Close... but not close enough

Sugar Hut Group Ltd & Ors v AJ Insurance Ltd [2016] EWCA Civ 46

The Court of Appeal has overturned a trial decision where the claimant was ordered to pay the defendant’s costs after a Part 36 offer, even though it had beaten that offer at trial.

Background Facts

The case involved a well known nightclub featuring in a popular reality TV show. A fire broke out in September 2009, destroying parts of the club and forcing its closure for 49 weeks. A claim was made under the relevant insurance policy for the damage and loss of business. The insurers avoided the policy for material non-disclosure. The claimants sued the insurers but the claim failed.

This led to the claimants making a claim against their insurance brokers, the defendants in this matter.

The claimants sought recovery of damages under the following heads:

1. Property damage
2. Business Interruption Loss (‘BIL’)
3. Accountants’ costs
4. The insurers’ legal costs and the claimants’ legal costs in the previous action
5. Interest

The parties agreed on liability with the defendants conceding a 65% contribution. The property damage claim was compromised, as was the costs of the failed claim against the insurers. This left the BIL, accountants' costs and the level of interest in issue.

First Instance Decision

At trial the claimant was awarded £568,670 for the BIL and interest at 5% for the entire period as claimed. Once interim payments had been deducted the claimant was awarded just over £277,000 inclusive of interest. The claim for accountants’ costs failed.

Part 36 Offers and Calderbank Offers had been made by both sides. Neither parties’ Part 36 Offers were ‘effective’ under Part 36 as they had not bettered the offer at trial.

The defendant had made a Part 36 Offer of £250,000 inclusive of interest (net of the interims), which the claimant had only narrowly beaten. The offer was based on a gross award of £600,000 in respect of BIL, but with a lower interest rate of 2.5%. This was a single, indivisible offer for the whole claim. The defendant did not make separate, free standing offers for BIL and interest.

The trial judge ordered that as the claimant had failed on the accountants’ costs point it was entitled to 70% of its costs up to the expiry of the defendant’s Part 36 Offer.

He then deviated from the usual costs rule that the successful party is awarded their costs and awarded the defendant its costs from the expiry of the Part 36 Offer despite the claimant having beaten that offer at trial.

Eder J based this on CPR Part 44.2, which covers the conduct of the parties. He said that the claimant had acted unreasonably on two grounds. He considered that the claimant ought to have compromised the BIL claim following the defendant’s offer, which he deemed was capable of being accepted. Secondly, he criticised the conduct of the claimants. He found that they had been slow in providing disclosure, causing delays to the litigation.

The claimants appealed.

Court of Appeal findings

The Court of Appeal were very clear and unanimous in their judgment led by Tomlinson LJ. They found that Eder J had come to a decision “which was outside the bounds of reasonable decision making which was moreover in large part based upon an error of principle”. They said that he had considered the defendant’s Part 36 Offer as being a free standing offer in respect of BIL, which it could not have been. In making that error, he effectively determined that the claimants had been unreasonable in persisting with an “exaggerated” claim. By making that decision combined with the reduction to 70% he had penalised the claimant twice on the same issue. That could not be correct.

The Part 36 Offer made by the defendant was beaten by the claimants. It was irrelevant that the claimant only beat the defendants’ offer by some 10%. There is no longer a “near-miss” rule. The successful party is entitled to recover their costs.

The Court of Appeal accepted that the defendant’s offer was reasonable and a fair valuation but the claimant had every right to reject it. It was not unreasonable conduct to seek an award higher than your opponent’s offer. Further, the claimant’s conduct in respect of disclosure throughout the claim had already been penalised by an interim costs order. The Court of Appeal also found that the claimant could not have accepted the defendant’s indivisible offer in any event. If they had, they would have to accept the offer in respect of interest as well. There was in effect no offer that the claimant could accept. The defendants could have made a free standing offer under Part 36 in respect of the BIL alone. They did not do so.

Accordingly, whilst the claimant may have only just beaten the defendant’s Part 36 offer, they would still be entitled to their costs. A fair reduction had already been made in the order to reflect the issues where the claimant failed at trial.

Points to Consider

Whilst not overly positive for defendants the decision does provide some guidance and assistance. The importance of clear issues based offers and issues based costs awards was re-emphasised.

The Court of Appeal was clear that any claimant who wins on all issues, was a very fortunate claimant. It is to be expected that they will lose on some issues. That will not see an automatic deviation from the costs presumption. The winner should still get their costs.

Reductions in claimants’ costs can be made for those issues that they run to trial, but do not win. The Courts do retain a discretion under CPR 44.2 to deviate from the usual costs rule  when the conduct of the parties can be called into issue.

Had the defendants made a free-standing offer in respect of BIL alone, rather than inclusive of interest, the outcome may have been different. The near miss may have gone but issues based offers and awards remain powerful weapons for the well advised defendant.