ISSUE BASED COSTS ORDERS: ITS NOT MONEY IN THE BANK

The judgment of Sir Anthony Edwards-Stuart in Lloyds Bank -v- McBains Cooper  [2017] EWHC 30 (TCC) considers the question of issue based costs orders. What is interesting here is:

  • Neither party appears to have made a valid Part 36 offer.
  • The claimant’s case on damages was described as “virtually incomprehensible”.
  • The reduction in costs because of the conduct of the claimant (although the claimant did recover the majority of its costs).
  • The judge looked in detail at the attempts at negotiation between the parties.

KEY POINTS

  • The claimant although successful had only recovered a small percentage of the damages claimed. The claimant recovered 80% of its costs up to trial and 100% thereafter.
  • However the claimant had made allegations of fraud which caused the defendant to instruct leading counsel. As a result of those allegations the claimant was disallowed the costs of leading counsel.  The claimant was also ordered to bear the success fee of  its own leading counsel.
  • The claimant had unnecessarily caused further hearings on damages to be held and was ordered to pay the defendant’s costs of those hearings.

THE CASE

The claimant bank had obtained judgment after a trial. However the judgment was for a much lower figure than claimed.
  1. The claim arose out of a loan by the claimant Bank for the development of a former bingo hall for use as an evangelical church. The Defendant, McBains Cooper, was engaged as the Bank’’s project monitor, and was retained to give initial advice in relation to the feasibility of the project and thereafter to monitor the progress of the work. Under the terms of the facility the borrower was to fund the development by way of monthly drawdowns. McBains Cooper was engaged to check the monthly applications and to satisfy itself that they were justified and in accordance with the facility and then recommend whether or not the amount claimed should be paid. If McBains Cooper recommended that the drawdown be authorised, the sum claimed was then paid by the Bank without further enquiry or question.
  2. Following the first judgment I gave a “”Provisional indication as to damages”” dated 27 October 2015, in which I set out my tentative conclusions on damages because I had been unable to reach any firm conclusions on the basis of the evidence before the court at the trial.
  3. There were two particular difficulties. First, the figures put forward by the Bank were virtually incomprehensible and quite incapable of reconciliation with those put forward by McBains Cooper. Second, there was no agreement as to the valuation of the building being developed, which formed a major part of the Bank’’s security, at the appropriate date, which I found to be April 2009. However, there was some indication that the valuation experts might be prepared to agree that value in the sum of £800,000, which was the figure that I took when expressing my tentative conclusions on quantum.
  4. However, the Bank was not prepared to agree the value at £800,000 and wanted to call its valuation expert to give evidence (the valuation experts not having given evidence at the trial). For various reasons, mainly concerning availability, this hearing did not take place until 2 February 2016. Unfortunately, the delays did not end there because shortly after that hearing other commitments intervened (in particular, I began a very substantial trial, which did not conclude until early June 2016). As a result, I was not able to issue my second judgment in this case until early August 2016, when it was circulated in draft. There was again a problem in finding a date suitable to both parties on which they could address me as to costs, and so this did not take place until 19 December 2016. Whilst these delays are very unsatisfactory, they were not the result of any want of prosecution of the case by either party. Fortunately, I do not consider that they have added significantly to the overall costs of the litigation.
  5. The claim made by the Bank was for a little over £1.8 million. However, in July 2013 it recovered £288,323 following the decision of an adjudicator. It therefore gave credit for that sum, reducing the net claim to about £1.55 million. The Bank’’s final recovery was £127,115 (excluding interest), after giving credit for the amount recovered in the adjudication. It was £415,439 before deducting that recovery.
  6. Depending on how one looks at it, therefore, the Bank recovered a little under 25% of its total loss, or 8% of its net claim. McBains Cooper unsurprisingly deployed the latter figure. However, in my view that is not the correct approach because at all times McBains Cooper denied liability for any sum and had in fact brought separate proceedings to recover the £288,000 odd paid pursuant to the adjudicator’’s decision. That said, I suspect that the real battle was as to whether the Bank would do better than its recovery in the adjudication: in the event it did so but, as the figures show, not by much.”

THE HISTORY OF THE NEGOTIATIONS

The judge looked at the history of the negotiations between the parties in detail.  (Note, however, that looking at the history of negotiations was specifically discouraged by the Court of Appeal in Manna -v- Central Manchester Hospitals NHS Trust [2017]  EWCA Civ 12. Offers to settle had been made. It does not appear that either party made a valid Part 36 offer.  The claimant bank did, however, offer to settle for a sum that was £100,000 less than the figure it obtained judgment for.

THE JUDGMENT

The judge reviewed the rules relating to offers and the authorities in some detail.

Issues based costs orders
    1. I have already summarised Mr Brannigan’’s submissions in relation to an issues-based costs order: in short, he submitted that this was a classic case for such an order. However, I regard this submission as over pitched. For example, questions of contributory negligence and causation run right through the period of the project. I consider that it would be disproportionate to expect a costs judge to isolate the costs attributable to either of these issues, let alone to expect the exercise to be done with any degree of reliability. Accordingly, I consider that neither of these issues is an appropriate subject for an issues-based costs order.
    2. I consider that the better approach is to take these points into account when considering the overall order for costs: for example, in the context of the Bank’’s application, whether or not it should be deprived of a proportion of its costs.
    3. In relation to the allegations of recklessness, I consider that McBains Cooper is on much firmer ground. However, the failure of Mr Symons to attend site on at least five occasions and to attend only one site progress meeting is, in my view, relevant to the performance of McBains Cooper’’s duties as a whole, although it would have been far more relevant if the Bank had asserted and proved any link between the lack of site visits and shortcomings in the monthly progress reports. In addition, I do not consider that the Bank could have been criticised if it had simply relied on the fact that Mr Symons had consistently asserted that he attended almost all the meetings and visited the site every month when he had done nothing of the sort as matters going to his credit and general reliability. But, against this, there is the seemingly inexplicable failure of the Bank to raise this point until almost five years after it had first been raised internally.
    4. I have already indicated that I accept that the decision by McBains Cooper to instruct leading counsel was made substantially because of the seriousness with which it viewed the allegations of recklessness. In a witness statement prepared for this hearing, its solicitor, Mr Robin, has said that but for the fraud allegations McBains Cooper would not have incurred the cost of instructing leading counsel. He said that McBains Cooper’’s intention “”had been to use junior counsel for the entirety of the case”” (at paragraph 8). Although I am left with a residual doubt – given McBains Cooper’’s intransigent approach to this litigation – as to whether it might still have instructed leading counsel for the trial even if the allegations relating to the site visit had always been confined to negligence, I do not feel that this amounts to a sufficient justification for not accepting Mr Robin’’s evidence on this point.
    5. However, on balance, and taking these various factors into account, I do not consider that it would be appropriate to make an issue-based costs order in relation to the issue of recklessness. Instead I consider that some reduction must be made to any recovery of costs by the Bank to reflect its ill-considered pursuit of these allegations.
    6. From the costs budget produced by the Claimant in October 2016 the fees of leading counsel up to the end of the trial were about £250,000. The Bank had instructed a relatively experienced junior counsel whom I am confident could have conducted the case if leading counsel had not been instructed; but of course that would have involved more work and responsibility on his part and so I would have expected his fees for doing to have been substantially greater than the fees actually charged. Doing the best I can in the light of leading counsel’’s fees and the fees actually charged by junior counsel, I consider that overall the additional cost to the Bank of instructing leading counsel was £125,000. In relation to McBains Cooper, Mr Robin says that leading counsel’’s fees amounted to about £287,000. However, I take the view that it would be reasonable to take a figure of £150,000 to reflect the additional cost of instructing leading counsel on behalf of McBains Cooper. I have taken a lower proportion of the actual fees because I consider it likely that McBains Cooper would probably have found it necessary to instruct a second junior.
    7. Accordingly, in my view the fairest way to deal with the additional costs to which McBains Cooper was put by reason of the allegations of recklessness, is to reduce the Bank’’s recovery in respect of its costs by £125,000, plus any uplift in respect of leading counsel’’s fees that may be allowed on a detailed assessment, and to order it to pay £150,000 towards the costs of McBains Cooper.
    8. I should make it quite clear that this conclusion is not to be taken as any criticism of either Lord Marks or Mr Brannigan, both of whom conducted the case with skill and vigour – as I would have expected.
    9. I now turn to the issues in relation to the valuation evidence and the hearing in February 2016, about half of which was taken up by the evidence of the expert valuers. The submission of McBains Cooper is that this further hearing was unnecessary and that the Bank gained nothing from it. So far as the valuation evidence was concerned, the result was a finding that the value of the development property in April 2009 was £800,000, the figure that the court understood that the valuation experts would have been prepared to agree at the time of the trial. It is reasonably clear from its submissions in relation to damages that this was a figure that McBains Cooper was prepared to agree.
    10. Lord Marks submitted that this was a bad point. He said that the Bank’’s evidence was that the value of the property was £1 million in September 2009 and that there had been no material change in the market since April 2009. Lord Marks said that since they had been no finding about this value in the first judgment, it had to be determined.
    11. He submitted that after the trial the valuation expert instructed by McBains Cooper abandoned the residual valuation approach that he had taken for the purposes of the trial and produced an entirely new methodology two days before the February 2016 hearing. I explained at paragraph 20 of the second judgment why this change of opinion came about and I do not think that he is to be criticised for it, although service of his report should not have been left until the last minute. However, his new method was seriously flawed as I explained in that judgment.
    12. But against that it has to be said that the expert instructed by the Bank did not fare much better, because I found that his figure of £1.2 million (which had in fact been rounded up from £1.156 million) was too high since he had underestimated the construction costs and allowance for contingencies and, it appeared, had assumed that the building was wind and weathertight in mid-December 2008, which it was not. I therefore concluded that his valuation, assuming that it was based on an appropriate approach, was probably too high by about £300,000 – £350,000.
    13. When adjusted to take into account the various points made in the second judgment, the two valuations straddled a figure of £800,000, and so I concluded that that was the value of the building in April 2009 in its condition as at December 2008. But, looking at the position overall, I consider that Mr Brannigan is justified in submitting that the whole exercise achieved nothing of advantage to the Bank.
    14. However, given the difficulty that I had been having with the figures put forward by either side, I consider that some form of hearing in relation to damages was pretty much inevitable. But that hearing would not have involved any valuation evidence or, indeed, the preparation of any further reports. I consider that the Bank should have agreed the figure of £800,000.
    15. In these circumstances I have little doubt that it would be unjust to order McBains Cooper to pay any part of the costs of the Bank’’s valuation evidence incurred following the first judgment. However, since I concluded that the evidence put forward by McBains Cooper was also unsatisfactory, as well as being produced very late, I consider that it would be wrong to order the Bank to pay the whole of the costs of it.
    16. So in relation to the valuation evidence I conclude that it is appropriate to make some form of issue-based costs order. In the light of the considerations that I have mentioned, I consider that the fair order is as follows:
(1) The Bank is to bear its own costs, including its legal costs, of instructing its valuation expert after the conclusion of submissions, say from 31 July 2015.
(2) The Bank is to pay 50% of the McBains Cooper’’s costs of instructing its valuation expert after 31 July 2015, including its legal costs (save for the legal fees of the hearing on 2 February 2016).
(3) The Bank is to pay 50% of the McBains Cooper’’s legal fees of the hearing on 2 February 2016, but not the fees of preparing for it save to the extent indicated in (1) and (2) above.
The issues of contributory negligence and causation
    1. In the light of the matters I have already discussed, I am not persuaded that this is a case where there should be a wholesale departure from the principle that the successful party should recover its costs, particularly in the light of the Bank’’s approach to settlement and, especially, its offer of 10 January 2014. However, for the reasons that I have already given I have concluded that the issues of recklessness and the costs of the valuation evidence incurred after the trial call for a different approach.
    2. In relation to the issues of causation and a contributory negligence, I have already concluded that an issues-based costs order is not appropriate. But even if I thought that an issues-based costs order might have been appropriate in principle, I would have concluded that it was practicable to make an order under CPR 44.2 (6)(a) instead.
    3. Until its closing submissions the Bank refused to acknowledge that there was any justification for a finding of contributory negligence or that it should bear some of the responsibility for its losses. This was an unrealistic approach.
    4. Mr Robin says in his witness statement that it was the issues of reliance, causation and contributory negligence that led to the need to call the lending experts and some of the Bank’’s witnesses. I do not accept this: so long as McBains Cooper was contending that it had no liability at all owing to the absence of reliance and causation, and that the apportionment in respect of contributory negligence should be much higher than the 30% which I found (as it still contends), I consider that all these witnesses would have been called in any event. Looking at it from another angle, I regard it as inconceivable that McBains Cooper would have agreed to admit unchallenged the evidence of the Bank’’s witnesses, such as Messrs Downes, Humphrey or Arman, so that they would not have to be called.
    5. I therefore reject the submission that the issues of reliance, causation and contributory negligence added significantly to the costs of the litigation. However, I accept that the evidence would have been more confined if the Bank had made realistic concessions at the outset. But realistic concessions are not the same as total capitulation – which is, in effect, the position for which McBains Cooper was contending. In these circumstances, I consider that the saving of costs that might have resulted from realistic concessions by the Bank would have been about 10% of each party’’s total costs.
    6. On this basis, and in the absence of any other considerations, I consider that the Bank should be deprived of 20% of its costs to reflect its lack of success on this issue. I have arrived at the figure of 20% by adopting the broad assumption that each party’’s costs would have been reduced by the same amount: so the order reflects the fact that not only would the Bank’’s own costs have been reduced by 10% if it had acted reasonably, but also McBains Cooper’’s costs would have been reduced by about the same amount.
    7. The final question is whether in the exercise of my discretion I should make any further adjustment to reflect the other factors are referred to in CPR 44.2. I consider that I should not.
    8. In reaching this conclusion, I have not overlooked the unsatisfactory features of the conduct of each party that I have already mentioned. So far as the adjudication is concerned, I doubt whether this really affected the overall costs of the litigation, since the costs of the adjudication are not recoverable as part of those costs. What probably did add to the costs of the litigation was the Bank’’s initial pursuit of allegations of negligence in relation to the Interim Report.
    9. But this seems to me to be more than offset by McBains Cooper’’s intransigent approach to settlement. If it were not for that, I might have been prepared to penalise the Bank more heavily for its pursuit of the allegations of recklessness – but at the end of the day all this might have been avoided if McBains Cooper had taken a more realistic approach to the offer of 10 January 2014 and had not persisted in pressing for disclosure. But, as I have explained, the Bank decided to introduce the allegations of fraud, to withdraw that offer and revert to the previous higher offer: so for all practical purposes the portcullis then came down.
The overall order for costs
    1. Drawing the threads together:
(1) The Bank is to have 80% of its costs of the two actions up to 31 July 2015, after deducting £125,000 as representing the additional costs of instructing leading counsel. The Bank is not to recover and must itself bear any success fee payable to leading counsel. From that figure a further £150,000 is to be deducted to reflect the additional cost to McBains Cooper of instructing leading counsel as a result of the fraud allegations.
(2) In respect of the period after 31 July 2015, the Bank is to have 100% of its costs of the two actions, less the deductions and payments I have already identified at paragraph 89 above in relation to the valuation evidence.
    1. The costs are to be assessed on the standard basis.
The application for payment on account
  1. The Bank’’s application was for a payment on account of its costs of a sum in the region of £700,000. Having regard to the order that I have made, I consider that the appropriate figure is £250,000. I have arrived at this figure by making the adjustments that I have identified and then deducting about 10% from the resulting total. This sum should be paid within 14 days of the handing down of this judgment in draft.

 

Issue based costs orders