CONDUCT AND COSTS: SUCCESSFUL DEFENDANT RECOVERS – NOTHING

In  European Real Estate Debt Fund (Cayman) Ltd v Treon & Ors [2021] EWHC 2866 (Ch) Mr Justice Miles considered issues relating to costs after a defendant had succeeded at trial because the claimant’s action was statute barred. The judge made no order for costs.

“I have decided that the just order in this case is that there should be no order as to costs.”

THE CASE

The claimant brought an action alleging fraudulent misrepresentation by the defendants.  At trial the judge found that the action would have succeeded on the facts, however it was statute barred. The claimant’s claim failed.  The judgment in relation to the trial can be found here.

THE ARGUMENTS AS TO COSTS

Despite failing the claimant argued it should recover the majority of its costs.  The defendants’ case was that they were entitled to their costs.

 

  1. There is a gulf between the parties’ positions. The claimant contends that the defendants should pay 80 per cent of its costs on the indemnity basis. The defendants contend that the claimant should bear their costs. They accept that some reduction might be appropriate to reflect their conduct and the issues on which they lost, but they say that it should be limited. Neither party invites me to make an issues-based order in the sense of an order for one party to pay the assessed costs of certain issues, and the other(s) to pay the assessed costs of other issues. Each side invites me to make a single overall order along the lines I have already indicated.

THE JUDGE’S FINDINGS: NO ORDER AS TO COSTS

The judge considered the submissions made and the principles relating to the award of costs in some detail.  He found that, on the facts of this case, the appropriate order was no order for costs.

 

    1. I have carefully considered the various submissions of the parties, including some more detailed points not summarised in this survey. I have reached the following principal conclusions.
    1. First, it is clear that the defendants are the successful parties; the claims were entirely dismissed. It follows that the general rule applies unless the court decides to make a different order, but the court should still give real weight to the overall success of the defendants as the winning parties, even if a different order is appropriate.
    1. Secondly, this is to my mind plainly a case where the conduct of the parties in relation to the issues and allegations and their respective success on parts of the case justify a departure from the general rule that all of the costs should follow the event. In the main judgment I found that both sets of defendants were guilty of deceiving Duet/ERED in 2011. They induced ERED to enter into the loan notes and, as a result, ERED suffered substantial losses. Nonetheless, there is some force in the defendants’ submission that I did not find that the defendants were subjectively motivated by an intention to harm ERED. That is not a necessary element of the tort of deceit, and I found that the defendants believed, no doubt over-optimistically, that the business would survive and the loan notes would be repaid. This is not, therefore, a case of the most serious form of tortious wrongdoing. It is nonetheless a case where fraud has been established. The claimant submitted that once misconduct of this kind has been established and there is no similar misconduct on the other side, the position is black-and-white: the court simply asks whether there has been dishonesty or not. I am unable to accept that submission. It is contrary to the authorities, including the case of Hutchinson v Neale [2012] EWCA Civ 345, as summarised in TMO at [15]. That shows that the court must evaluate the nature and degree of the misconduct; its relevance to, and effect upon, the issues arising in the trial; and its tendency to create an unwarranted increase in the costs of the action. I have followed this approach.
    1. As to the defendants’ conduct during the litigation, they contested all of the issues raised in the particulars of claim. As I have already explained, they lost on many of these issues. I also found that the evidence of the first defendant and Dr Srinivas were to be treated with extreme caution. I found that they were very poor witnesses and in various respects I found that they had invented evidence. In this regard, their evidence went beyond mere confusion or lack of recollection. They were prepared to give sworn evidence that various conversations had taken place which I found not to have happened. I also found that, at least in the case of some instances, there were recent inventions. In relation to Dr Srinivas in particular I found his evidence to be confused and inconsistent, indeed at times incoherent. However, again, I think in some respects the flaws in his testimony went beyond mere confusion or mis-recollection.
    1. But I do not consider that this was a case where the defendants decided at the outset to fabricate their whole story. I take into account that they were both asked to give evidence about the events occurring many years before. They may have persuaded themselves of the core of their story. They did not have all the documents needed to recall what had happened until relatively late in the day. I concluded in my main judgment that their evidence did contain a number of significant lies, but I think these were attempts to improve or embellish their case at the trial. They were putting forward new stories to bolster their defence. I do not think that the entire defence was a cynical abuse of the process, and therefore I do not think that the case falls within the description given by Briggs J in the second part of [19(i)] of the Bank of Tokyo-Mitsubishi case: where “the entire case of the party can properly be described as amounting to an abuse of process”. The defendants have told a number of lies, but I do not think their entire case can be described as an abuse of process.
    1. Nonetheless, the court must reflect the serious misconduct of the defendants in the events that led to this litigation and the lies that they told when giving evidence. I consider that on any view I should at least make a substantial reduction from the costs that would otherwise be payable to the defendants to the reflect this conduct. It would not be right to require the claimant to bear those costs. I shall return to the question whether there should also be an allowance for the claimant’s own costs of proving the underlying fraud case and uncovering the lies told by the defendants.
    1. Thirdly, there are some elements of the case on which the claimant did not succeed. I have listed these when reciting the submissions of counsel. It is hard to put a precise or even approximate figure on how much of the proceedings were devoted to these other issues, but they probably accounted for about 5 per cent of the forensic documents.
    1. I consider there is some force in the defendants’ complaint that the delay by the claimant in bringing this action, which has never been explained, and has contributed to the difficulties of the witnesses in giving accurate recollections to the court. As explained above, some of the evidence of the claimant’s witnesses was found to be unreliable as well as that of the defendants. That includes the evidence going to the bank covenant compliance claims on which the claimant lost.
    1. On the other hand, I do not think that most of the other points raised about the claimant’s conduct carry much weight. It is not possible, it seems to me to reach any real conclusion about the adequacies or otherwise of the disclosure process or the need for expert evidence. On the latter point, while at the trial the expert evidence did not play much of a part, that was largely because the experts had sensibly been able to reach agreement on many of the issues. The defendants’ complaints about ADR are capable of cutting both ways. Either party to litigation may propose and press for ADR, and it does not seem to me that either party made any sustained effort for there to be an alternative dispute resolution process in this case. It seems to me that that is a factor of relatively little weight.
    1. Fourthly, there is the question of how much of the costs are properly to be allocated to the limitation issues. Neither party has come up with a particularly compelling calculation of the time and costs properly attributable to the limitation issues. Neither has attempted a scientific exercise by seeking to allocate the underlying costs of the steps in the litigation to the various issues. The claimant’s approach is based on the number of pages and paragraphs in the judgment and the skeleton arguments devoted to the limitation issue. There are a number of obvious flaws with that approach. First, there were numerous common background matters that had to be gone into in any case. In terms of the judgment, it seems to me that that would include the parts concerning the background, the parties and the agreed statement of facts. Secondly, since the legally principles concerning deceit were common ground, it would also be necessary to exclude those from the page and paragraph count when working out the proportions. With those parts excluded, the sections of the judgment which concern limitation come to around 14 or 15 per cent of the judgment, but even that calculation is of no real assistance. By the time it came to the limitation defence in the judgment, it was possible for the court to cross-refer to earlier parts of the judgment, including those parts covering the analysis of the claims, and deal with things in a fairly shorthand way. Had the judgment only been concerned with limitation, it would have had to have been expressed at somewhat greater length than the section concerning limitation in the actual judgment. Thirdly, I also think that the claimant has exaggerated the extent to which it would have been possible for the trial to be shortened. I think the defendants are right to say that there would still have been some evidence from their witnesses to explain what they told the claimant and what information was provided to third parties and when. On the other hand, I think that the defendants have overegged the extent to which it would have been necessary for there to be extensive cross-examination of the defendants. The claimants may also fairly say that they did at least attempt a calculation of the amounts of time attributable to the limitation defence, and the defendants have not themselves come up with any alternative basis of calculation. It seems to me, doing the best I can, applying a fairly broad brush, that it would be fair to say that about 15 per cent of the time at least at trial was devoted to the limitation issues, and it seems reasonable (in the absence of any other yardstick) to apply that to the proceedings as a whole. That is a very broad brush and is not based on any scientific or detailed process.
    1. Fifthly, much of the time at the trial and space in the judgment was devoted to issues on which it cannot be said that the defence was in any way infected by dishonest evidence. These include issues concerning inducement and loss, which took up reasonably substantial parts of the trial and the judgment. Though the defendants lost on those points, they were properly arguable and they cannot be said to be tainted by any wrongdoing on the part of the defendants in the conduct of the proceedings.
    1. Sixthly, while I think it right to make an allowance to reflect those parts of the evidence where the defendants gave false evidence, I am not persuaded that this is a case where I should require the defendants to bear in full the costs of the claimant in relation to the underlying allegations of wrongdoing. The claimant decided to bring the claim. I have concluded it was statute-barred and it has been dismissed in full. I have to give appropriate weight to the fact that the defendants are the successful party when framing a just costs order, and not merely in deciding whether to depart from the general rule. I also agree with the defendants that the limitation defence cannot be regarded as a mere technicality. However, I do think that some allowance should be made in favour of the claimant for their costs of demonstrating that the defendants’ witnesses were giving untruthful evidence. They had to incur costs to uncover the defendants’ lies. But that does not go, for the reasons I have already given, to those elements of the claimant’s case such as inducement, loss, mitigation etc., about which there were no lies. Moreover, I do not think that all of the defendants’ evidence was knowingly false, even on the main points.
    1. Seventhly, I take into account the offer to drop hands. It has some relevance. I do not think that the claimant is right to say that it would only be relevant if I had otherwise decided to make an order in favour of the claimant. It seems to me that it is a factor to take into account in deciding what order I should make. However, the offer was made very late in the day, on the eve of trial, when the great bulk of the costs had already been incurred.
    1. Eighthly, there would, in any event, have been common costs of the litigation, and one is not merely looking at the costs of the trial itself. There were costs of procedural steps including the CMC, the PTR, arguments about security for costs, arguments about disclosure, the preparation of bundles, the preparation of witness statements and other steps. These were steps that would have had to be taken in any case.
    1. Ninthly, I have already mentioned the question of the parties’ relative success and failure on the various issues. I do not consider it appropriate in this case to make an issues-based order under CPR 44.2(6)(f) in the sense of requiring the court on a detailed assessment to undertake a separate assessment of the costs of the different issues, and indeed neither party invited me to make such an order. Each sought instead an overall order taking into account, amongst other things, the outcome on the various issues and the conduct of the parties. I do not think that it is as straightforward as the claimant suggests, to tease the limitation issues out of all of the other issues, but I do think there is some force in their overall submission that they won on most of the points and the defendants lost on most of the points. However, that needs always to be balanced against a point that I have made several times already, that even where the court departs from the general order that costs follow the event, it should still give weight to the fact that the defendants are the overall winners.
    1. I have ultimately to reach a just costs order taking into account all the relevant circumstances. I have enumerated my principal conclusions above but it may be helpful here to pick out the points that seem to me to be of particular importance. First, the defendants are the overall winners and would not have been put to any costs had the claimant recognised the validity of the time-bar defence. That goes not merely to the starting point but is an important consideration when deciding any appropriate alternative order. Secondly, I do not think this is a case where the entire case of the defendants may be regarded as an abuse of process. Thirdly, the defendants were, on my findings, guilty of deceit. The court should reflect this in its order. Fourthly, the defendants’ main witnesses were not merely poor witnesses but at times invented evidence. That led to the defendants denying the claims in deceit, and that undoubtedly led to more prolonged proceedings at the trial. The court should reflect this in its order by depriving the defendants of part of their costs. Fifthly, however, not all of the evidence on the main issues of liability was affected by the lies told by the defendants’ witnesses. There were issues of inducement, causation and loss which did not depend on that. Sixthly, the claimant lost on some aspects of the case as well as the limitation part of it, albeit those aspects were relatively small in the overall picture. Seventhly, on a broad brush calculation, the limitation issues probably took up about 15 per cent of the trial process, and the other issues on which the claimant lost took up perhaps 5 per cent. Eighthly, some allowance should be made in the claimant’s favour to reflect the additional costs it was put to in exposing the false evidence given by the defendants. Ninthly, there was an offer to drop hands shortly before the trial but it was late in the day. It would have reduced the overall costs, but would not have obviated the great bulk of the costs of the proceedings. Tenthly, some elements of the claimant’s conduct, particularly its delay in issuing the proceedings, are of some relevance but I do not overall think they have great weight. Finally, I consider that some of the costs set out in the claimant’s costs schedule appear to be high and it is possible that some of them may be disproportionate, though on the information before me I say no more than that.
  1. I have carefully taken into account all of the features of the case including all of the submissions made so forcefully to me by the parties. I have decided that the just order in this case is that there should be no order as to costs.