In our previous article we reported on this long running and well publicised dispute, which had already been before the Court of Appeal once on the hearing of the substantive preliminary issues. Mr and Mrs Burgess (the "Claimants") had claimed damages from their neighbour, an architect, Ms Lejonvarn (the "Defendant") for breach of contract and negligence after she had provided her services free of charge in relation to their garden landscaping project. The Defendant had secured a contractor to complete the ground work and it was intended she would later provide detailed design work for a fee. However, the parties fell out over the quality and progress of the work on site, and the budget.
In 2015 the Claimants brought proceedings against the Defendant in contract and tort and following numerous interlocutory hearings, a trip to the Court of Appeal and a subsequent five-day trial, the claim failed in its entirety, with the court finding that whilst the Defendant may have owed a duty of care to the Claimants in tort, it had not been breached.
Shortly after proceedings began, the Defendant had made a Part 36 offer of £25,000, which the Claimants had rejected.
The Defendant argued that her costs should be assessed on an indemnity basis in view of the fact she had beaten her own Part 36 offer, and also given the Claimants' conduct of the litigation. In his costs judgment of 13 December the trial judge had only allowed costs on the standard basis indicating that the Claimants' claim had not been hopeless. The Defendant subsequently appealed.
Court of Appeal Decision
The Court of Appeal, led by Coulson LJ, overruled the earlier High Court decision, allowing the Defendant's appeal and ruling that the trial judge had applied the wrong test when considering the Defendant's application for indemnity costs.
They considered that there were 3 issues to be determined:
The court considered the conduct of the Claimants and held that the trial judge had been wrong in failing to address the issue of whether a reasonable Claimant would have concluded that the claims were so speculative, weak or thin that they should no longer be pursued.
Coulson LJ held that the first Court of Appeal decision on the preliminary issues emphasised that the duty related only to what the Defendant had actually done. The Claimants should have understood the "critical impact" of that decision at that point because they had known how little work the Defendant had undertaken for them and they should have realised that their claims were "at the very least, speculative / weak claims". The Claimants' pursuit of the claims after the Court of Appeal judgment had been handed down had been sufficiently "out of the norm" as to justify indemnity costs.
The Claimants' failure to accept or beat the Defendant's Part 36 offer had been a separate element of their conduct which was out of the norm, justifying indemnity costs. The Defendant beating her own offer was an important factor which the trial judge should have considered in the exercise of the court's discretion under CPR Pt 44.
The trial judge had not explained why that important factor did not lead him to exercise his discretion to order indemnity costs. When a defendant beats their own Part 36 offer, the court should always consider whether the claimant's conduct in refusing that offer took the case out of the norm. In making the offer, the Defendant had acted sensibly and proportionately at the outset. The Claimants had not.
The Claimants argued that, whilst the Defendant's costs budget was £415,000, her actual costs had been £724,000, so that indemnity costs in such circumstances would reward her for failing to remain within the budget.
The Court of Appeal found that the assessment of costs on an indemnity basis was not constrained by the approved costs budget. An approved budget figure could not affect whether there should be indemnity costs. However, on detailed assessment, even on the indemnity basis, the Court of Appeal thought that the Defendant's costs of £724,000 were likely to be found unreasonable in this case.
The Court of Appeal judgment is an important one for defendant professionals, which emphasises the importance of making sensible early offers of settlement, in consideration of the merits of the claim.
The judgment highlights the need for parties to continually review the strength of the claim as the litigation develops. The 'critical impact' in this case was the Court of Appeal's decision on the preliminary issues. Following the ruling, the Claimants had amended their claim such that it was 'diametrically opposed' to the claim they had originally brought. At this point, the claim changed from being an arguable case to a speculative claim, which was one of the factors which entitled the Defendant to indemnity costs based on the Claimants' 'out of the norm' conduct in continuing to pursue the claim.
Unlike a claimant, a defendant has no automatic entitlement to indemnity costs if they beat their own Part 36 offer. However, this case shows that defendants should not be deterred from making such offers to protect their position, in proper consideration of the underlying merits of the claim.
The case provides helpful guidance as to the circumstances where a court will consider awarding indemnity costs to a defendant and that courts should always consider whether a claimant's conduct, by not accepting a Part 36 offer, takes the case 'out of the norm', such that to continue with the claim would justify indemnity costs.
Finally, the case reiterates that an approved budget does not 'safe-guard' an unsuccessful party from greater liability should the court award the successful party's costs to be assessed on the indemnity basis.
However, the court will still consider the reasonableness of costs incurred against the factual matrix of the dispute. An approved costs budget is not necessarily a reliable comparator with the amount of costs actually incurred.
Costs on an indemnity basis are intended to provide near complete compensation for the costs of litigation. However, they still have to be reasonable. In this case, the court could not comprehend how the Defendant had incurred such costs in the dispute, given that her original involvement in the project in issue had only lasted a few weeks and she had not charged for the work.