ARGUE A WEAK CASE ON EACH AND EVERY POINT, GET INDEMNITY COSTS AWARDED AGAINST YOU

In Suez Fortune Investments Ltd & Anor v Talbot Underwriting Ltd & Ors [2019] EWHC 3300 (Comm) Mr Justice Teare held that a claimant, who had pursued a weak case in a robust manner, should pay indemnity costs.   There is a useful review of the principles relating to indemnity costs and, in particular, the running of a weak case.

“The Bank was entitled to resist the Underwriters’ claim but in circumstances where its case was weak and the Bank chose to do so at length and on every point in an uncompromising manner it cannot, it seems to me, be unjust to order that the Bank pays all of the Underwriters’ costs since May 2016 on the indemnity basis.”

THE CASE

The second claimant (a bank) claimed against the underwriters for the loss of a ship. After a 52 day trial the claim failed on the basis that the shipowners had conspired in the loss of the ship.

THE ISSUE AS TO INDEMNITY COSTS

The issue was whether the bank should pay costs on an indemnity basis.

THE JUDGMENT ON INDEMNITY COSTS

The judge first considered the rules and authorities relating to the award of indemnity costs.
    1. The court’s power to order costs on the indemnity basis stems from CPR Part 44.3 which provides that costs may be assessed on the standard basis or on the indemnity basis. Whereas costs on the standard basis must be proportionate and any doubt as to whether the costs were reasonably and proportionately incurred must be resolved in favour of the paying party, costs on the indemnity basis are not subject to the requirement of proportionality and any doubt as to whether costs were reasonably incurred must be resolved in favour of the receiving party. In deciding what order to make about costs the court will have regard to all the circumstances of the case including the conduct of the parties; see CPR Part 44.2(4) and (5) which provide as follows:
“(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including-
(a) the conduct of all the parties………….
(5) The conduct of the parties includes-
(a) conduct before, as well as during, the proceedings …………..
(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue:
(c) the manner in which a party has pursued or defended its case or a particular allegation or issue………”
    1. In Excelsior Commercial and Industrial Holdings v Salisbury Hammer Aspden and Johnson (a firm) [2002] EWCA Civ 879 the court’s power to order costs on the indemnity basis was considered. Lord Woolf MR emphasised that the court had “a wide and generous discretion in making orders as to costs” (paragraph 12) but that there must be “some conduct or (I add) some circumstance which takes the case out of the norm” (paragraph 19). Lord Woolf said that “an indemnity order may be justified not only because of the conduct of the parties, but also because of other particular circumstances of the litigation” (see paragraph 31). Finally he said that “there is an infinite variety of situations which can come before the courts” and that it would be “dangerous for the court to try and add to the requirements of the CPR which are not spelt out in the relevant parts of the CPR” (see paragraph 32).
    2. Although the requirement that there be some conduct or some circumstance which takes the case out of the norm is not stated in the CPR, that requirement is a necessary consequence of the scheme of the CPR. Costs on the standard basis are the norm and so, in order to justify costs on the indemnity basis there must be something which takes the case out of the norm.
    3. Very recently, on 3 October 2019, Excelsior was described by Sir Bernard Rix as “the leading modern authority” and that litigants were discouraged from citation of authority on what is “a well-travelled road“; see Ford v Bennett [2019] Costs LR 1473 at paragraphs 26-29.
    4. Notwithstanding that discouragement the court was presented with 16 pages of submissions on the law relating to indemnity costs and with no less than 31 authorities. There appeared to be a dispute as to the manner in which the court’s discretion should be exercised. The oral submissions of counsel for the Underwriters suggested that the dispute concerned a number of matters but, in reality, the dispute concerned one question, namely, whether, when conduct is relied upon to justify an order for indemnity costs, the conduct had to be unreasonable to a high degree.
    5. There is a long line of authority that where it is said that a party’s conduct was unreasonable it must be unreasonable to a high degree to justify an order for indemnity costs. That requirement was first stated in Kiam v MGN Ltd. (No.2) [2002] 1 WLR 2810 by Simon Brown LJ and has been repeatedly stated since; see Euroption Strategic Fund Ltd. v Skandinaviska Enskilda Banken AB [2012] EWHC 749 (Comm) at paragraph 14 per Gloster J., Elvanite Full Circle Ltd. v AMEC Earth Environmental (UK) Ltd. [2013] 4 Costs LR 612 at paragraph 16(a) per Coulson J., ICI v Merit Merrell [2017] 5 Costs LR 631 at paragraph 12 per Fraser J. and Hislop v Perde [2019] 1 WLR 201 at paragraphs 35-36 per Coulson LJ.
    6. It was suggested that the requirement that conduct must be unreasonable to a high degree was not stated in the CPR and that this gloss on the CPR was therefore wrong in principle. However, the requirement is, I think, a necessary corollary of the scheme of the CPR. Having regard to the importance ascribed to the principle of proportionality in the CPR, where unreasonable conduct is relied upon as justifying costs on the indemnity basis, and hence removing the need for the costs to be proportionate, the conduct must be unreasonable to a high degree. Otherwise due regard would not be had to the importance of proportionality in the scheme of the CPR. This was explained by Morgan J. in Digicel (St. Lucia) Ltd. and others v Cable and Wireless plc and others [2010] 5 Costs LR 709 at paragraph 19:
“Finally, I have found it useful, when asking myself whether the conduct of the paying party was at a sufficiently high level of unreasonableness or inappropriateness to make it appropriate to order indemnity costs, to remind myself of why precisely I am asking that question. The purpose behind the question is whether the relevant conduct makes it just as between the parties to remove from the paying party the two-fold benefit of an order on the standard basis, as compared with an order on the indemnity basis, that is to say, to enable the receiving party to recover its costs, reasonably incurred and reasonable in amount, with the benefit of the doubt being given to the receiving party and without the receiving party having to address (and persuade the court upon) the subject of proportionality. In this regard, I need to give proper weight to the significance which the CPR attach to this question of proportionality. The policy considerations behind the requirement of proportionality and the weight to be attached to the requirement are emphasised in Lownds v Home Office [2012] 1 WLR 2450, in particular, at [8]-[10]. The matters which will be relevant to any dispute about proportionality include those set out at CPR rule 44.5(3), which I have set out above, and also the similar provisions in rule 1.1(2)(c).”
    1. Counsel for the Bank referred to the summary of the relevant principles by Coulson LJ in Hislop v Perde [2019] 1 WLR 201 at paras. 35-36 which is in these terms:
“(a) Indemnity costs are appropriate only where the conduct of a paying party is unreasonable “to a high degree”. “Unreasonable” in this context does not mean merely wrong or misguided in hindsight.
(b) The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it out of the norm in a way which justifies an order for indemnity costs.”
    1. The issue in Hislop v Perde did not in fact concern indemnity costs pursuant to CPR Part 44 but the fixed costs regime in CPR Part 45 for low value road traffic accident cases and employers’ liability/public liability claims where there was a late acceptance of a claimant’s Part 36 offer. It does not appear that there was any debate as to the circumstances in which it was appropriate to order indemnity costs pursuant to CPR Part 44. Although the summary could be taken as supporting the proposition that indemnity costs are only appropriate where there is unreasonable conduct to a high degree, such a proposition would not only be contrary to CPR Part 44 which enjoins the court to have regard to “all the circumstances” of the case but would also be contrary to Excelsior, the effect of which is stated in paragraph (b) of Coulson LJ’s summary. Coulson LJ’s summary of the principles should, as it seems to me, be read as saying that where conduct is relied upon as justifying an order for indemnity costs it must be unreasonable to a high degree. I did not understand counsel for the Bank to disagree with that approach.
    2. In the light of the wide nature of the discretion to order costs on the indemnity basis I accept the submission made by counsel for the Underwriters that there may be an “aggregation of factors” which justify an order for costs on the indemnity basis, one of which may be unreasonable conduct though not to a high degree. What matters is whether, looking at all the circumstances of the case as a whole, the case is out of the norm in such a way as to make it just to order costs on the indemnity basis. That is the approach in Excelsior; see also ABCI v Banque Franco-Tunisienne [2003] EWCA Civ 205 at paragraph 70 per Mance LJ.
    3. The wide nature of the discretion has been expressed by Christopher Clarke J. in Balmoral v Borealis [2006] EWHC 2531 at paragraph 1 in these terms:
The discretion is a wide one to be determined in the light of all the circumstances of the case. To award costs against an unsuccessful party on an indemnity scale is a departure from the norm. There must, therefore, be something – whether it be the conduct of the claimant or the circumstances of the case – which takes the case outside the norm. It is not necessary that the claimant should be guilty of dishonesty or moral blame. Unreasonableness in the conduct of the proceedings and the raising of particular allegations, or in the manner of raising them may suffice. So may the pursuit of a speculative claim involving a high risk of failure or the making of allegations of dishonesty that turn out to be misconceived, or the conduct of an extensive publicity campaign designed to drive the other party to settlement. The marking of a grossly exaggerated claim may also be a ground for indemnity costs.
  1. In the present case the Underwriters say that costs on the indemnity basis are appropriate for no less than 11 reasons. Counsel stressed that he did not base his submission upon unreasonable conduct by the Bank (though, if he had to, he would). Although the word “unreasonable” does not appear in paragraph 36 of counsel’s written submissions which summarises those 11 reasons, most of the reasons appeared to be criticisms of the Bank’s conduct and I had therefore thought that counsel was saying that the Bank had acted unreasonably. But I was told in counsel’s reply that they were not saying that. Rather, the Underwriters’ claim for indemnity costs was based upon the character of the claim, looked at objectively, its weakness, the manner in which the Bank had pursued its claim (see CPR Part 44.2(5)(c)) and its effect on the Underwriters’ response to it. The court was urged to consider whether, in the light of such matters, it was appropriate that in assessing the costs payable by the Bank the Bank should retain the twin benefits of costs on the standard basis or whether the Underwriters should have their costs assessed on the more generous basis of indemnity costs without, in particular, the need to establish that their costs, although reasonably incurred, were also proportionate in amount.
  2. In response counsel for the Bank said that its claim was independent of the Owner’s claim, that it was objectively arguable, that it would not have been apparent at the start of the trial that it was weak, that the Underwriters’ case had to be tested and won at trial and that the outcome of the trial was not a foregone conclusion.

DISCUSSION OF WHETHER COSTS SHOULD BE AWARDED ON THE INDEMNITY BASIS

The judge considered the bank’s conduct of the matter, conduct of the trial and overall view that could (or should) have been taken on the merits.   He decided that, for the most part, indemnity costs should be ordered.

    1. The character of the Bank’s claim, being one which sought an indemnity under a policy of insurance where the Underwriters had pleaded (and were to prove) that the loss had been caused by the wilful misconduct of the Owner, was out of the norm. Such a claim typically gives rise to considerable cost. I explained in my judgment at paragraph 23 why that is often the case. One reason is the need for the claimant to establish a plausible explanation for the loss consistent with “innocence” and with the evidence in the case; see also the quotations from The Ikarian Reefer in paragraph 62. The need in the present case for the Bank to establish a plausible explanation for the loss gave rise to considerable expenditure on expert evidence not only with regard to the location and cause of the resurgence of the fire but also with regard to the plausibility of the armed men being disaffected members of the Yemeni coast guard who wished to share the profits from hijacking the vessel with Somali pirates; see paragraphs 115-133 and 340-350 of the judgment. The latter evidence involved much wide-ranging speculation and conjecture because there has never been a reported case of Yemeni-Somali piracy.
    2. The question is whether there is something in the circumstances of the case, or in the manner in which it was conducted by the Bank, that was so much out of the norm that justifies an order for costs on the indemnity basis. In answering that question it is necessary to bear in mind the importance of proportionality in the CPR and to consider whether it is appropriate to excuse the Underwriters from the need to show that their costs were proportionate.
    3. I was referred to several judicial comments on the relevance of the merits of a case. Thus in Three Rivers Tomlinson J said at paragraph 25(5):
“Where a claim is speculative, weak, opportunistic or thin, a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails.”
    1. Similarly, in Borealis Christopher Clarke J. said at paragraph 1 that
“…the pursuit of a speculative claim involving a high risk of failure”
may suffice to justify an order for indemnity costs.
    1. In Elvanite Full Circle Ltd. v AMEC Earth and Environmental (UK) Ltd [2013] 4 Costs LR 612 at paragraph 16 per Coulson J. and in ICI v Merit Merrell Technology Ltd [2017] EWHC 2299 at paragraph 10 per Fraser J. at paragraph 10) it was said that
“the pursuit of a weak claim, will not usually on its own, justify an order for indemnity costs provided that the claim was at least arguable and not hopeless from the outset”
    1. In Hosking v Apax Partners LLP [2019] 1 WLR 3347 at paragraph 42-43 EWHC 2732 Hildyard J. said at paragraph 42
“The merits of the case are relevant in determining incidence of costs: but, outside an entirely hopeless case, they have much less, if any, relevance, in determining the basis of assessment.”
    1. I am not persuaded that there is a rule or law or any principle to the effect that the merits of a case are only relevant in certain circumstances. CPR 44.2(4) does not permit of any such rule or principle. All depends upon the circumstances of the case and whether the case, or the circumstances of the case, are beyond the norm to such an extent that an order for indemnity costs is justified. There does however seem to me to be good sense and justice in the observation by Tomlinson J. that where a claim is weak a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails.
    2. The Bank, in my judgment, decided to continue the claim in May 2016 at time when, for the reasons I have given, there was a real risk of failure. The developments thereafter in 2017 and 2018 served only to increase that risk to such an extent that the Bank, through its experts, was compelled to abandon that which had been common ground between the experts and to advance theories which had to be abandoned late in the trial. That occurred not in relation to minor matters but in relation to crucial matters which must have consumed considerable sums in costs, namely, the location in which the resurgence occurred, the purifier room, and the significance of the damaged drain cock in the purifier room. The Bank was entitled to pursue its claim and to argue every point but it did so in circumstances where its claim was weak and there was a high risk of failure. Such were those weaknesses that there were times during the trial that I thought that there must have been some reason of which I was unaware that justified the Bank (or the mortgagee interest underwriters, see paragraph 19 of my judgment) in pursuing this claim against the war risk underwriters. But no such reason has materialised.
    3. In circumstances where I received over 640 pages of closing submissions from counsel for the Bank the claim cannot be said to have been beyond argument. It was, however, when viewed objectively, a weak and fragile case, albeit one which still had to be “won” by the Underwriters.
    4. In the circumstances of the present case I am persuaded that the character of the claim and the circumstances in which it was pursued since May 2016 were beyond the norm and justify an order that costs be paid on the indemnity basis. When I ask myself whether there is good reason why the Bank should be deprived of the twin benefits of costs on the standard basis I am persuaded that it is fair and just that it should be. The Bank chose, undeterred by the objective weakness in its case, to argue the case at length and on every point. The Underwriters had to respond at length and on every point. In the result the Bank lost on every point of substance and did so for reasons which could have been predicted at the commencement at the trial in February 2019 by an objective observer familiar with the case.
    5. I have considered whether to limit the indemnity costs to those incurred from the commencement of the trial because that is when the weakness of the Bank’s case (having regard to the discovery of the damaged drain cock) must have been most apparent. But it is clear that the Bank’s uncompromising manner of pursuing its case long pre-dated the start of the trial. In the Reply the Bank pleaded that there were no suspicious circumstances at all. This unrealistic approach to the case continued through to the trial. At the commencement of the trial it was said that the Underwriters’ case was “no more than a conspiracy theory” which, in a memorable and striking phrase, was said to “shoot for the baroque”. The Bank was entitled to resist the Underwriters’ claim but in circumstances where its case was weak and the Bank chose to do so at length and on every point in an uncompromising manner it cannot, it seems to me, be unjust to order that the Bank pays all of the Underwriters’ costs since May 2016 on the indemnity basis.