England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		Wednesday, 11 October 2006

1. THE DEPUTY JUDGE: The trial of this matter was due to commence yesterday, Tuesday 10 October 2006 with a time estimate of four days. However, on Monday 9 October 2006 the matter was settled, save as to costs, on the basis that the Claimants accepted the Defendant's open offer of £38,000 in respect of their claim for damages as pleaded in the Particulars of Claim in the sum of £350,000 odd, plus interest.
2. Accordingly, yesterday, instead of embarking on a full trial I heard oral argument from each side on the question of costs. New skeleton arguments confined to the issue of costs were submitted by both sides. The Court has been informed that the costs of the action on each side are in the region of £120,000 odd.
3. Before I embark on a short chronology in this action, I should make some initial points of observation.
4. The Court has power to makes a costs order when the substantive proceedings have been resolved without a trial but the parties have not agreed about costs. The overriding objective in such circumstances is to do justice between the parties without incurring unnecessary Court time and consequently, additional costs. However, there is a real difficulty in asking the Court to exercise its discretion in respect of the costs of an action which the Court has not tried. It is often very difficult for a judge to decide who is the winner and who is the loser without embarking on a course which comes close to conducting a trial of the action that the parties intended to and have avoided by their compromise. The truth is often that neither side has lost or won and often the best course for the Court is to say, "If you have not reached an agreement on costs, then you have not settled your dispute and the action should proceed".
5. Accordingly, the first task for the Court is to decide whether it is really in a position to make an order as regards costs at all, having regard to the need to have a proper basis of agreed or determined facts upon which to decide, in the light of the principles set out in CPR 44, which order to make.
6. As is well established, the general rule is that if the Court decides to make an order, the starting point is that the unsuccessful party will be ordered to pay the costs of the successful party, as set out in CPR 44.3(2)(a). However, the Court can make a different order (CPR 44.3(2)(b)) and if it does, the Court is required to have regard to the factors set out in CPR 44.3 including, the conduct of all the parties; any payment into court; any admissible offer to settle; whether a claimant has exaggerated its claim; the manner in which the party has pursued or defended his case or particular allegation; whether it was reasonable for a party to raise a particular issue; whether the party has succeeded on part of its case and the extent to which the parties have followed the pre-action protocol.
7. Turning now to the chronology in this action. On 24 July 2003, the Claimants' previous solicitor sent a pre-action protocol letter to the Defendant setting out a claim and damages for, inter alia, breach of an alleged retainer in the sum of about £3.725 million. The protocol letter stated expressly that the Claimants had not yet appointed an expert in relation to the matter. However it appears that shortly after this letter, the Claimants provided the Defendant with a valuation from Messrs Savilles ("Savilles") purportedly in support of the £3.75 million claim.
8. In response to this claim, the Defendant's insurers, the Solicitors Indemnity Fund ("SIF") wrote on 4 September 2003 a long letter of rejection, making it quite clear that the Defendant refuted liability and also rejected the valuation by Savilles as inadequate. It appears, and it was accepted by Mr Kremin for the Claimants that the Savilles' report had been obtained for quite a different purpose. Having seen that report myself, it is quite clear that it did not support the value of the claim put forward by the Claimants in the protocol letter.
9. On 7 October 2003 the Claimants' solicitors responded to the SIF letter and sought details of the solicitors for acceptance of service of the proceedings. On 4 November 2003 draft particulars of claim were provided to the Defendant. These draft particulars mirrored the claim set out in the protocol letter and made a claim for £3.725 million plus interest and costs, making the total claim nearer to £4 million.
10. On 4 November 2003 SIF sought particulars of the alleged retainer and on 5 November 2003 received a reply of sorts from the Claimants' then solicitors. In response to that reply, SIF wrote again on 11 November 2003 disputing liability. Thereafter parties agreed a moratorium for limitation purposes.
11. The action then went to sleep until May 2005. It was one and a half years later when the Defendant received the letters from Messrs Russell Jones and Walker, newly instructed by the Claimants, alerting the Defendant of the claim again, and giving notice that the Claimants would be in touch after they had carried out further detailed investigations.
12. In light of the Claimants' letter on 13 July, SIF gave notice terminating the agreed limitation moratorium and the moratorium came to an end by agreement on 4 August 2005.
13. On 2 August 2005, two days before the moratorium was due to come to an end, the Claimants' solicitors called the Defendant's solicitors suggesting mediation. This was rejected by SIF. In a letter of that date, SIF wrote informing the Claimants that the Defendant's view was that the claim was misconceived as there was no retainer, and that the retainer alleged in the draft particulars in claim was vague and unparticularised. In the circumstances, SIF contended that there was no current utility in a mediation.
14. The Claimants rely on this rejection of mediation as to evidence of the Defendant's unreasonable behaviour, and something that I should take into account in considering costs. I will come back to this in due course, but it was Mr Kremin's submissions that the Defendant had turned its face against a mediation throughout.
15. However, I think it is important to bear in mind that as at 2 August 2005 nothing had in fact changed in the way the claim had been formulated since the protocol letter in 2002, so the Defendant was being asked to mediate a £3.75 million claim, barely particularised with no proper expert evidence supporting it. In my view, and I will return to this later, it was not unreasonable for SIF to say then that there was no current utility for a mediation at that juncture.
16. Moving on, the Particulars of Claim were then served on the Defendant on 3 August and the claim was no longer pleaded at £3.75 million but was £350,000 plus interest and costs. The claim was acknowledged on 24 August 2005 and on 28 September 2005 the Defendant filed a detailed defence and thereafter, on 30 September, made a CPR Part 18 request for particulars of both liability and quantum, indicating that they were considering striking out the Claimants' claim.
17. The particulars were provided on 22 November 2005. These particulars made clear to the Defendant that this was not a case that was suitable for a strike-out application, because there was an obvious dispute of fact as regards the retainer. As regards the question of quantum, the particulars stated that the claim for £350,000 was a matter of expert evidence, suggesting, therefore, that the Claimant had expert evidence to support that claim.
18. Shortly before particulars were provided on 20 October 2005, the Defendant wrote to the Claimants making a without prejudice offer to settle the claim on a drop-hands basis. This was done on the basis, according to the Defendant's letter, that the Claimants had no real prospect of being able to prove the factual basis of their claim and that, mindful of legal costs that would be incurred in pursuing the matter, the Defendant was suggesting a drop-hands basis for commercial reasons. No response to the offer was received from the Claimants and on 2 November 2005 the Defendant withdrew that offer.
19. The next thing that happened was a CMC before Master Moncaster on 2 February 2006 at which it was agreed that the issue of valuation should be dealt with by evidence from a single joint expert and directions were given for his appointment and the provision of his evidence. There appears to have been no discussion of mediation at this time.
20. Mr Hargreaves, the single joint expert, produced his report on 9 August 2006. He reported that the difference in value between the Claimants' existing leasehold interest and the combined leasehold and freehold interest of which the Claimants claimed that they had been allegedly deprived by reason of the Defendant's alleged breach, was £38,000; i.e. about 10 per cent of the Claimants' pleaded claim for this loss. Mr Hargreaves' report was made available to the parties on 11 August 2006.
21. On 1 September 2006, the Claimants served on Mr Hargreaves certain questions pursuant to CPR Part 35. The Claimants were obviously disappointed with Mr Hargreaves' findings and were questioning his analysis and whether he had carried out the correct exercise. The Claimants sought a response to their questions within seven days. Mr Hargreaves responded on 6 September 2006 giving the requested clarification and sticking to his £38,000 valuation.
22. Further questions were then raised by the Claimants on 15 September 2006 and further replies were provided by Mr Hargreaves on 18 September 2006. However, not content with these responses, the Claimants then issued an application to have Mr Hargreaves cross-examined and also to put in evidence from Savilles to support the Claimants' case that Mr Hargreaves' valuation was incorrect and should not be relied upon by the Court. Had this matter not settled on Monday, this application would have been heard by me yesterday on the first day of the trial.
23. Whilst all this was going on and the Claimants were maintaining their disagreement with Mr Hargreaves' report, steps were beginning to be taken by both parties towards settling this matter. On 4 September 2006 the Claimants' solicitors wrote to the Defendant's solicitors raising the suggestion of mediation and suggesting a mediation in the next couple of weeks. No response was forthcoming from the Defendant and on 8 September 2006 the Claimants' solicitors chased the Defendant's solicitors.
24. On 13 September 2006 however, the Defendant made a without prejudice drop-hands offer again in a letter to the Claimants' solicitors. The rationale for this drop-hands, as stated in that letter, was that in light of Mr Hargreaves' report, the Defendant took the view that even if the Claimants were to win at trial, which they refuted, the Claimants would not recover their costs. Further, the costs exceeded the realistic value of the Claimants' claim by a considerable margin.
25. The Defendant sought a response as soon as possible from the Claimants. On 20 September 2006 the Claimants rejected this drop-hands offer and made a CPR Part 26 without prejudice offer to take £38,000 plus costs. On 21 September 2006 the Defendant rejected this offer and made a "without prejudice save as to costs" offer of £38,000 with no order as to costs. The rationale for this offer, as set out in the letter, was that in the light of the Claimants' conduct, there was a real prospect, so the Defendant contended, that the Court would order the Claimants to pay the Defendant's costs. In that letter the Defendant also suggested mediation and suggested that it would make itself available on any working day in the next two weeks.
26. On 27 September 2006 the Claimants rejected this offer. In a letter of that date, the Claimants made clear their position on quantum, namely that they had serious concerns with Mr Hargreaves' report and that they would be making an application to have him cross-examined and to call Mr Churchhouse of Savilles to give evidence. They also rejected an offer from the Defendant to mediate the dispute, on the basis that: "It would not be logistically possible to arrange a mediation at this late stage".
27. Instead, the Claimants offered a without prejudice meeting and the Claimants invited the Defendant to reconsider the Claimants' without prejudice offer of £38,000 plus costs.
28. Finally, on 29 September 2006 the Defendant made an open offer of £38,000, with no interest, and for the Court to determine the issue of costs. On Monday this week, that offer was accepted by the Claimants.
29. In short, where the parties ended up was that the Claimants accepted £38,000, gave up their claims to any interest (which would have been quite significant at 6 per cent for 7 years or so) and it was agreed that the Court should determine the costs.

The parties' respective submissions

30. The parties' respective submissions are set out in their skeleton arguments and I do not intend to repeat them in full in this judgment. In short, the Claimants contend that they were the effective winner and should recover their costs from the Defendant, or a very substantial part of the costs, for the following reasons:

(i) The Defendant has paid the full amount that the single expert determined the Claimants had lost. In other words, the Claimants have won 100 per cent of the loss as identified by that single joint expert, Mr Hargreaves;

(ii) The Claimants have recovered the sum of £38,000 in this litigation, which litigation was necessary to effect any recovery;

(iii) the Defendant turned its face against mediation throughout the litigation;

31. (iv) Moreover, the Defendant has always contested liability. It is contended that it was never said by the Defendant prior to Mr Hargreaves' report that the Claimants' claim was exaggerated. Further it was never said by the Defendant that had the Claimants' initial claim been in the region of £38,000, it would have paid it. In short, the Defendant has always contested liability and it is not open now to the Defendant to say that it is simply paying £38,000 as a nuisance value for commercial reasons to get rid of the claim. How, ask the Claimants rhetorically, does paying £38,000 make sense when the Defendant has incurred such considerable sums in its own costs?
32. Whilst the Claimants accept that Mr Hargreaves' report changed matters considerably in August 2006 and accept that the Claimants were unhappy with Mr Hargreaves' report and issued an application to contest it and to call Savilles to give contrary evidence, the Claimants say that they should nonetheless recover the whole of the costs of the action which they had to pursue to get any payment at all from the Defendant. The Claimants, says Mr Kremin, should not be punished for pursuing the litigation this far when in fact they have recovered a significant amount as a result of the litigation and could not have got any money without it. Further, it is not said by the Defendant that the Claimants have pursued the claim in bad faith or that they have deliberately exaggerated the quantum of the claim.
33. Finally, Mr Kremin argues that if the Court is minded to reduce costs at all, the Court might disallow the costs spent prior to the Claimants' present solicitors' involvement and the cost, perhaps, of challenging Mr Hargreaves' report, the application to cross-examine him and the cost of any additional Savilles' evidence.
34. I hope that this is an accurate summary of the Claimants' arguments, which are set out in Mr Kremin's helpful skeleton, although they may not do justice to the eloquence of Mr Kremin's submissions.
35. The Defendant's response to these contentions is, again, in summary, (i) that the Claimants' claim has been inflated grossly throughout; (ii) where one has arrived at is that the Claimants have accepted £38,000 for a claim originally put at £3.75 million, then pleaded at £350,000 plus interest at 6 per cent over 7 years, which would add another £20,000-odd, plus costs. In other words, the Claimants have accepted a fraction (less than 10 per cent) of their pleaded claim.
36. Further, the parties have been put to disproportionate expenditure and it is commonsense that if the Claimants' claim had been properly put in the first place (i.e. at the £40,000 level) then the Defendant's approach would have been different. The Defendant says the whole strategic approach to defending a claim is bound to differ depending on its value.
37. Further, the Defendant contends the Claimants' claim is flawed from the outset. The claim, as originally pleaded, was wholly unsupported by expert evidence. Moreover, the Defendant contends that it did not shun mediation at every stage. Mediation was not feasible or realistic at the protocol stage when it was faced with unparticularised claim for £3.7-odd million and no expert report. Mediation was mooted after Mr Hargreaves' report was made available and sensible steps were taken to try and settle the matter thereafter.
38. Finally, the Defendant contends, liability has never been admitted by it and was not admitted by the offer of payment of £38,000. The offer to settle was made on grounds of proportionality and commercialism. It was in effect, the Defendant says, a nuisance payment.

My Judgment

39. In my view, the correct order to make in the present case is that there should be no order as to costs. This is the order the Defendant urges me to make and for the reasons I will now explain, I accept the Defendant's submission in this regard. This is a case where the Court is in a position to make an order as to costs, the background facts set out above being broadly agreed between the parties.
40. In my opinion, it is simply not right to conclude that the Claimants have won or, indeed, are the "effective winners" of this litigation. The Claimants have not recovered by way of settlement what they might have recovered had this matter proceeded to trial and had the Court had adopted Mr Hargreaves' valuation. The Claimants have accepted an offer of £38,000 in settlement of a claim of £350,000, plus interest at 6 per cent for 7 years. In short, they have accepted a sum which represents about 10 per cent of their pleaded claim and have agreed to forego the interest on that sum.
41. Whilst the Court would accept that the sum of £38,000 is not an insignificant amount for any individual to recover, this result cannot properly be regarded as a "significant" win for the Claimants. Indeed, in circumstances where the Claimants have recovered only 10 per cent, approximately, of their claim, and have given up interest on that claim, it may more properly be regarded as a failure on the part of the Claimants. Moreover, it may be regarded as that much more of a failure in circumstances where right up until Monday of this week, the Claimants were contending that Mr Hargreaves' valuation of £38,000 was incorrect and were seeking to introduce evidence from Savilles to support their valuation of £350,000. In short, right up until Monday this week, the Claimants were positively asserting that the proper value of their claim was £350,000 or thereabouts.
42. The Claimants were not obliged to accept the Defendant's offer of £38.000. It was open to the Claimants when this offer was made either to seek to insist on it being paid into Court so they would recover the costs up to that date or that the Defendant paid the whole of the costs as part of the settlement, failing which the Claimants would proceed to trial. Instead, the Claimants made a commercial decision to settle, one assumes, having regard to the risks that they might fail on liability at trial or succeed on liability but recover an amount only in the region of £40,000 in line with Mr Hargreaves' report.
43. One does not criticise the Claimants for this decision. It may be regarded as a perfectly sensible commercial decision to dispose of this action and avoid the further incursion of costs in circumstances where they may have perceived there to be a real risk that even if they were successful, they might only recover £38,000-odd. However, it was, nonetheless a commercial decision which the Claimants made in the circumstances.
44. Further on this question as to who is the "effective winner", the Court has been told the Claimants' costs were in the region of £120,000-odd. Accordingly, unless the Claimants are awarded their costs, then they are going to be considerably out of pocket. In the circumstance, it seems to me a bit much for the Claimants to say that they are the effective winners. Contrary to Mr Kremin's submission, the Claimants are not being penalised with an order that the costs lie where they fall. This was a risk that the Claimants took when they decided to accept a settlement that did not include costs and, indeed, when they accepted a settlement of a figure which alone would be insufficient to cover their costs.
45. As I have said, it is obviously difficult for the Court in these sorts of circumstances to decide who is the winner and who is the loser. The truth often is, as I have said, that neither side has won or lost. It is also true that a considerable number of cases are settled by parties in the belief that the terms of the settlement represent a victory, or at least a vindication of their position in the litigation, or in the belief that they have not lost, or at the very least, in the belief that the other side has not won. But in circumstances where the Claimants were seeking damages of £350,000-odd, which was in itself 10 per cent of what was originally sought in 2002, and where the Defendant was always contending that it had no liability, most people would probably say that either that there was no winner or more likely that the Defendant was the winner.
46. Finally, Mr Kremin urges on me that his clients have won because without the litigation they would not have recovered anything and they have recovered a not insignificant sum in this litigation.
47. However, as I said, it is not so simple. In particular, I accept Mr Parker's submission that the whole strategic approach of a Defendant to defending a claim is bound to differ depending on its value. Had the Claimants claim at the outset in 2002 or even in 2005, been put at a value of £38,000 and not £350,000 or, indeed, £3.5 million, this whole litigation may well have taken a completely different course. Whilst it is right that the Defendant has at all times disputed liability, it may well have taken a quite different commercial approach to a far smaller claim.
48. Obviously, this is all hypothetical, because the Claimants' claim was not put in the region of £38,000 but was put at a figure 10 times that amount. But I accept Mr Parker's submission that a simple, commercially expedient settlement, as has now occurred, is overwhelmingly more likely for a tiny claim so as to avoid the sort of disproportionate expenditure which has now unfortunately been spent on this case.
49. In short, I reject Mr Kremin's submission that simply because the Defendant has never accepted liability and has never contended expressly that the value of the claim was exaggerated (because the Defendant's primary contention has always been that the claim was misconceived) that the Defendant would not have taken a different approach to a much smaller claim in the region of £38,000.
50. Having concluded, therefore, that the Claimants are not the effective winners in this litigation and are therefore not entitled to their costs without more, I turn to the factors outlined in CPR Part 44.3 when considering what other order I should make. In this regard, I accept the Defendant's submissions set out in Mr Parker's skeleton argument and in his oral argument with regard to the conduct of this litigation by the Claimants and in particular the point that the Claimants' claim throughout this litigation has been, objectively exaggerated.
51. As Mr Parker correctly points out, the costs recoverable by a receiving party, if any, should be measured by reference to the amount of damages recovered by that party. As is made clear in a decision of the Court of Appeal in Painting (Yvonne Hazel) v University of Oxford (2005) [2005] EWCA Civ 161, where a claim has been exaggerated by a considerable margin and this is to be determined objectively, it would be wrong to regard the receiving party as the real victim in the claim. It matters not that the exaggeration was unintentional. The Court must have regard to the exaggeration in whatever form it takes. This is made quite clear from the wording of CPR Part 44.3(5)(d).
52. The Claimants claim at the outset was for £3.75-odd million. It then dropped to £350,000 plus interest, and the Claimants have now accepted £38,000 which is 1 per cent of the original amount and little over 10 per cent of the pleaded claim. It is quite clear that the value pleaded in the Points of Claim of £350,000 was not one properly based on expert evidence. The Savilles' Report which I have been shown and which was relied upon the Claimants, firstly does not support that value and secondly, and more importantly, as Mr Kremin accepts, was obtained for a different purpose. It was only after Mr Hargreaves' report was produced that the Claimants sought specific advice from Savilles to support the claim.
53. I find that the Claimants' claim was grossly exaggerated at the protocol stage. (In this regard I should note that the Claimants' present solicitors were not involved at that stage, nor, I believe, was counsel). It was then exaggerated when the proceedings were commenced in 2005, and these factors, in my view, were bound to affect the way the Defence was run.
54. Further, I do not accept Mr Kremin's submission that the Defendant has always set its face against mediation and that the Court should take account of this in any order for costs. This submission, in my view, is simply not borne out on the facts. In my view, it was reasonable for the Defendant to reject mediation in 2002 when it received the initial protocol claim for £3.75-odd million, unsupported by expert evidence and with little in terms of particulars of the claim as regards the alleged retainer.
55. Mediation was then not raised until after Mr Hargreaves' report was produced and the Defendant was willing at that time to consider it. Even though no mediation took place, from mid September 2006 onward the parties slowly, in pincer-like movements, inched towards settlement. There were telephone conversations and letters, without prejudice offers and CPR Part 36 offers, so commonplace in litigation of this type. There was no obstruction to settlement on the part of the Defendant. Meaningful offers were made by the Defendant. It offered to drop hands in October 2005 and again on 13 September 2006. The Defendant's stance throughout has been that the Claimants should not be paid their costs owing to the lack of overall merit of the claim. This has been the Defendant's consistent position and the fact that the Claimants have not regarded the Defendant's offers as meaningful, in my view, more likely reflects the fact that the Claimants were simply not prepared, until Monday, to accept anything less than a substantial sum plus costs.
56. Finally, I do not accept Mr Kremin's submission that the Defendant has impliedly accepted liability by making the payment of making of £38,000 and should, for that reason, pay the Claimants' costs. On the evidence, it is quite clear that the Defendant has never accepted liability. The offer to pay £38,000 was not made on the basis that liability was accepted. The offer was clearly made on the basis it was proportional and commercially sensible to settle the claim in light of Mr Hargreaves' report and that, in effect, the Defendant was offering a nuisance payment to get rid of the action.
57. Whilst it is right that the Defendant will have to pick up the £120,000 odd of its own costs, plus the £38,000 agreed sum to be paid to the Claimants, the settlement will have saved a considerable amount of costs on the part of the Defendant. In addition, there would be a degree of irrecoverable costs had the Defendant succeeded and it would have had to recover any costs personally from the Claimants.
58. In conclusion, in the circumstances, it seems to me that the appropriate order, to do justice between the parties, is no order as to costs.
59. Finally, I would like to thank both counsel for their very helpful submissions.