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

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