England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(Mr Justice Gray)

		Royal Courts of Justice Strand London WC2 Monday 29th October, 2001

1. LORD JUSTICE WARD: Lord Justice May will give the first judgment.
2. LORD JUSTICE MAY: This is an appeal by successful defendants from a costs judgment and order of Gray J on 19th December 2000. The judge himself gave permission to appeal.
3. The judgment and the appeal concern costs in a libel action in which the jury, after a 12-day trial, found in favour of the defendant's defence of justification. The publication in issue was on 6th November 1996 in an interview broadcast on Radio 5 Live. The protagonists in the litigation were both concerned with professional football and professional footballers. The occasion was the House of Commons, in advance of a meeting with a Member of Parliament. I do not think it necessary to say any more about the substance of the proceedings.
4. The brief relevant chronology - relevant that is to this appeal - is as follows. The broadcast, as I say, was a radio broadcast on 6th November 1996 and the writ was issued on 8th January 1997. There was exchange of pleadings and amended pleadings, disclosure and so forth and the time came, in 1999, when, on 22nd July, the defendant's application to strike the claim out for want of prosecution or as an abuse of process was dismissed by Master Foster. He made an order for claimant's costs in cause of the application. Questions then aired about further specific discovery were adjourned to the judge in charge of the jury list.
5. It was then that on 1st September 1999 the solicitors acting for the defendant wrote a letter headed "without prejudice, save as to costs" in which they referred to a letter of the same date concerning a proposed amendment to their client's defence. The proposed amendment which was subsequently allowed was strengthening and widening the defence of justification, bringing into it serious allegations against the claimant, including allegations of dishonesty. The letter of 1st September ended in these terms:

"We would also emphasise to you that the Defendant has every intention of resisting this claim as strenuously as possible for as long as necessary.

In these circumstances we are instructed to invite the Claimant to discontinue its claim on the following terms as to costs, namely the Claimant will pay the Defendant's costs of the action on the standard basis up to the date of service of the notice of discontinuance pursuant to CPR Part 38.3, including all costs not already provided for by Orders of the Court, to be taxed if not agreed.

Should this offer of terms for the disposal of these proceedings not be accepted, the Defendant will draw its terms to the attention of the Court on his succeeding at trial and seek all costs incurred after seven days from the date of this letter on an indemnity basis."

6. That suggestion was not acceded to. The action continued. Gray J gave permission to amend the defence. There was an amended reply which reinforced allegations by the claimant that the defendant was malicious. There was a request for further information regarding the amended reply. On 1st December 1999, the claimant made what they referred to as a Part 36 offer to accept £1 and their costs in full and final settlement of the proceedings.
7. In response to that, two days later, on 3rd December 1999, the defendant's solicitors on instructions wrote to say that he would accept £50,000 in full and final settlement of his claim for costs in the proceedings if the action was settled within the next seven days. That was a letter which asserted that the defendant's estimated costs to date were in the order of £100,000. Those proposals did not produce a settlement.
8. On 3rd May 2000 the claimant wrote saying that they had received an offer of insurance in relation to the proceedings and that the premium they were going to be paying was £157,500 and that they would accept this proposal unless the defendant responded with a view to settlement within five days. Subsequently, on 8th November 2000, the claimant gave notice of entering into a conditional fee agreement with itself (the claimant being a firm of solicitors) and gave notice of a policy of insurance having been entered into.
9. Accordingly, these offers and counteroffers having been made and turned down, in a trial in which each side was alleging that the other was dishonest and where the judge had ruled that the publication was on an occasion of qualified privilege, the jury found in favour of the defendant on the issue of justification. So there was judgment for the defendant. The judge was invited to make an indemnity costs order in favour of the defendant. He declined to do so, saying this:

"I am by no means unsympathetic with the application that is made on behalf of the Defendant that the Claimant should be ordered to pay the costs of the action on an indemnity basis. But I have to say that it appears to me that Mr Shields is unable to bring himself within Part 36 and, in particular, sub-rule 21 of Part 36. That sub-rule is concerned with the position where the claimant does better than his Part 36 offer. There is, in the Rules, no, as it were, converse provision which governs the position that arises where a defendant has made a proposal as to the way in which an action may be compromised. In those circumstances, it appears to me that I am driven back, when considering an application for indemnity costs, to the more general basis on which costs can be ordered on an indemnity footing.

The relevant rule is 44.4, the note to which I think accurately summarises what I understand to be the effect of the authorities on this topic by saying that indemnity costs should only be awarded on an indemnity basis if there has been some sort of moral lack of probity or conduct deserving of moral condemnation on the part of the paying party. I do not think that I can go so far as to say that applies in this case. Accordingly, I order that the Defendant should have his costs on a standard basis, not an indemnity basis."

10. The essence of the main ground of appeal is that the judge misdirected himself in saying that costs should only be awarded on an indemnity basis if there has been some sort of moral lack of probity or conduct deserving of moral condemnation on the part of the paying party.
11. Mr Shields opened his submissions today by saying that the letter of 1st September 1999 was pivotal. But he developed submissions in the circumstances of the pleaded case, its result and the various offers and counteroffers that have been made, to say not only that the judge applied the wrong principle but that this court should in substitution award indemnity costs to the defendant.
12. It is axiomatic, I think, to start with Rule 1.1 of the Civil Procedure Rules, which (as everybody knows) say that:

"These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly."

13. Being a new procedural code, the Rules are not to be taken as embodying or taking on board the baggage of the old Rules; and generally speaking, although there are exceptions, most of the procedural cases decided under the Rules of the Supreme Court (or indeed the County Court Rules) are not of relevance - or certainly not of central relevance - to an interpretation of these new Rules.
14. It is necessary to see what Rule 36.21 says. It says this:

"(1) This rule applies where at trial-

(a) a defendant is held liable for more; or

(b) the judgment against a defendant is more advantageous to the claimant, than the proposals contained in a claimant's Part 36 offer.

(2) The court may order interest on the whole or part of any sum of money (excluded interest) awarded to the claimant at a rate not exceeding 10% above base rate for some or all of the period starting with the latest date on which the defendant could have accepted the offer without needing the permission of the court.

(3) The court may also order that the claimant is entitled to-

(a) his costs on the indemnity basis from the latest date when the defendant could have accepted the offer without needing the permission of the court; and

(b) interest on those costs at a rate not exceeding 10% above base rate."

15. That of course applies, as Gray J observed, to a claimant's Part 36 offer. There is no equivalent provision in Part 36 for a defendant's Part 36 offer. Mr Shields submits that it should be applied by analogy so that where an offer such as was made on 1st September 1999 is not accepted a defendant should be entitled to indemnity costs if the defence succeeds.
16. As Gray J observed, the court has to look to Rule 44 for provisions relevant to this matter. They are Rule 44.3 and parts of Rule 44.4. Dealing with Rule 44.3 first, we find this:

"44.3 (1) The court has discretion as to-

(a) whether costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

...

(4) In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including-

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention (whether or not made in accordance with Part 36).

(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 any relevant pre-action protocol;

(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(d) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim."

17. Rule 44.4 provides, under the heading "Basis of assessment":

"(1) Where the court is to assess the amounts of costs (whether by summary or detailed assessment) it will assess those costs-

(a) on the standard basis; or

(b) on the indemnity basis,

but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount."

18. The Rule then goes on to indicate what costs on a standard basis and on the indemnity basis involve.
19. Mr Shields has referred us to two post-CPR authorities on the subject of costs. The first of these was the case of Petrograde Inc v Texaco Ltd, a Court of Appeal decision in a constitution presided over by the Master of the Rolls, Lord Woolf, on 23rd May 2000. That was a case where the court was considering costs in consequence of Part 36.21. At paragraph 62 the Master of the Rolls said this:

"However, it would be wrong to regard the rule [36.21] as producing penal consequences. An order for indemnity costs does not enable a claimant to receive more costs than he has incurred. Its practical effect is to avoid his costs being assessed at a lesser figure. When assessing costs on the standard basis the court will only allow costs `which are proportionate to the matters in issue' and `resolve any doubt which it may have as to whether costs were reasonably incurred or reasonably proportionate in amount in favour of the paying party'. On the other hand, where the costs are assessed on an indemnity basis, the issue of proportionality does not have to be considered. The court only considers whether the costs were unreasonably incurred or for an unreasonable amount. The court will then resolve any doubt in favour of the receiving party. Even on an indemnity basis, however, the receiving party is restricted to recovering only the amount of costs which have been incurred (see Part 44.3 and Part 44.5).

63. The ability of the court to award costs on an indemnity basis and interest at an enhanced rate should not be regarded as penal because orders for costs, even when made on an indemnity basis, never actually compensate a claimant for having to come to court to bring proceedings. ...

64. The power to order indemnity costs or higher rate interest is a means of achieving a fairer result for a claimant. If a defendant involves a claimant in proceedings after an offer has been made, and in the event, the result is no more favourable to the defendant than that which would have been achieved if the claimant's offer had been accepted without the need for those proceedings, the message of Part 36.21 is that, prima facie, it is just to make an indemnity order for costs and for interest at an enhanced rate to be awarded. However, the indemnity order need not be for the entire proceedings nor, as I have already indicated, need the award of interest be for a particular period or at a particular rate. It must not however exceed the figure of 10 per cent referred to in Part 36."

20. So there we find that an award of costs on an indemnity basis is not intended to be penal and that regard must be had to what in the circumstances is fair and reasonable.
21. That message also appears in a short passage from the judgment of Brooke LJ in a case called Baron v Lovell, a Court of Appeal decision on 27th July 1999 in a court presided over by the Lord Chief Justice. It concerned the question of sending an appropriately authorised legal representative to attend a pre-trial review. Of that Brooke LJ said, at the foot of page 11:

"If a defendant's lawyers choose not to send a representative with appropriate authority to attend a pre-trial review and choose not to ensure that the client (who in this case should be equated with the defendant's insurer) attends the review, the judge, who is likely to be the trial judge, is likely to note their absence. If he considers that that party has acted unreasonably in this way in connection with the litigation in breach of a direction of the court, there may come a time when he decides that it is appropriate to make an order for indemnity costs against that party, or to exercise his power to award interest on damages at a much higher rate than what is usual, if those powers are available to him. The whole trust of the CPR regime is to require the parties to behave reasonably towards each other in the conduct of the litigation. The old antagonistic point scoring, which used to drag personal injuries cases out and run up costs, should now be at an end."

22. So there again the emphasis is on what is reasonable.
23. Mr Shields submits that the judge was wrong to fetter his discretion in the way that he did. Mr Bacon emphasises that Petrograde was concerned only with indemnity costs under Rule 36.21. He submits that there is a distinction between the court's discretion under that Rule and under Rule 44.4. He refers to the case of McPhilemy v Times Newspapers Ltd (No 4) [2001] EMLR 858, a libel case in which questions of costs arose, where Simon Brown LJ said at page 875:

"When dismissing the principal appeal, we left over for decision whether The Times should pay the respondent's costs of that appeal on a standard or an indemnity basis. Clearly rather more of a stigma attaches to an indemnity costs order made in this context than in the context of a rule 36.21 offer - although even then no moral condemnation of the appellant's lawyers is necessarily implied ..."

24. That suggests in itself that Gray J may have misdirected himself.
25. Mr Bacon submits, contrary to what the Master of the Rolls said in Petrograde, that the stigma referred to by Simon Brown LJ imports some sort of punitive effect. But, as I have indicated, Simon Brown LJ said that no moral condemnation was implied. Mr Bacon submits that there is no real difference between an expression of disapproval and moral condemnation. He also referred us to Raja v Rubin [1999] 3 All ER 72, a decision of 19th March 1999, but that was a decision before the new procedural code of the CPR was in operation. Mr Bacon came close to submitting that Rule 44.3 is not concerned with matters going to indemnity costs, which was to be found in Rule 44.4.
26. Mr Monson, who dealt with the merits of the matter, submitted that Gray J applied the correct test and that he correctly extracted it from the notes to Rule 44.4 in the White Book which relied on pre-CPR cases. He submitted that there is no real difference between conduct deserving moral condemnation and unreasonable conduct of litigation in any manifestation. The respondent's written submissions in this court referred to numerous pre-CPR authorities and submitted that their principles survived into the CPR.
27. In my judgment, the judge here was wrong to constrain himself in the way that he did. He was, I think, implicitly guided by pre-CPR authorities which are no longer apt for the new procedural code in this respect. Under the CPR, it is not, in my view, correct that costs are only awarded on an indemnity basis if there has been some sort of moral lack of probity or conduct deserving moral condemnation on the part of the paying party. The court has a wide discretion under Rule 44.3 which is not constrained, in my judgment, by authorities decided under the rules which preceded the introduction of the CPR. The discretion has to be exercised judicially, in all the circumstances, having regard to the matters referred to in Rule 44.3(4) and Rule 44.3(5). The discretion as to the amount of costs referred to in Rule 44.3(1)(b) includes a discretion to decide whether some or all of the costs awarded should be on a standard or indemnity basis. Rule 44.4 describes the way in which an assessment on each basis is to operate, but does not prescribe the circumstances in which orders on one or the other of the bases is to be made.
28. As the very word "standard" implies, this will be the normal basis of assessment where the circumstances do not justify an award on an indemnity basis. If costs are awarded on an indemnity basis, in many cases there will be some implicit expression of disapproval of the way in which the litigation has been conducted, But I do not think that this will necessarily be so in every case. What is, however, relevant to the present appeal is that litigation can readily be conducted in a way which is unreasonable and which justifies an award of costs on an indemnity basis, where the conduct could not properly be regarded as lacking moral probity or deserving moral condemnation.
29. The circumstances referred to in Rule 44.3(4) include any payment into court or admissible offer to settle which each of the parties may have made. But it seems to me that in the present appeal the letter of 1st September 1999 by itself, although relevant, may not take the case for indemnity costs very far. I do not see that there is much to be made of an analogy for defendants with Rule 36.21. That rule applies to claimants. There is no equivalent rule for defendants who must, in my view, look elsewhere for means of putting themselves in the strongest possible position as to costs.
30. The letter of 1st September 1999 was very close to an invitation by a defendant to the claimant to throw his hand in, and it made little real concession. I appreciate that it might be said that the offer gave away the possibility of costs on a more favourable basis than the standard basis for some or all of the case so far. But it cannot be right that every defendant in every case can put themselves in the way of claiming costs on an indemnity basis simply by inviting the claimant at an early stage to give up, discontinue and pay the defendant's costs on a standard basis. It might be different if a defendant offers to move some way towards a claimant's position and the result is more favourable to the defendant than that.
31. Thus, in my view, the letter of 3rd December 1999 may be rather more persuasive than the letter of 1st September 1999 - although I emphasise that the court has to take all relevant circumstances into account.
32. There will be many cases in which, although the defendant asserts a strong case throughout and eventually wins, the court will not regard the claimant's conduct of the litigation as unreasonable and will not be persuaded to award the defendant indemnity costs. There may be others where the conduct of a losing claimant will be regarded in all the circumstances as meriting an order in favour of the defendant of indemnity costs. Offers to settle and their terms will be relevant and, if they come within Part 36, may, subject to the court's discretion, be determinative.
33. Since, in my view, the judge proceeded on a mistaken view of the law, his decision should I think be set aside. The question then arises whether this court should proceed to exercise its discretion and make the decision anew. The court has power to do this, and Mr Shields invites us to do it. So does Mr Monson, who has made extensive submissions on the merits; although, of course, he argues for a different result from that for which Mr Shields contends.
34. I am not persuaded that we should do this. We have a very small view of the conduct of the parties in this litigation. It is limited to the nature of the case to be derived from the pleadings, its result, a few letters, and quite abbreviated submissions by counsel. The judge heard the case over 12 days and heard all the evidence. He was well versed in the long previous preparatory history. I appreciate that the judge expressed sympathy with the application for indemnity costs, but I do not personally consider that I have a secure feel for this litigation in the round, so as to be able to judge fairly what the costs order should be. I have, for instance, no means of judging whether at trial the claimant's case was throughout obviously going to fail; or whether, although the jury's verdict was in favour of the defendant, it was a close-run thing. Nor is it clear to me whether the claimant's letter of 1st December 1999 was a genuine offer or the manifestation of a libel action with no substance. I am sure that there will have been many other aspects of each party's conduct which need to be considered and taken into account.
35. For these reasons I would allow the appeal, order the judge's costs order to be set aside and remit the matter to him for further determination.
36. LORD JUSTICE KAY: I agree.
37. I only want to add one other matter. The approach of the CPR is a relatively simple one: namely, if one party has made a real effort to find a reasonable solution to the proceedings and the other party has resisted that sensible approach, then the latter puts himself at risk that the order for costs may be on an indemnity basis. What would be a reasonable solution will depend on all the circumstances of the case, and might, in a case which is clearly of no merit, include pointing out, in such detail as is appropriate, the fundamental weaknesses of the case being presented by the other side and inviting consideration of abandonment. That was not the circumstances of the letter of 1st September, which was simply an expression that the case was of no merit at all and inviting abandonment. If there had been more detail and more explanation, then it might have carried greater weight in the general consideration of the circumstances.
38. But for the reasons given by my Lord, Lord Justice May, I agree that this appeal should be allowed and the matter remitted to the judge for further consideration.
39. LORD JUSTICE WARD: I can have some sympathy for the judge who based himself largely on the notes to the CPR 44.4, as they then appeared in the White Book to the effect that some disgraceful conduct deserving of moral condemnation was necessary to justify costs being awarded on an indemnity basis. That approach is erroneous for the reasons given by my Lords, with which I agree.
40. Although I was tempted to seize upon the judge's introductory remark that he was "by no means unsympathetic with the application" for costs to be paid on an indemnity basis, and so robustly exercise my discretion to give effect to what may be read between the lines, I am persuaded by my Lords that we do not have the full feel of the case. So I too would allow the appeal, but send it back to the judge.
ORDER: Appeal allowed with costs, assessed in the sum of £22,500 inclusive of VAT; case remitted to Gray J. (Order not part of approved judgment)