Court of Appeal decision highlights indemnity costs risk where claimant pursues speculative claims and unreasonably refuses Part 36 offer

In a recent judgment, overturning the High Court's decision, the Court of Appeal has ordered indemnity costs in favour of a successful defendant where the claimants should have known their claims were speculative/weak and where the defendant had made an early Part 36 offer: Lejonvarn v Burgess [2020] EWCA Civ 114.

The present case acts as a warning to claimants who pursue claims which they should have appreciated were weak or speculative. When such a claim ultimately fails, the claimant may face an award of indemnity costs, regardless of whether it may be said that the claim was "hopeless".

The decision also confirms that, while there is no automatic entitlement to indemnity costs where a claimant fails to beat a defendant's Part 36 offer (in contrast to the position where a claimant beats its own Part 36 offer), this may be an important factor in the exercise of the court's discretion. The court commented that, in such circumstances, the court should always consider whether the claimant's conduct in refusing the offer took the case "out of the norm" so as to justify an award of indemnity costs.

Where costs are assessed on the indemnity basis, the receiving party is likely to recover a higher proportion of its costs than on the standard basis. That is because any doubt as to whether particular costs are reasonable is resolved in favour of the receiving party, and there is no requirement to show that the costs are proportionate.

Background

The defendant is an architect and was a friend and neighbour of the claimants. She provided assistance to the claimants, without charge, in relation to a garden project at their North London home. The parties fell out and, on 5 March 2015, the claimants brought proceedings against her for breach of contract and/or negligence. Three weeks later, the defendant made a Part 36 offer in the sum of £25,000, which was not accepted.

Following a trial of preliminary issues, and an appeal against the court's findings on the preliminary issues, it was established that there was no contract and that, while the defendant had owed the claimants a duty of care, that duty related only to such professional services as she had in fact provided, and not any alleged omissions. At the main trial, the judge concluded that the defendant had in fact provided very few services and had not been negligent in providing any of them, so the claim failed in its entirety.

The defendant claimed costs of £724,265 and sought assessment on an indemnity basis. The judge found that costs should be assessed on the standard basis. The defendant appealed. There were three issues on appeal:

1. Whether an order for indemnity costs was appropriate due to the claimants' pursuit of what were said to be "speculative, weak, opportunistic or thin claims".
2. Whether the defendant's Part 36 offer also (either separately or cumulatively with 1 above) justified an order for indemnity costs.
3. The relevance, if any, of the defendant's approved costs budget of £415,000.

Decision

The Court of Appeal allowed the appeal. Coulson LJ gave the leading judgment, with which Rose LJ and Sir Jack Beatson agreed.

Issue 1: Speculative/weak nature of the claims

Coulson LJ found that the judge had adopted the wrong approach in considering the question of whether an order for indemnity costs was justified by the speculative/weak nature of the claims. He had been asked to consider whether, in hindsight, the claims could be said to be "hopeless". That focus was misplaced: the judge should instead have been asked to consider whether, at any point during the proceedings, a reasonable claimant would have concluded that the claims were "so speculative or weak or thin that they should no longer be pursued".

In Coulson LJ's judgment, it was clear that no later than one month after the appeal judgment on the preliminary issues, the claimants should have realised that the remaining claims were so speculative/weak that they were very likely to fail, and should not be pursued any further. The pursuit of the claims after that date (7 May 2017) was out of the norm such as to justify an order for indemnity costs.

Issue 2: Part 36 offer

Coulson LJ noted that Part 36 is clear: there is no automatic entitlement on the part of a defendant to indemnity costs if that defendant beats its own Part 36 offer. That is in contrast to the position of a claimant who beats its own Part 36 offer, where there is an automatic entitlement to indemnity costs (unless that can be shown to be unjust).

He also rejected the defendant's submission that, following amendments to the CPR to give a renewed emphasis on proportionality in recent years, there should be a "presumption" of indemnity costs in favour of a defendant who beats its own Part 36 offer. Coulson LJ accepted that, unless there is an order for indemnity costs, a claimant will entitled to take points as to the proportionality of the defendant's costs which would not have been available before the rule changes. However, it was unrealistic to suppose that this would disincentivise a claimant from accepting a defendant's Part 36 offer and, in any event, to find that there was such a presumption would "amount to a backdoor rewrite of the CPR".

However, Coulson LJ said, the absence of an automatic entitlement to indemnity costs is the beginning, rather than the end, of the analysis. The fact that a defendant has beaten its own Part 36 offer is "plainly a matter of importance in the exercise of the court's discretion" in determining the appropriate costs order. In the present case, while the judge properly recorded that the claimants' failure to accept and then beat the offer was an important matter in the exercise of his discretion, he did not explain why this important factor did not lead him to exercise his discretion in favour of an order for indemnity costs.

In the particular circumstances of this case, Coulson LJ concluded that this failure was a separate and stand-alone element of the claimants' conduct which was out of the norm, separately justifying an award of indemnity costs, or alternatively justifying such an order when taken together with the speculative/weak nature of the claims.

However, it was appropriate to limit the order for indemnity costs to the period after the claimants had had time to digest the appeal judgment on the preliminary issues, ie 7 May 2017, rather than awarding indemnity costs from the end of the relevant period for the Part 36 offer in March/April 2015. It was from the later date that the claimants' refusal of the offer was "unreasonable beyond any doubt".

Issue 3: Costs budget

The claimants submitted that an order for indemnity costs would provide the defendant with a way round her approved costs budget, and thereby reward her for failing to keep her costs within the approved budget. Coulson LJ rejected that submission.

Citing comments from cases including Denton v TH White Ltd [2014] EWCA Civ 906 and Kellie v Wheatley and Lloyd Architects Ltd [2014] EWHC 2886 (TCC), Coulson LJ said that, in principle, the assessment of costs on an indemnity basis is not constrained by the approved cost budget. To the extent that his own obiter comments in Elvanite Full Circle Ltd v AMEC Earth and Environmental (UK) Ltd [2012] EWHC 1643 (TCC) (considered here) or Bank of Ireland v Watts [2017] EWHC 2472 (TCC) suggested the contrary, they should be disregarded.

In the present case, Coulson LJ said, he was not persuaded that there was an approved budget figure which was a reliable comparator with the amount of costs actually incurred. The costs management order related only to certain elements of costs, and even those figures were uncertain because the order envisaged that there would be revised costs budgets.

Even if there had been an approved budget figure, it could not affect whether or not the court should make an order for indemnity costs. There is as a matter of principle no overlap between a costs budget, which is approved on the basis of projected costs figures that were assessed as reasonable and proportionate, and the actual costs to be assessed by reference to the indemnity basis, where proportionality is not relevant.

Coulson LJ did comment, however, that in the circumstances of this case the defendant's costs of some £724,000 were likely to be found unreasonable, and so were likely to be reduced even on an assessment on the indemnity basis.

Note: The Supreme Court has refused permission to appeal on 13 December 2021.