such) where a party seeking to invoke the saving provision would be well advised to do so by making a prompt CPR 3.9 application”). Our view is that, regardless of the nature of the default or the reasons for it, there is no excuse for any delay in making an application for relief. Delay may well prove fatal, rendering a forgivable breach unforgivable.

Having allowed the invocation of the saving provision, the Judge considered the three stage Denton test: first, the seriousness and significance of the breach; second, the reason for the breach; and third, all the circumstances of the case.

As to the first, the failure was serious but “The paperwork was all in order by the time the bundles were filed for the CCMC and the Claimant was able to deal without difficulty with the Defendants’ budget”. As to the second, the judge accepted that the default was inadvertent, borne out of reliance on the agreed table of procedural steps which was silent as to budgets.

In all of the circumstances it was appropriate to grant relief from sanctions.