COST BITES 28: APPEALING AGAINST AN ORDER FOR COSTS: THE MAJOR HURDLE INVOLVED AND THE RELEVANCE OF A NON-PART 36 OFFER TO SETTLE

October 28, 2022 · by · in Appeals, Conduct, Costs

In TMO Renewables Ltd v Yeo & Ors [2022] EWCA Civ 1409 the Court of Appeal dismissed an appeal against an order for costs.  The case is a reminder of the difficulty in appealing a decision as to costs.  Further it illustrates that an offer to settle, which is not a Part 36 offer, is far from definitive when a judge determines an issue of costs.

 

THE CASE

At a trial the judge found that the defendants to an action had acted in bad faith. However the claimant had suffered no loss as the company involved was insolvent in any event. The judge ordered that the claimant pay 30% of the defendants’ costs.  One defendant appealed that order, arguing that he should have been paid 100% of his costs on the indemnity basis.

 

    1. At the conclusion of a lengthy trial, Mrs Justice Joanna Smith found that the defendants had acted in breach of fiduciary duties owed to the claimant company and that they had done so in bad faith. Those who are interested can read the whole sorry story in her careful and comprehensive judgment on the merits ([2021] EWHC 2033 (Ch)). In a nutshell, she found that the defendants had gerrymandered a vote at an extraordinary general meeting of the claimant with a view to defeating resolutions presented by a major shareholder aimed at changing control of the claimant’s board of directors. The gerrymandering consisted principally of the issue of 75 million ordinary shares to a new investor on terms which (1) permitted payment to be deferred for up to two years notwithstanding that the claimant was in financial straits and (2) enabled that new investor to vote against the resolution, thereby ensuring its defeat.
    1. But the judge also found that the defendants’ breaches caused the claimant no loss, principally because it was insolvent and would have gone into administration anyway. So she dismissed the claim against all of the defendants. She ordered that the claimant should pay 30% of the defendants’ costs of the claim, to be assessed on the standard basis.
  1. The claimant sought permission to appeal against the dismissal of its claim, but that application was refused by Lord Justice Lewison. An appeal against the judge’s costs order by the 3rd and 5th defendants has been compromised. What is left is an appeal on costs by the 4th defendant, Mr Michael McBraida. Mr Richard Morgan KC, who appears for Mr McBraida, submits that as the successful party Mr McBraida should have been awarded all of his costs, and that because he did better than an offer to settle which he made at the outset, those costs should be assessed on the indemnity basis.

THE HURDLE

The Court set out the nature of the hurdle that an appellant faces when appealing in relation to costs.
    1. The height of the hurdle which an appellant faces in challenging a trial judge’s assessment of the appropriate order to make on costs is too well known to require extensive citation. One description of this was given by Lord Justice Davis in F & C Alternative Investments (Holdings) Ltd v Barthelemy (No. 3) [2012] EWCA Civ 843, [2013] 1 WLR 548 at [42]:
“Decisions on costs after a trial are pre-eminently matters of discretion and evaluation. Further, it is particularly important to bear in mind that a trial judge – especially after a trial such as this one – will have a knowledge of and feel for a case which an appellate court cannot begin to replicate. The ultimate test, of course, for the purposes of an appeal of this kind is whether the decision challenged is wrong. But it is well established that an appellate court may only interfere if the decision on costs is wrong in principle; or if it involves taking into account a matter which should not have been taken into account or failing to take into account a matter which should have been taken into account; or if it is plainly unsustainable.”
  1. For reasons which I will endeavour to explain briefly, the appellant’s submissions in this case do not come close to clearing this hurdle.

THE APPELLANT’S FAILURE TO MEET THAT HURDLE

 

    1. Although Mr Morgan submitted that the judge failed to give any or sufficient weight to the unreasonable conduct of the claimant, it seems to me that this submission is untenable. The judge plainly took into account all aspects of the claimant’s conduct of which criticism was made. She dealt with them at length and explained in her conclusion which I have quoted above how that conduct impacted on her ultimate decision. There is no scope here for an appellate court to intervene.

 

Double counting

    1. Mr Morgan submitted that there was an inconsistency, or an element of double counting, in the judge’s reasoning. She held at [65(ii)] that the claimant should not recover its costs, contrary to the submission then advanced by Mr Sutcliffe, and that the right approach was for the defendant to be deprived of its costs incurred in advancing a dishonest case on liability. But she had then applied a further reduction of 30% of the defendants’ costs at [65(iii)] “to reflect an element of the costs incurred by [the claimant] in dealing with those issues at trial”. The effect of this, said Mr Morgan, was to do precisely what the judge had said that she would not do, that is to say to award the claimant part of its costs of dealing with the liability issue.

 

    1. In my judgment this submission misunderstands what the judge was doing at [65(iii)]. It is clear that she was in fact following the approach set out in the Bank of Tokyo case at [19(ii)] which she had cited earlier in her judgment. This was to disallow the defendants’ costs in advancing a dishonest case (which she assessed at 40% of their total costs) and, in addition, to mark the court’s disapproval of this conduct by “the imposition of an additional penalty” (as to which, see [8] above), thus reducing the defendants’ recovery by a further 30%. It is clear from the judge’s reference to “a fair and proportionate additional deduction having regard to the gravity of the misconduct of the Defendants” that this is what she was doing: the language echoes what Mr Justice Briggs said in Bank of Tokyo.

 

  1. This was an orthodox and appropriate course to take.

THE OFFERS TO SETTLE

The Court of Appeal dismissed the argument that this defendant had made an offer to settle which had not been properly taken into account when assessing costs.

The offers to settle
    1. It is common ground that the offers to settle were not offers made under CPR 36 and therefore did not carry the costs consequences of such offers. They were, therefore, offers to be taken into account pursuant to CPR 44.2(4)(c), but the weight to be given to them depended on all the circumstances of the case and was pre-eminently a matter for the judge to determine. As the judge said in terms that she would give some weight to the offers to settle, made first by Mr McBraida alone and then by all of the defendants, and as she clearly did so in the passages from her costs judgment which I have set out above, the submission that she failed to do so is ambitious.
    1. Mr Morgan submitted, however, that the judge cannot in fact have done so because the same order was made in respect of Mr McBraida as in respect of the other defendants who had not made an offer at the outset before proceedings commenced. Mr Morgan submitted that this showed that Mr McBraida had in fact received no credit at all for this early offer which, if it had been accepted, would have avoided the whole claim against him. I do not accept this submission. While Mr McBraida was the only defendant to have made an offer to settle at the outset, he was also the only defendant to have made what was described as the “Undervalue Allegation”. This was an allegation, relevant to quantum, that the claimant’s sale of the business to a third party was a sale at an undervalue. The allegation was the subject of expert evidence, but in the event was dropped shortly before the trial. The judge decided not to make a separate costs order in respect of this allegation. However, she was entitled to weigh this in the balance when considering what weight to give to the offer made by Mr McBraida. Moreover, it was too simple to say that acceptance of Mr McBraida’s offer would have avoided the need for proceedings against him. It was an offer which came with strings attached, namely the requirement for an indemnity in the event of a contribution claim against Mr McBraida by the other defendants.
    1. Overall, therefore, the judge was entitled to take the view that Mr McBraida should not be treated differently from the other defendants and I see no reason to doubt that she did take into account the offers to settle when reaching her conclusion as to what was required by the overall justice of the case.
Indemnity costs
  1. I need say next to nothing about indemnity costs. The submission that it was an error of principle not to award costs on the indemnity basis in favour of a defendant who had conducted a dishonest case is hopeless.