England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Claim No HC 11C03082
		11 December 2012

Mr John Baldwin QC:

1. In this action the Claimant, a company engaged in the business of residential mortgage lending, brought a claim in negligence against the Defendant, a firm of solicitors, who advised in connection with the acquisition of some property with funds loaned by the Claimant's predecessor in title. The Claimant alleged that it would not have made the loan if the Defendant had not been negligent, and claimed damages accordingly. The case has now settled - pursuant to the acceptance on 23 May 2012 of a Part 36 offer made on 17 May 2011. The court has been called upon to make an appropriate order as to costs.
2. The Claimant seeks an order for its costs on the standard basis, contending that such is the normal order when Part 36 Offers are accepted out of time and that there is nothing from which a conclusion could be drawn that it would be unjust to make such an order. It relies on SG v Hewitt [2012] EWCA Civ 1053.
3. The Defendant on the other hand contends that the Claimant should have its costs up to 12 January 2011 (when it made a request for disclosure of some documents) but it should have its costs thereafter, alternatively the Claimant should have its costs up to 21 days after the Part 36 Offer made on 17 May 2011 and it should have its costs thereafter, alternatively that the Claimant should have its costs up to 21days after the Part 36 Offer and that there should be no order for costs thereafter. The Defendant relies on the failure of the Claimant to comply with the Professional Negligence Pre-Action Protocol (the Protocol) by its unreasonable conduct in relation to disclosure.
4. In order to understand the argument it is necessary recite from some of the correspondence. On 26 July 2010 the Claimant sent a Letter of Claim, purportedly in accordance with the Protocol, and valued the claim in the sum of £165,000 (all figures in this judgment are rounded), the stated premise being that the loan would not have been made (as distinct from being in a lower amount) if the Defendant had not been negligent. It made a Part 36 Offer on the same day and asked for £140,000 plus costs. The Defendant responded on 19 October and invited the Claimant to resubmit its Letter of Claim and Part 36 Offer taking into account contributory negligence, gave its reasons for so doing, and asked for an extension of time for a response to the earlier letters. On the following day (20 October) the Claimant wrote saying that it appeared that the 19 October letter was the Letter of Response under the Protocol and that the majority of the letter was nonsensical. On 1 December 2010 the Defendant, in addition to complaining that the Claimant had not given sufficient disclosure in accordance with the Protocol, and in addition to making clear that the letter was not a Letter of Response and that no such Letter had been sent at that point, made a Part 36 Offer in the sum of £10,000.
5. On 12 January 2011 the Defendant made a request for 12 classes of documents which it said it needed to prepare its Letter of Response (in accordance with the Protocol). On 24 January 2011 the Claimant replied contending that it had complied with its obligations under the Protocol and reminded the Defendant that Guidance Note C5.1 of the Protocol provided that requests for information should not be used as fishing expeditions, and that no party was obliged under Paragraph B4.3 to disclose any document which the court would not order them to disclose in the Pre-Action Period. It did not, however, contend that any of the documents requested fell into either of these categories. The letter enclosed some extra documents (said to be for the purpose of enabling a determination of settlement levels), asserted that the other documents requested were not necessary for the Defendant to assess its liability, and asserted that the 12 January letter from the Defendant was a Letter of Response (despite its explicit text which made clear that it was not). The letter also stated that further documents would be disclosed but only once settlement levels had been agreed. The letter ended by contending that it was now open to the Claimant to issue proceedings, implying that the Protocol Period was over.
6. On 17 February 2011 the Defendant replied saying that the Protocol Period had not yet started and identified further the documents it sought in order to understand and evaluate the claim. Particular attention was drawn by the Defendant to the relevant underwriting file and the repossession and sale file although comments were made on the other classes of documents sought as well. On 22 February 2011 the Defendant wrote again explaining in some more detail why it needed the underwriting file and the repossession and sale files. The Defendant was contending that these documents were essential for it to assess the extent of its possible liability, if any. There was no relevant response to the letters of 17 and 22 February.
7. On 15 March 2011 the Claimant wrote contending that the Defendant appeared not to be serious about resolving the matter pre-action. It enclosed a draft Particulars of Claim and invited realistic settlement proposals. It did not mention or deal with the request for documents.
8. On 8 April the Defendant wrote stating that it could not make a Protocol Letter of Response because of the failure to provide the documents requested. It threatened to apply for a stay of any proceedings to enable compliance with the Protocol.
9. On 12 April the Claimant replied asserting that it had complied with the Protocol by providing the documents enclosed with the Letter of Claim (26 July 2010) and the letter of 25 September 2010. It went on to assert that the Defendant was not entitled to any farther disclosure until it formally admitted liability. It contended that B5.4(b) of the Protocol only applied when liability had been admitted but accepted that then there could be further disclosure to assist in formulating settlement proposals.
10. Thus the position at this stage was that the Claimant was refusing to provide any more documentation until liability was admitted. On its face that does not seem to me to be an approach which could properly be described as being reasonable and consistent with the expressed aim of the Protocol (see paragraph A2 thereof).
11. On 17 May 2011 the Claimant made its Part 36 Offer. It was expressed to be calculated on the basis of the Defendant's position, that is to say, that presumed recovery was on the basis of the difference between what it lent and what it would have lent in the absence of negligence (i.e. a lower loan as distinct from no loan, as contended in the Particulars of Claim). The sum sought was £30,000, less than 20% of the sum in the Letter of Claim.
12. On 17 June 2011 the Claimant wrote drawing attention to B5.6 of the Protocol, claimed that the 6 month negotiation period had expired and gave 14 days notice in accordance with B8.2 of the Protocol that proceedings would be commenced. On 5 July the Defendant reminded the Claimant that no Protocol Letter of Response had been served since it was unable to respond to the issue of causation pending disclosure of the documents which had been requested. On the same day, and in a without prejudice save to costs letter, the Defendant's solicitors again said that it could not advise on the merits of the offer without receipt of the documents requested on 17 February.
13. There was no reply to the Defendant's 5 July letters and proceedings were served on 12 September 2011. On 14 September the Claimant served a Notice of Funding and on 20 September 2011 it made another Part 36 Offer. This offer required more money in total than the previous one.
14. On 12 October 2011 the Defendant served its Defence. It went on to express disappointment at the failure of the Claimant to comply with the Protocol and asserted that the Claimant's interpretation of the Protocol was 'entirely misconceived'. It drew attention to the aim of the Protocol (paragraph A2), to the provisions of paragraph B4.3 (which is relevant during the period when the Defendant is investigating the Letter of Claim and provides ('The parties should supply promptly, at this stage and throughout, whatever relevant information or documentation is reasonably requested') and to Guidance Note C5 (which includes a statement that B4.3 is to encourage early exchange of relevant information so that issues can be clarified or resolved). The letter went on to explain once more which classes of documents were sought and why.
15. On 9 March 2012 the Claimant provided standard disclosure by list and inspection was, I am told, in early May. On 23 May 2012 the Defendant accepted the Part 36 Offer dated 17 May 2011. It drew attention to CPR 36.10(4) as being the relevant rule and contended that it was not liable to pay any of the Claimant's costs occasioned in the period during which the Claimant failed to comply with its obligation to give disclosure.
16. The relevant legal principles in relation to orders for costs under CPR 36.10(4) are conveniently set out in SG v Hewitt, [18 - 22 and 29] per Black LJ:

18 CPR Rule 36.10(4) provides:

"Where -

(a) ....

(b) a Part 36 offer is accepted after the expiry of the relevant period,

if the parties do not agree the liability for costs, the court will make an order as to costs."

19 Rule 36.10(5) provides:

"Where paragraph 4(b) applies, unless the court orders otherwise -

(a) the claimant will be entitled to the costs of the proceedings up to the date on which the relevant period expired; and

(b) the offeree will be liable for the offeror's costs for the period from the date of expiry of the relevant period to the date of acceptance."

It thus establishes what might be described as "the normal order" but confers upon the court a discretion to depart from it. It does not provide any guidance as to when the court should do so.

20 It was held in Lumb v Hampsey [2011] EWHC 2808 (QB) (@ §6) that the approach should be similar to that under Part 36.14(4) . Neither party sought to persuade us to differ from this. The Court of Appeal took an analogous view in Matthews v Metal Improvements Co Inc [2007] EWCA Civ 215 (@ §29), in relation to Part 36 as it was before it was revised in 2007.

21 Rule 36.14 concerns the costs consequences of a Part 36 offer following judgment. So far as material, it provides:

"(1) This rule applies where upon judgment being entered -

(a) a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer; or

(b) ...

(2) Subject to paragraph (6), where rule 36.14(1)(a) applies, the court will, unless it considers it unjust to do so, order that the defendant is entitled to -

(a) his costs from the date on which the relevant period expired;

and

(b) interest on those costs.

(3) ....

(4) In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3) above, the court will take into account all the circumstances of the case including -

(a) the terms of any Part 36 offer;

(b) the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;

(c) the information available to the parties at the time when the Part 36 offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated."

22 Accordingly, in the present case, the court had to make the normal order unless it considered it unjust to do so and in deciding whether it was unjust, it had to take into account all the circumstances of the case including the four matters expressly set out in Rule 36.14(4). I will refer to this loosely as "the test" that had to be applied.

29 I do not think it wise to attempt to prescribe or restrict in the abstract the circumstances in which the court may reach the conclusion that it is unjust to make the normal order. Rule 36.14(4) requires that, in considering whether it is unjust to make the normal order, the court must take into account all the circumstances of the case. The four factors specifically identified as relevant cast quite a wide net on their own but they are not the only matters that fall for consideration and anything else which is relevant must be considered as well. Costs decisions are particularly sensitive to the facts of the individual case.

and [75, 76] per Arden LJ:

75 In my judgment, Matthews v Metal Improvements Co. Inc. [2007] EWCA Civ 215 decides the following point. A Part 36 offer is designed to be a means whereby a party may normally throw the risk of having to pay the other side's costs on to the other side if the other side fails to accept the offer within the 21-day period allowed, or to beat it at trial. The other side then has to satisfy the court that it is unjust for this consequence to follow and not to make some other order, that is, an order as to costs other than that he has to pay all the offeror's costs.

76 To my mind, the power of the court in this regard is a deliberate and important safety valve. For a case to be within the safety valve, however, the judge will in general need to find that the case has features which take it out of the ordinary principle and which demonstrate that it is unjust to impose the normal shifting of the costs risk. I would therefore, as Lady Justice Black has done, interpret the existing CPR 36.10(4)(b) consistently with CPR 36.14(2) and thus as requiring the court to find that it is unjust not to order otherwise. Where those circumstances are present, however, the judge has a wide discretion as to the form of order that he substitutes.

17. The Defendant also drew my attention to the Practice Direction for Pre-Action Conduct and in particular paragraph 4.2 (which provides that the court expects the parties to have complied with this Practice Direction or any relevant pre-action Protocol), paragraph 4.4 (which provides that the court may decide there has been a failure of compliance because a party has, without good reason, not disclosed documents requested to be disclosed) and paragraph 4.6(2) (which provides that if, in the opinion of the court there has been non-compliance, the sanctions which the court may impose include an order that the party at fault pays some or all of the costs). Paragraph 4.5 is also relevant (it provides that the court will look at the overall effect of non-compliance on the other party when deciding whether to impose sanctions).
18. It is clear to me from the principles set out above (i) that the normal order in this case would be that the Claimant gets its costs up to acceptance by the Defendant of the 17 May 2011 offer, (ii) that there should not be a departure from that order unless the Defendant satisfies me that it would be unjust not so to do, (iii) that, in considering the matter, I must take all the circumstances of the case into account including those expressly set out in CPR 36.14(4), and (iv) relevant in the assessment of whether or not it would be unjust to depart from the normal order is whether or not there has been substantial compliance with the Protocol or whether sanctions might be appropriate.
19. In cases where a party wants to settle a dispute at an early stage there is a tension between that party wanting to settle with minimum cost and inconvenience to himself and that party having to incur expense and effort in providing information to the other party so that other party might better inform himself about the dispute and his potential liability thereunder. Pre-Action protocols address that tension and the Professional Negligence Pre-Action Protocol is directly relevant to the present situation. CPR 36 also addresses that tension and provides a regime which prescribes an allocation of risk.
20. The aim of the Protocol (expressed in paragraph A2) is to establish a framework in which there is an early exchange of information so that the claim can be fully investigated and, if possible, resolved without the need for litigation. Paragraphs A4 and A5 make clear that the courts expect the parties to act reasonably and that sanctions will be imposed only if there is substantial non-compliance. The parties are urged to disregard minor departures from the Protocol and it is plain why that is so - the Protocol is urging a common sense approach to potential litigation, one that is practical and expedient and directed to an early resolution of the dispute at a proportionate cost.
21. In the present case there was a Letter of Claim in July 2010 and it was followed by numerous requests for disclosure. It may be the case that the early requests for disclosure were too ambitious but it is fairly apparent from the chain of correspondence that the Defendant was placing emphasis on and asking for two important files, further was explaining why disclosure of these files was necessary to enable it properly to consider the claim. In my judgment a Claimant acting reasonably would, in the circumstances of this case, have supplied copies of those files at an early stage and not merely extracts therefrom. Instead of doing that the Claimant either refused without giving any good reason to supply the documents requested or failed to respond at all to the letters of request. Such conduct is not, in my view, in accordance with the Protocol. It was not helpful or conducive to an early disposal of the case.
22. Even if I am wrong in taking this view, it seems to me that the letter of 12 April in which the Claimant, purportedly in accordance with the Protocol, refused to give further disclosure unless liability was admitted was clearly acting well outside the letter and spirit of the Protocol. The Claimant's conduct was not, in my judgment, conduct which was designed to achieve early resolution of the dispute with a proportionate expenditure on costs.
23. In this case and having considered all of the correspondence carefully and assessed the implications thereof, and having re-read the evidence filed on this application, I am satisfied that the Claimant's non-compliance with the Protocol does make it unjust for the normal order under CPR 36.(10)(4) to flow.
24. I now have to decide what would be the appropriate order as to costs in the circumstances of this particular case. In terms of the actual quantum of costs in issue, I was not given any figures. I do know, however, that the Claimant is seeking an order for all its costs (to be assessed on the standard basis) and for a payment on account of £75,000. Thus it is evident that the costs in question are significantly greater than the sums payable or paid to settle the claim, a situation which one looks at with some regret. It is unlikely that costs would have been at anything like this level if the 17 May Part 36 offer had been accepted within 21 days.
25. The Defendant contends that I should grant the Claimant its costs up to January 24 2011 (when it made a request for disclosure) and grant the Defendant its costs after that date. Such an order would place the Defendant in a better position qua costs than it would have been in had it accepted the 17 May Part 36 offer within the stipulated 21 day period (with the consequences in CPR 36.10 (1) - the Claimant would be entitled to its costs up to the date notice of acceptance of the offer was served).
26. It seems to me that it will be rare indeed if a party can improve his position on costs by waiting till the end of the relevant period for the purposes of CPR 36.10(1) so that he can rely on CPR 36.10(4)(b). I cannot envisage circumstances which might lead to such and my attention was not directed to anything in the Protocol which gives a steer to such. Of course, I cannot rule it out, but I can say that, in my view, it is very far from the circumstances of this case.
27. The question becomes more difficult in relation to the costs after the period for acceptance of the Part 36 offer had expired. On the one hand the Claimant is trying to protect himself on costs by making an offer which, if accepted, will preclude him from claiming more. On the other hand the Defendant is asking the Claimant to spend more money on disclosure so that the Defendant can make a reasonable assessment as to whether to accept the Part 36 offer which has been made. And all of this is some months before proceedings were commenced.
28. I have reached the conclusion that the Claimant was not proceeding properly in accordance with the Protocol by, at least, not properly responding to the letters of 17 and 22 February 2011 and by rejecting any obligation to provide further disclosure until liability was admitted, as it did by its letter of 17 June 2011. In my view it would be unjust to require the Defendant to pay any costs after the 17 June 2011.
29. The matter does not stop there, however, since costs, and possibly a substantial amount by way of costs, were incurred after 17 June 2011. I am satisfied that it is significantly more likely than not that those costs would not have been incurred had the Claimant acted reasonably and responded properly to the letters of request for disclosure made on 17 and 22 February 2011 and again on 5 July 2011. Although that latter date is after 17 June 2011, I think that the fair order in the circumstances is that the Claimant should have its costs up to 17 June 2011 but should pay the Defendant's costs incurred thereafter, all such costs to be assessed on the standard basis if not agreed.