In Lejonvarn v Burgess [2020] EWCA Civ 114, the Court of Appeal ordered indemnity costs in favour of a successful defendant where the claimants should have known their claims were weak.
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:
The Court of Appeal allowed the appeal. Coulson LJ gave the leading judgment determining the three issues as follows:
The court 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. The appropriate test is 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 was out of the norm such as to justify an order for indemnity costs.
The court noted, in contrast to the position of a claimant, under Part 36 there is no automatic entitlement to indemnity costs if a defendant beats its own Part 36 offer.
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.
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 rather than awarding indemnity costs from the end of the relevant period for the Part 36 offer. It was from the later date that the claimants’ refusal of the offer was “unreasonable beyond any doubt”.
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.
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.
Following a trial, there is a rebuttable presumption that, where a claimant has failed to better a defendant’s Part 36 offer, the claimant should pay the defendant’s costs on a standard basis unless it is unjust to do so.
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.
The burden of proof is on the defendant to show the claimant’s conduct in refusing the offer was unreasonable such as to take the case “out of the norm”. However, the mere failure to accept the offer cannot itself justify indemnity costs.
An early commercial nuisance Part 36 offer can provide costs protection and increase the prospects of costs recoverability in weak, speculative cases that may be expensive to defend.
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