WHAT HAPPENS IF YOU DON’T SETTLE AFTER A MEDIATION: NO ISSUE BASED ORDER, INDEMNITY COSTS AND £127,000 ON ACCOUNT OF COSTS

There is much for litigants and litigators to learn from the judgment on costs of James Mellor QC (sitting as a High Court judge)  in Cranstoun & Anor v Notta [2021] EWHC 133 (Ch).  The dangers of rejecting offers of settlement made after a mediation; the risks of having indemnity costs ordered against you; the revision of costs budgets and the amounts that can be awarded on an interim costs order.

 

“I can well understand that it may be difficult to turn one’s mind to a costs budget revision in the lead up to trial when the focus is very much on attending to the issues live in the trial, but it is also important to bear in mind that most costs budget revisions ought to be done on paper, without any significant costs being expended on them, and should best be done in advance of the result being known”

 

THE CASE

The claimants were, the judge held, successful in a trial relating to a Dental Costs Sharing Agreement.   The defendant had rejected several offers of settlement, including one made after a mediation.  If the defendant had accepted the offers he (and the claimants) would have been considerably better off.

 

THE JUDGE’S REFUSAL TO MAKE AN ISSUE BASED COSTS ORDER

The judge considered, and rejected, the defendant’s argument that there should be an issue based costs order.

An issue-based order
    1. One of the points which the Defendant put forward in support of his ‘honours even’ argument translates into an alternative submission that there was a suitably circumscribed issue on which the Claimants did not succeed. It concerns the allegations of the breaches of the CSA set out in the Particulars of Claim. Mr Butler drew my attention to the fact that the Defence firmly denied all such breaches. He submits that the Claimants’ witness statements dealt with matters going to the allegations of breach and that the Claimants’ Counsel indicated on the first day of trial that the allegations of breach were no longer pursued.
    2. All his points are true, but it is important to keep in mind the following:
    3. 1. First, the Defendant’s witness statement also dealt with the allegations of breach, even though, following the hearing on 24 May 2019, those allegations had already served their primary purpose of establishing that the Defendant was the Seller. This was another aspect of the case on which both sides failed properly to consider what really remained in issue following that hearing.
    4. 2. Second, the fact that the allegations of breach were not pursued at trial was at least partly due to my message to the parties in advance of trial that I was unable to see how those matters impinged on either of the issues which seemed necessary for me to decide and which I did decide in the Main Judgment.
    5. 3. Third, and most importantly, it is necessary to keep in mind the terms of paragraph 22 of the Defence which I quoted in [8] of the Main Judgment. The Defendant could have simply agreed to be the Seller under the CSA without prejudice to a denial of all the alleged breaches, but that is not what the Defence said. I acknowledge that all the allegations of breach were denied in the Defence, but, in my view, that does not detract from the terms of the final phrase in paragraph 22 of the Defence: ‘and the Defendant was deemed to have given notice to terminate the CSA pursuant to clauses 23.2.4; 23.2.10; 23.2.11 and/or 23.2.12 on 24 October 2018′. The Defendant’s argument seems to require the terms of the provisions mentioned to be ignored, but that seems unrealistic. I emphasise that I have made no finding that the Defendant was in breach, nor was it necessary for me to make any such finding either in the Main Judgment or in this judgment.
    6. I take the Defendant’s submission to be that I should disallow the costs of the Claimants’ witness statements because they dealt with the alleged breaches and consider ordering the Claimants to pay the costs of the Defendant’s witness statement. I decline to do so for the following reasons:
    7. 1. First, in their witness statements, both of the Claimants set out the facts, including the history of this dispute, in measured terms expressing in particular their frustrations at how long this dispute had taken and how costly the whole process had been. Part of the history they related did concern aspects of the alleged breaches, but it is not true to say that their witness statements dealt only with the breaches.
    8. 2. Second, in the Claimants’ costs budget, the costs allowed for witness statements were modest, both generally and relative to the overall costs on each side.
    9. 3. Third, because much of the history in those witness statements is relevant to issues concerning costs.
    10. 4. In essence, I do not consider the costs of dealing with the breaches in the witness statements can be considered a suitably circumscribed set of costs which it is possible to identify or which I should deduct. After all, it has often been said that it is a rare case where the claimant succeeds on every point.
The basis of assessment
    1. The Claimants contend for an award of indemnity costs in respect of two distinct periods: first, from the inception of the dispute until 29 May 2019; second, from the end of the period of acceptance on 21st April 2020 of the Claimants’ Part 36 offer dated 1st April 2020, down to today.
    2. Taking into account the early stages of this dispute, although I have formed the view that there was a degree of unreasonableness in the Defendant’s conduct, in my view the position is complicated by the facts that (a) there were other disputes between the parties and (b) other solutions were explored. Accordingly, I decline to award indemnity costs for that initial period, albeit I record the Claimants have failed by only a narrow margin. For that reason I propose to record a comment in the Order which will be made to give effect to this Judgment to that effect pursuant to CPR3.15(4) to assist any subsequent assessment proceedings, should they take place.
    3. However, once the action was underway and the principal issues were defined by the developments at the hearing on 24 May 2019, I consider that the Defendant could and should have been significantly more co-operative in the provision of up to date and reliable financial information. It seems to me his conduct caused a significant increase in the costs and complexity of this action, which would have been avoided by adherence to the overriding objective.
    4. This brings me to the offers made by the Claimants which I discussed above.
    5. If the Defendant had accepted the offer made immediately after the Mediation, both he and the Claimants would be significantly better off. As for the offer dated 1st April 2020, this was, of course, shortly after the imposition of the first ‘lockdown’ and reflected that development. It was a serious offer of more than I have decided as the actual valuation and which, in the event, the Defendant should have accepted. The alleged ‘defects’ in the form of that offer would not have prevented a resolution of this action being achieved very quickly if the basic sum had been acceptable to the Defendant. If the Defendant had accepted that offer, (and taking into account what I decide below) he would now be in a better financial position, although I suspect the Claimants would have been slightly worse off. The fact the offer was made is a further demonstration that the Claimants were regularly exploring ways to resolve the dispute and save costs.
    6. In my view, by the 1st May 2020, all the circumstances of this case discussed in the Main Judgment and above, including in particular the offers made by the Claimants combine to take this case out of the norm. Costs from 1st May 2020 are to be assessed on the indemnity basis, if not agreed.

THE ORDER FOR AN INTERIM PAYMENT ON ACCOUNT OF COSTS

The judge then made an order for an interim payment as to costs.

Interim payment on account of costs
    1. In this section of the judgment, all costs figures exclude VAT unless otherwise indicated. Contrary to my initial assumption, dental work is classified as medical care and therefore exempt from VAT. Although I understand there is or may be an ongoing issue as to whether some cosmetic procedures properly qualify as medical care, it was not submitted that this issue has any impact on the Claimants. Since the Claimants are not able to recover VAT as an input tax, to the extent that they recover costs, such costs are payable including VAT.
    2. The Claimants’ Precedent H which was prepared some days before the hearing on 7 November 2019 showed incurred costs of approximately £78,500. The Court approved amounts for the future phases of the litigation totalling £40,200 including a PTR and a further sum for ADR/Mediation. Since no costs were incurred for those matters, they must be left out of account, with the result that the total approved costs for the phases which were in fact completed amounted to £30,070, including the costs of trial preparation and trial (then estimated to be 3 days) of £2,700 and £14,500 respectively on the basis that the Claimants’ case would be conducted by leading counsel. The amounts approved in the Defendant’s budget going forward were somewhat higher (and perhaps more realistic), with the total being £59,069 and the trial preparation and trial costs approved in the sums of £7,000 and £20,000 respectively
    3. In the result, the evidence was concluded within 3 days but there was insufficient time to deal with closing submissions. I directed that oral closing submissions should take place on a deferred fourth day with short written closings served in advance. Furthermore, it has proved necessary to have a hearing to resolve the outstanding matters in the light of my Judgment. Both these developments have undoubtedly increased costs on both sides.

APPLICATION TO VARY THE CLAIMANTS’ COSTS BUDGET

Finally the judge allowed an application by the claimants to vary their costs budget retrospectively.
The application to vary the Claimants’ costs budget.
    1. This application came about in the following way.
    2. With his skeleton argument, Mr Dhillon presented a ‘Summary of Costs arising outside of Budgeted Costs’. This document raised a number of issues, not least the point that, a Costs Management Order having been made, when assessing costs on the standard basis, the court will not depart from the budgeted costs unless satisfied there is a good reason to do so (CPR3.18(b)).
    3. At the hearing I indicated that I might entertain an application from the Claimants to revise their costs budget to take account of recent significant developments in a similar way to what was done by Birss J. at the form of order hearing in Victoria’s Secret v Thomas Pink Ltd [2014] EWHC 3258, where he revised the winning party’s costs budget to take account of additional costs incurred at the trial and for the form of order hearing. I directed that if such an application was to be made, it must be served by 5pm on Friday 22nd January 2021 and Mr Butler for the Defendant indicated he would respond on Sunday 24th January 2021. These deadlines were helpfully complied with.
    4. Before I turn to that application, I should mention that certain of the earlier entries in the Summary, at least at first sight, seemed to be inconsistent with the sums set out in the Claimants’ Precedent H. However, I was satisfied that there were no inconsistencies. Although if the Claimants’ costs are the subject of a detailed assessment, it will be for the Costs Judge to rule on which costs are allowable and in what amount, for the purposes of the rulings I have to make, I was satisfied that the entries in the Summary prior to 7 November 2019, which was the date of the CMO, identified the costs incurred on the Claimants’ side, albeit some of them did not appear in the Precedent H.
    5. At the hearing when the CMO was made, the order was ‘costs in the case’. The Claimants’ costs of that hearing are identified as being £12,013.70 but I can see that these costs are not reflected in the incurred costs set out in the Claimants’ Precedent H which was served some days in advance of that hearing. When making the CMO, the Master did not record the levels of incurred costs, but merely set out the budget for each side and for the future phases of the action.
    6. In respect of the entries in the Summary which date from after 7 November 2019, there were three: the first was for a sum of £3,779 from the hearing on 24 September 2020 before Deputy Master Hansen where the order was for costs in the case; the second was for a sum of £16,011 (excl VAT) identified as “extra day of trial”; and the third was for a sum of £8744 (excl VAT) for the form of order hearing: total sought £24,755. In fact, the ‘extra day of trial’ included certain additional expert witness fees and certain travelling and hotel expenses.
    7. In the Precedent T served as the application, the budget items for the PTR and ADR/Mediation were removed, but the three entries in the Summary had morphed somewhat. I will set out each variation claimed and rule on each one.
    8. I approach the application for variation having regard to CPR3.15A and part of the guidance in the notes on costs management generally which state (and have stated for some time, albeit the previous version referred to different provisions):
“Once a CMO has been made, each party must actively reconsider its budget and, if a significant development warrants the making of a revision, upwards or downwards, must promptly seek such a revision either by agreement with other parties or with the approval of the Court…”
    1. In my view, the promptness (or otherwise) with which a variation is sought may well reflect on whether the revision is or is not in respect of a significant development.
    2. Furthermore, I can well understand that it may be difficult to turn one’s mind to a costs budget revision in the lead up to trial when the focus is very much on attending to the issues live in the trial, but it is also important to bear in mind that most costs budget revisions ought to be done on paper, without any significant costs being expended on them, and should best be done in advance of the result being known.
    3. The first variation claimed is for £3,726 and claimed in respect of Leading and Junior Counsel ‘in respect of the application heard at the CMC’. The Defendant objects to this revision. I confess I do not fully understand this part of the application. The costs budget approved by Master Kaye had no provision for CMC costs because they had all been incurred by the time of that hearing, as I understand it. In my view, this variation is not in respect of a significant development and is sought far too late.
    4. I hold the same view in respect of the second variation for £900 in respect of an ‘additional witness’. Not a significant development and far too late.
    5. The third variation is in respect of disbursements of £4,335 on expert’s fees. Although the Defendant submitted that £1,000 was reasonable for the short opinion on the impact of COVID-19, I will allow an additional £4,000 for expert’s fees due to the additional complications from the Defendant’s disclosure and for the additional report on the impact of COVID-19.
    6. I will take the fourth and fifth variations sought together because they concern Trial Preparation and Trial. For the first item, an extra £2,838.10 is claimed, of which £1,000 is solicitors fees, £1,500 is counsel’s fees and £338.10 is in respect of transcript services engaged for the hearing on 4 September 2020 and said to be due to the Defendant’s lack of co-operation. In respect of Trial costs, an extra £16,643 is claimed, of which the time costs amount to £6,579 and disbursements £10,064.
    7. The significant developments said to justify these additional sums are expressed as follows:
“Increase in solcitors fees for trial being extended to 5 day: £2000.00
Increase in fees due to amendments to the Judgment. In addition to advising on Judgement, holding a conference with the clients; and a conference with Counsel: £2029.00.
Increase in fees in respect of Form of Order Hearing: £1550.00.
Solicitors fees for attendance at the Form of Order hearing: £1000.00
Total fees: £6579
Counsel’s additional fees for extended trial: £3000.00
Video Bridging service was instruction on the Courts instructions: £312.00
Train Ticket incurred due to extended Trial: £245.00
Counsel provided a conference to update the clients and advise on Form of Order Hearing: £1250.00
Counsel’s fees for Form of Order Hearing: £2500.00
Disburesments: £1064.00″
  1. Whilst the first set of time costs do add up to the stated total of £6579, the total at the end of the second set of figures, meant to represent the total disbursements, is wrong on two counts. First the disbursements listed total £7,307, and the total given of £1064 seems to be a typo when compared with the disbursements figure of £10,064 in the Table. So the corrected figure for the Trial costs revision is £13,886
  2. Counsel for the Defendants realistically accepted that the additional hearings of 1 day for Closing Submissions and ½ day for the form of order hearing were significant developments. I agree. However, he went on to make a series of points that the sums claimed were excessive. His points have some force, in particular that a number of the sums now sought for trial preparation were either already included in the budgeted costs or are in any event part of the work covered by a refresher. Furthermore, I think it is right to record that, in my view, the Court should be somewhat wary of an attempt to revise the costs budget of a successful party upwards when (a) the revisions are out of line with the rates adopted in the previously allowed budget and (b) the revisions are presented in the knowledge or expectation that that party is the winner.
  3. However I formed the view that the estimates which the Claimants put forward in their Precedent H for the future costs (all of which were approved) somewhat underestimated the amount of work which was actually required. This underestimation was probably due at least in part to the additional difficulties in securing reliable and up to date financial information from the Defendant.
  4. It is to be noted that the sum approved in the costs budget for the trial costs was £14,500, of which £10,000 was the fees of Leading Counsel for the 3 day trial (which can be divided roughly into a brief fee of £7,000 and two refreshers of £1,500) and £4,500 were time costs (say 3 x £1,500). The revision sought is for a total of £16,643 (corrected to £13,886), essentially for an additional 1.5 days of trial, albeit separated into hearings of 1 day and then ½ day and with the preparation of written closing submissions and a skeleton argument.
  5. In terms of time costs, Mr Butler was inclined to agree £1,500 and £750 for the closings and form of order, to which I will add a further £1,000 for additional preparation (e.g. of the additional bundle). In terms of disbursements, Mr Butler estimated refreshers at £2,000, giving a total of £4,000, but contended that the additional conferences claimed were part of the work covered by the refreshers. To a large extent I agree with his point and exclude the costs of the additional conferences. I will however take more generous refreshers at £4,000 plus a further £1,000 to cover the additional documents prepared by Counsel and the additional hearing days. I also allow the additional expenses of £557. I refuse to make the other revisions sought.
  6. Accordingly, the Claimants’ costs budget will be revised as follows:
  7. 1. Expert evidence: £4,000;
  8. 2. Trial Preparation: £1,000;
  9. 3. Trial: Time costs: £3,250; Disbursements: £5,557.
  10. 4. Total upward revisions: £13,807.
  11. 5. Total removals: £10,130 (PTR and ADR/Mediation).
  12. By my calculations, the costs the Claimants had incurred by the time of the CMO amounted to the total shown on their Precedent H (£78,469.30 ex VAT) plus the costs of that hearing, at which the Order was costs in the case, (£12,013.70 inc VAT, or £10,078.50 ex VAT), totalling £88,547.80. The total budgeted costs (as revised) amount to £43,877, yielding an overall total of £132,424.80 ex VAT. I derive some comfort from a rough comparison of the Defendant’s overall costs, which I was informed amount to approximately £125,000, especially since in an action of this nature one would expect the Claimants’ costs to be somewhat higher than those of the Defendant.
  13. In a normal case, one would expect the costs incurred by the time of the CMO to be less (perhaps considerably less) than the budgeted future costs. However in this case the fact that the normal pattern is reversed is not a surprise bearing in mind the efforts made by the Claimants pre-action to reach a resolution and the fact that considerable work had been done in the action (including the service of what turned out to be the initial expert’s reports) by the time the CMO was made.
  14. In order to include VAT, I am conscious it would not be accurate to simply apply the VAT rate of 20% to the total figure set out above since it will include some costs which are not the subject of VAT (court fees for example). However, since the bulk of the costs are made up of solicitors, counsel and expert’s fees, on which VAT is charged at 20%, and since I can take account of any inaccuracy when setting the level of interim payment, the overall total plus 20% comes to nearly £159,000.
  15. Although it is a decision to be taken in the circumstances of each case, I am aware that other Judges have awarded high percentages (e.g. 80% and 90%) as interim payments in cases where a CMO has been made. In the particular circumstances of this case, I consider it is appropriate to award the Claimants a relatively high percentage – approximately 80% – of the total by way of an interim payment on account of costs, on the basis that, on a detailed assessment, they would recover a sum in excess of the resulting figure, albeit not significantly in excess.
  16. Accordingly, I order the Defendant to make an interim payment on account of the Claimants’ costs in the sum of £127,000, to be paid within 21 days, i.e. on or before 17 February 2021.