England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM WOLVERHAMPTON COUNTY COURT
(HIS HONOUR JUDGE J HODSON)

		Royal Courts of Justice Strand London WC2 Tuesday, 9th July 2002

Tuesday, 9th July 2002

1. LORD JUSTICE WALLER: The point which arises on this application for permission to appeal and an application to extend time for appealing is the arguability of an order made by the judge for indemnity costs.
2. The action has a very unhappy history. The claimants sued the defendant alleging breach of a contract made in June 1995 under which the claimant was to build a car. The claimant asserted that the contract price for the building of the car was some £6,500. The claimant amended his claim at the trial to add a claim for certain other sums, including £2,000 for painting the car and £5,000 in respect of the purchase of parts. The claimant also made a claim for damages based on the repudiation of that contract by the defendant for other losses effectively a loss of other business he might have obtained. The defendant at the trial said that that contract was not with him personally, but was with a company, and asserted that the price was the £6,500 (to which I have referred) and did not accept the other aspects of the claimant's claim.
3. In July 2000 the judge was asked to try certain preliminary points. He held first, that there was a contract, and that it was with the first defendant personally. He also found that the first defendant had sought to pull the wool over everyone's eyes by producing some documents in the company's name, whereas a document that had been preserved by the claimant seemed to indicate that the defendant was personally liable on the contract that the judge found. The judge also found that there was an agreed price for the building of the car of £6,500, and poured fairly cold water on the other elements of the claimant's claim, but left over the quantification of any claim that the claimant might have. He also found there was a breach by the defendant, and it was in those circumstances that the quantification of damage was left over to be assessed. But again the judge said that in his view the claimant was unlikely to recover much in respect of the loss of business claimed.
4. We are told by Mr Haycroft (and I think Mr Daniel would not disagree with this) that there were a number of remarks made by the judge during the currency of the trial about the costs that were being incurred in the running of this action; and indeed we have a transcript of part of a day at the trial on 7th June 2000, in which the judge put to Mr Haycroft the following. He said:

"... I am allowed now to tell you that I think that the damages in this case will be a fraction of the costs.

Mr Haycroft: I am sure that is right, your Honour.

JUDGE HODSON: I am going to ask you now: what is the estimate of the cost on your side?"

5. Mr Haycroft is reported as saying: "I do not know", but then counsel took instructions and then came up with the figure of some £12,000. Looking at the other side the judge said: "What is the estimate of the costs on your side?" Mr Considine, counsel for the defendants, gave the figure of about £15,000 to the judge and Mr Haycroft then said to the judge: "Certainly your Honour is absolutely correct. It would be a fraction." Some reference too is made to the fact that there had been some to-ing and fro-ing between the parties, and a reference is made to there being in existence a Calderbank letter, though as far as I could see that Calderbank letter, if there ever was one, does not surface again.
6. In any event after the judgment there was considerable correspondence between the parties in order to see whether they could agree the quantum aspect. One sees some part of that correspondence in the supplemental bundle that has been put in by Mr Daniel, and one sees that one of the points which is taken in that correspondence relates to interest that might or might not be part of the settlement figure. I refer in that regard particularly to a letter of 23rd August 2000 from the claimant's solicitors, in those days Patience, Clarke & Burrows, and what that letter for example says at the end at page 29 of this bundle is this:

"Counsel advises that there should be no difficulty in making out a case to persuade the Court that we seek a further £6,500 to £7,500. Your client's offer of £4,000 in full and final settlement amounts to only £2,900 damages, and the remainder is interest. This is unacceptable and is accordingly rejected."

7. However, finally settlement was reached and it was reached, it is important to emphasise, on the basis that there had already been paid under the contract a sum of £2,500. The settlement figure reached was £8,500 but the actual figure to be paid and agreed to be paid at that moment in time was £6,000, including interest. Indeed on Mr Daniel's behalf it was also agreed that he should pay all the costs. There is no doubt that that included the costs of all the various actions that had been taking place between these parties or people related to these parties and which had been consolidated into the one action.
8. So then the question was precisely what should be the form of order that the judge would make, and the only issue that remained outstanding by the time the matter came back before the judge was as to whether those costs should be paid on an indemnity basis or on a standard basis. The suggestion that they should be paid on an indemnity basis came (so far as the formal documents are concerned) in the first affidavit sworn by Mr Cowell of the solicitors then representing the claimant. That affidavit says nothing about Part 36 offers and nothing about offers to settle, but it sets out part of the history of the action and the fact that there were more than one action, and matters of that sort. It then emphasises that the first defendant, Mr Daniel, is a wealthy man, that he has certain valuable classic Ferrari replica cars, and matters of that sort. Then it says this:

"He [Mr Daniel] would have known that the Claimant was legally aided and would therefore not under normal circumstances be ordered to pay his (Defendants') costs if he (Claimant) was successful. He has the resources to pay and I respectfully ask this Court to make an order that he do so. Because of the conduct of the First Defendant, I ask that the Order be on the indemnity basis. Individual elements of the Claimant's costs ought of course to be subject to scrutiny in the normal way through detailed assessment."

9. That affidavit was sworn in April 2001, and clearly was served on those representing Mr Daniel. Those representing Mr Daniel, who at this stage were Desmond Pye Partnership, finally wrote to the court in these terms:

"We are solicitors for both defendants... and we refer to our telephone call to the Court this afternoon.

We have received instructions to consent to the Order sought by the Claimants, save that we cannot consent to the Costs being on an Indemnity Basis. It seems to us that the correct basis in this action is for the costs to be on Standard Basis.

Please excuse our attendance at tomorrow's hearing."

10. The draft order at that stage shows precisely the terms of the order to which they were consenting (pages 65 and 66 of the bundle) save of course at that moment it did not have in it the words "on an indemnity basis", it simply provided for the first defendant to pay the claimant's costs.
11. On 3rd May the appointment before the judge being on 4th May the solicitors then acting for the claimant put in a further affidavit. That affidavit, according to the documents before us, was served on the court manager at Wolverhampton County Court. Mr Daniel certainly himself did not see it, and I am not clear for my part that it was ever served on those acting for Mr Daniel at the time. Mr Daniel says that he has been told that it was not. That affidavit is at pages 17, 18 and 19 of the main bundle. It first of all relies on a letter from the claimant's former solicitors to the defendant's former solicitors dated, 15th November 1995, and refers to the fact that in that letter the claimant plainly offers to settle his claim for £6,000 plus his then very modest costs. It refers then to a letter in response from the defendant's then solicitors which made a counter-offer simply that the sum of £2,500 paid under the contract should remain with the claimant, and then it refers to a third letter which was dated 8th November 1999. The paragraph of the affidavit reads in this way:

"5. The third letter in the bundle of copy correspondence was prepared and sent by me on the Claimant's behalf after I took over conduct of the file. It is dated 8th November9 1999, and it is a clear and full Part 36 offer under the Civil Procedural Rules. In it, the Claimant offers to settle at £8,000.00 plus his costs, and including interest. No reply was ever received to that offer and it is deemed to have been rejected.

6. Under the Civil Procedure Rules, Part 36.21, it is stated that a Court shall normally make a costs Order on the indemnity basis, together with interest on those costs at a rate not exceeding 10% above base rate, in circumstances where at Trial, a Defendant is held liable to pay more to the Claimant than the Claimant's offer, or that Judgment against the Defendant is more advantageous to the Claimant. It is my submission to this Court that the Claimant has in fact recovered £8,500 from the First Defendant and he has therefore bettered his own offer.

7. Such provision as to indemnity costs, and interest on the sum recovered, only dates in theory under the Civil Procedure Rules, from the latest date on which acceptance could have been made, which in this case is 30th November 1999, under the provisions of Civil Procedure Rules 6.7(1).

8. I refer this Honourable Court to the fact that, as long ago as November 1995, the claimant offered to settle at a figure of £6,000 plus costs, and that offer was never properly dealt with. It is certainly not accepted. I have already alluded in my first Affidavit to the First Defendant's conduct in bringing his son in as a puppet Second Defendant through the Limited Company... and invited the Court to draw the conclusion that this constituted unreasonable conduct of the proceedings.

9. Although there is no express provision in the Civil Procedure Rules for indemnity costs prior to the Woolf Reforms under Part 36, it is my submission to the Court that there is, and always has been, a discretion to award indemnity costs in the event of unreasonable conduct of proceedings. I therefore ask this Honourable Court so to order in the terms of the draft Order already filed and served by me."

12. If one looks at the offers that have been referred to, the November 1995 one (page 21) clearly was an offer to settle upon payment of the sum of £6,000. There is no doubt, and it is common ground that that was to pay £6,000, leaving the £2,500 where it was at a time when the costs clearly would be very much lower than they were by the time this trial took place. One then looks at the offer of 8th November 1999 and one sees this:

"Please note that, pursuant to Part 36 CPR, we are instructed that our client wishes to make an offer to settle. He will accept a payment of £8,000 in full and final settlement of his claims herein, together with interest, plus his costs, to be assessed if not agreed. This offer is open for 21 days from the date of this letter. Acceptance will have to be in writing as per CPR Part 36.12 and we particularly draw your attention to the provisions of CPR 36.12(2) as to costs."

13. One immediately notes that what purported to be a Part 36 offer was made not inclusive of interest whereas the affidavit had described it as being inclusive of interest.
14. It will be convenient at this stage to go back to the rules which are now applicable so far as costs are concerned. The starting point is Part 44, the general rules on costs. 44.3 provides:

"(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.

(2) If the court decides to make an order about costs -

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b) the court may make a different order.

(3) The general rule does not apply to the following proceedings [and it identifies those].

(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)

(Part 36 contains further provisions about how the court's discretion is to be exercised where a payment into court or an offer to settle is made under that Part."

15. It then identifies the conduct of the party.
16. I turn to Part 36. 36.5 provides as to how a Part 36 offer is made and what it provides for in part 36.5(3) is:

"A Part 36 offer must -

(c) if it is expressed not to be inclusive of interest, give the details relating to interest set out in rule 36.22(2)."

17. To go to that rule first, it provides for what the offer must contain in relation to interest:

"Where a claimant's Part 36 offer... is expressed not to be inclusive of interest, the offer or notice must state -

(a) whether interest is offered; and

(b) if so, the amount offered, the rate or rates offered and the period or periods for which it is offered."

18. (Clearly this purported Part 36 offer did not comply with Part 36.2(2)).
19. Reliance was placed on 36.21, which provides:

"(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."

20. It then has a provision as to interest, and it says in (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."

21. That is an important provision so far as the Part 36 procedure is concerned in that in order to encourage claimants to make Part 36 offers this sanction is applied under 36.21(4), which provides:

"Where this rule applies, the court will make the orders referred to in paragraphs (2) and (3) unless it considers it unjust to do so."

22. Thus the court does and will make an order for indemnity costs if in effect a defendant fails to beat a claimant's Part 36 offer.
23. It seems clear that at the time that consent was given for an order to be made against the defendant, Mr Daniel, by his then solicitors, did not have in mind or appreciate the distinction between costs on a standard basis and costs on an indemnity basis. The position so far as that is concerned is that if costs remain on the standard basis then the question of proportionality arises; if it is made on an indemnity basis then proportionality is not in issue and the reasonable costs are those that will be payable. It may be said with some force that the defendant's solicitors should have appreciated more clearly what the claimants were going to seek before the judge on this occasion when claiming indemnity costs; but it does appear they had no knowledge that purported Part 36 offer and the original offer made back in November 1995 were going to be relied on.
24. Furthermore, it can be said with some force that so far as anyone on the defendant's side was concerned the sort of estimate of costs that had been given by the claimant's representatives was an estimate in the region of £12,000 although it would have to be accepted that that was done very much off-the-cuff during the trial. In any event no one represented Mr Daniel at the hearing before the judge. When the matter came before the judge the misleading impression which had been given by the affidavit of there being a valid Part 36 offer was continued. The suggestion that was being made to the judge (and if the judge was taking it for himself a suggestion which he was encouraged to maintain) was that there had been a Part 36 offer made in November 1999, and indeed it was being said it was a Part 36 offer which had been beaten when one saw the order that the defendant was now prepared to accept so far as damages was concerned. Further reliance was placed on the fact that an offer had been made in November 1995 in order to take the indemnity costs back to at least that date. What was being sought was an indemnity costs order so far as all the costs of these actions were concerned. There is absolutely no reference to interest at any stage in the argument (so far as I can see) addressed to the judge on that day; no reference to the fact that Part 36.22 had not been complied with; no reference to the fact that the sum of £8,500 (which of course was £6,000 plus £2,500) might well contain an element of interest in it; no reference to the fact that the purported Part 36 offer did not "beat" the agreed damages.
25. In the result the judge made an order for indemnity costs and he gave briefly his reasons for doing so. Again it is clear from those reasons that his starting point was that there was a Part 36 offer made on 8 November 1999 and therefore one started from the position that there should be an order for indemnity costs from that date. He then referred to the previous offer of the £6,000 made in November 1995 and to the unreasonable approach of the defendants; and in particular the unreasonable stance in trying to deflect liability on to the limited company which, as the judge said, one assumes has no assets. Thus he made an order for costs on an indemnity basis.
26. At that stage no attempt was made to appeal that order. What appears to have happened is that when the solicitors for the claimant wanted their costs assessed they produced a schedule and that put the costs at, as I understand it, somewhere over £40,000. It would seem from the correspondence that at first the solicitors for Mr Nash contemplated that they would be able to argue the proportionality question, and only when they appreciated that because the order was for indemnity costs that question would not be arguable, was any thought given as to whether some efforts should be made to reverse the order made by the judge.
27. In the result Mr Daniel sought to apply for an extension of time for appealing, and indeed permission to appeal. The points he takes are first that he and his solicitors never saw that second affidavit which was put in before the judge. He says that the judge was misled in relation to the effectiveness of the Part 36 offer and misled in particular in relation to whether that offer was inclusive of interest or exclusive of interest, and he says that on that basis he should have permission to appeal and leave to do that out of time.
28. In my judgment there is substance in both those points. Where, as seems to me clear, the judge has been seriously misled on material aspects in relation to the basis on which he was being asked to exercise his discretion, it would be quite wrong for this court not to entertain an appeal from that order. It can of course be said that there was some fault on the part of Mr Daniel's solicitors for not appreciating the effect of an order for indemnity costs and ultimately not seeking permission to appeal at an earlier stage; but that fault, as it seems to me, pales into insignificance as compared with what was a serious misleading of the judge as to the basis on which he was being asked to exercise his discretion. I would also add that it seems to me that the claimants are not in a position to suggest that they are prejudiced by the delay there has been in bringing this appeal on, and thus it is I would give permission to appeal and I would extend time for so doing.
29. Of course, the way this application has been argued is to look at the merits of the appeal in some detail as already is clear. We have had the matter fully argued by Mr Haycroft on behalf of the claimant. He has, in effect, argued the merits of the appeal in resisting an application for permission. On the merits of the appeal it seems to me again it is clear that since the judge was misled as to the basis on which he should make an indemnity costs order it is simply impossible for Mr Haycroft to uphold the exercise of the judge's discretion in that regard. The matter must be looked at afresh. In that regard what Mr Haycroft suggests is that one must look at the conduct of the action as a whole. He, it is fair to say at this stage, accepts quite properly that the Part 36 offer did not beat the sum which the claimant ultimately accepted. It is much less clear what the position is in relation to the original offer in November 1995. Mr Haycroft puts his argument this way. He says what one can see is that there was an offer to take £6,000 at a time when the costs were very low. It was quite unreasonable for the defendant not to agree to pay that sum. But on the other hand the argument the other way is that at that stage the sum of £6,000 must have included costs of paint or other materials and certainly did not include any element of interest. The argument is that the only reason you get the £8,500 now is because there is a high percentage of interest in the £8,500 figure; and thus on the defendant's side it is said that if one is comparing the offer in November 1995 with what is now the sum ordered to be paid once again it is said that the claimant did not beat the figure.
30. As it seems to me since Part 36 was not in being at the time that that offer was made there are arguments in effect both ways on that original offer, but there is considerable force in the way in which Mr Daniel puts it. Standard costs are "the norm", and indemnity costs should only be awarded when a case is outside "the norm". If one excludes the alleged Part 36 offer and takes account of the fact that the November 1995 offer was made many years ago would that offer in November 1995 take this case out of the norm? Would the conduct of the defendant during the trial take this case out of the norm? One must have some regard to the fact that the claimant also looks as though he altered his claim by making amendments at the trial. One should also take into account the fact that the judge was badly misled by those seeking an indemnity costs order. One should also bear in mind that if an indemnity costs order is made then proportionality is something that is disregarded, whereas in a case of this sort it must be one of those cases where it is very important to have some regard to proportionality.
31. As it seems to me these matters should normally be for a judge handling the question of costs on a daily basis. If this matter had been fairly presented to the judge, and if he had weighed up all matters including the conduct of the defendant and the original offer and had ordered indemnity costs, I am not sure that is an order with which I would have interfered. But that is not how it happened.
32. We now are faced with a situation in which the court below was seriously misled in the way the application was made. We are also in a position that the judge was not. Although some estimate for costs was given in the region of £12,000 we can now see that costs in the region of £40,000 are being claimed.
33. Exercising my discretion afresh I would say this is not a case in which an order for indemnity costs should be made. I would say the costs should be assessed on the standard basis and I would allow the appeal accordingly.
34. LADY JUSTICE HALE: I agree. I do accept that the letter of 8th November 1999, which purported to contain a Part 36 offer, could be read in two ways. The relevant sentence is:

"He will accept a payment of £8,000 in full and final settlement of his claims herein, together with interest, plus his costs, to be assessed if not agreed."

35. The words "together with interest" could be read either as relating back to the words "payment of £8,000", or as relating back to the words "full and final settlement of his claims herein." It seems to me that it is the job of the person making the Part 36 offer to make it crystal clear which of those two meanings is intended; and if there is any doubt as to whether or not the interest is included in the settlement of the claims or whether it is on top of the payment of £8,000, that is something about which the defendant should not have to guess. In any event, whichever way it is read it is crystal clear that the inclusive total of £8,500 which was agreed in this case (that is the £2,500 deposit and an extra £6,000) does not beat the payment of an extra £8,000 on top of the £2,500 already paid. Thus on any view that Part 36 offer, if that is what it was, was not beaten. Yet, the claimant's solicitor says in terms in the affidavit which my Lord has quoted that it does beat that offer. Furthermore his own file note of the hearing makes it plain that he maintained that submission before the judge, as does a further note which follows it in the bundle. It is also crystal clear from the judge's own remarks that that point weighed with him in the exercise of his discretion when he decided to avoid indemnity costs.
36. Undoubtedly there were other points made to him which he no doubt took into account, but it is impossible, in my view, to conclude that had he not been misled in that way he would inevitably have reached the same conclusion. It seems to me he would have had a much more difficult task on his hands, because one has to bear in mind that the usual order is for costs to be paid on a standard basis, unless there is some element of the party's conduct of the case which deserves some mark of disapproval.
37. For those reasons I agree with my Lord that permission to appeal should be granted and that the judge's exercise of his discretion cannot stand, and for the reasons that he gives, exercising my own discretion afresh, I would revert to the standard order, not being sufficiently persuaded that this is a case from which it was proper to depart.
38. (Appeal allowed; costs below to be assessed on the standard basis; First Defendant's cost of the appeal to be paid by the Claimant; Claimant do pay the First Defendant an amount to be Defendants' costs to be determined by a Costs Judge; The First Defendant's costs to be subject of a detailed assessment in accordance with the Community Legal Service (Costs) Regulations 2000 and the Community Legal Service (Costs Protection) Regulations 2000; there be liberty to the First Defendant to apply within three months to a Costs Judge pursuant to Regulation 10(2) of the Legal Service (Costs) Regulations 2000; the Claimant's costs to be subject of a detailed assessment in accordance with the Community Legal Service (Costs) Regulations 2000).