Mr Justice Hildyard examines the principles and authorities governing an award of costs on the indemnity basis, specifically in the context of late discontinuance.
HOSKING & ANOR v APAX PARTNERS LLP & ORS [2018] EWHC 2732 (CH)
INDEMNITY BASIS COSTS : DISCONTINUANCE : CPR 38.6
(1) the making of serious allegations which are unwarranted and calculated to tarnish the commercial reputation of the defendant;
(2) the making of grossly exaggerated claims;
(3) the speculative pursuit of large-scale and expensive litigation with a high risk of failure, particularly without documentary support, in circumstances calculated to exert commercial pressure on a defendant;
(4) the courting of publicity designed to drive a party to settlement notwithstanding perceived or unaddressed weaknesses in the claims: [43]
The following factors were determined to have taken the case “well ‘out of the norm’” justifying an award of costs on the indemnity basis.
(1) The pursuit to the doors of the Court, and four days beyond, of serious allegations of commercial impropriety, which were suddenly abandoned only when settlement talks failed, and then without explanation and without visible change in the forensic landscape;
(2) The changing nature of and inconsistencies in the case, both internally and with the expert evidence put forward;
(3) The publicity attending the case, stoked up by the prior proceedings in the USA and the highly-coloured way in which the case was presented both there and in this jurisdiction;
(4) The overall unfairness of preserving for the Claimants the twin benefits of the ordinary basis of assessment whilst exposing the Respondents, having had to respond to an expensively presented case, to the twin detriments of facing a shortfall in costs recovery and being denied the chance of vindication without explanation: [100]
The judgment in this matter concerned:
“the denouement of litigation on a grand scale which was suddenly concluded, not by settlement or adjudication, but by discontinuance after four days of what had been envisaged to be six weeks of evidence and submission.”
The central issue to be determined was whether the claimants should be liable for costs, not on the standard basis provided for in the event of discontinuance by CPR 38.6(1), but on the indemnity basis.
The proceedings concerned a dispute between the joint liquidators of a Luxembourg entity called Hellas Telecommunications (Luxembourg) II SCA (“Hellas II”) and corporate entities and individuals connected with two global private equity house, Apax and TPG.
The first eight Respondents were at material times connected with Apax (“the Apax Respondents”); the 9th to 42nd Respondents were connected with TPG.
The Liquidators had claimed approximately €1 billion from the Respondents as being the entities and individuals responsible for a transaction allegedly at an undervalue which they contended placed intolerable financial strain on Hellas II and caused its commercial demise.
Despite the UK jurisdiction being the “natural home” for such proceedings, the Liquidators initially brought proceedings in Luxembourg and New York, unsuccessfully, before issuing in the English High Court shortly before expiry of limitation.
The Respondents contended that an order for standard basis costs would not properly reflect the conduct of the joint Liquidators (“the Liquidators”) in pursuing and then suddenly abandoning the proceedings. They said that the circumstances of the case took it well outside the norm so as to justify a order for costs on the indemnity basis.
In essence, the Respondents said:
(1) the Liquidators’ claim was always, if not hopeless, speculative, weak, opportunistic and thin; and that
(2) a claim pursued in such circumstances and with such limited prospects, particularly one based on allegations of commercial impropriety, which was discontinued without explanation after four days of trial when attempts to settle had failed, should attract upon such discontinuance an order for indemnity costs.
The Liquidators contended that the Court was not in a position, and should not attempt, to decide what it would have determined at the end of the remaining 6 weeks of trial without having heard the relevant factual and expert evidence and legal argument.
That, they submitted, would not be fair or proportionate; and it would undermine the simplicity and purpose of the specific rules in the CPR on discontinuance which they maintained are exhaustively there set out.
They emphasised especially that the Court had heard only brief oral opening submissions, but no detailed argument on the law or the law as applied to the facts, which were matters for closing submissions.
In these circumstances they cited Chadwick LJ in In re Walker Wingsail Systems plc [2006] 1 WLR 2194 at para 12:
“[I]t is no part of the function of a court on an application to discontinue to attempt to reach a decision whether or not the claim would succeed”.
37. The standard basis of costs is, as its description denotes, the norm. Only if the case is ‘out of the norm’ may the indemnity basis be justified.
38. An award of indemnity costs is valuable to a receiving party for two separate reasons: (1) the burden of persuasion as to reasonableness is shifted to the paying party, and (2) the paying party does not have the benefit of the limitation that only costs which were proportionate to the matters in issue are recoverable: see Digicel (St. Lucia) Ltd and others v Cable and Wireless PLC and others [2010] EWHC 888 (Ch), para [9] (Morgan J).
39. The decision of Morgan J. in Digicel contains a useful review of prior authority at paras [14] – [19]: see in particular paragraph [19] where Morgan J. asked 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”.
40. More recently, the Court of Appeal said the following on the subject in Excalibur Ventures v Texas Keystone & Others (No.2) [2017] 1 WLR 2221 at [21]:
“The principles which should guide the court in exercising its discretion as to the basis upon which a costs order should be made are too well known to require restatement. They are accurately summarised in the judge’s costs judgment, to which the judge referred at para 60 of the judgment which is the subject of this appeal. CPR Pt 44 makes clear, as the judge noted at para 62, that
the conduct of the parties is one, but only one, of the circumstances to be taken into account. The discretion is to be exercised in the light of all the circumstances of the case. To award costs on an indemnity scale is a departure from the norm and one therefore looks for something, whether it be the conduct of the relevant party or parties, or the circumstances of the case, which takes the case outside the norm.
The judge cited in his costs judgment some of the many cases which attempt to collect examples of circumstances which may take a case out of the norm—such as his own judgment in Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 2531 (Comm), my judgment in Three Rivers District Council v Governor and Company of the Bank of England [2006] 5 Costs LR 714 and the judgment of Gloster J in Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EWHC 749 (Comm).”
41. In the passage from her Judgment in the Euroption case which is referred to above, Gloster J (as she then was) said the following:
“There was virtually common ground between the parties as to the principles to be applied by the court in making its choice between the two bases of assessment. The principles are well-known and have been exhaustively rehearsed in the relevant authorities. The following is no more than a headline summary.
First, on either basis, the receiving party is only entitled to recover costs which it has actually incurred, and, further, is only entitled to receive costs which were reasonably incurred and were reasonable in amount. Second, the standard basis is the normal basis of assessment: see Reed Minty v Taylor [2002] 1 WLR 2800 at [28]; Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson [2002] EWCA (Civ) 879 at [19]. This means that there has to be something in the conduct of the action, or about the circumstances of the case in question, which takes it out of the norm in a way which justifies an order for indemnity costs: see Excelsior ( supra ) and Noorani v Calver [2009] EWHC 592 (QB) at [9], per Coulson J. Third, cases vary very considerably, and the Court of Appeal has declined to lay down guidelines on the subject: see Excelsior ( supra ) at [32]. It is obvious from a reading of the authorities that each case is highly fact-dependent. Fourth, to demonstrate that a case has gone outside the norm of behaviour, it is not necessary to show that the paying party’s conduct lacked moral probity or deserved moral condemnation in order to attract recovery of costs on an indemnity basis: see Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 2531 (Comm) at [1], where Christopher Clarke J said:
“… The basic rule is that a successful party is entitled to his costs on the standard basis. The factors to be taken into account in deciding whether to order costs on the latter basis have been helpfully summarised by Tomlinson, J., in Three Rivers District Council v The Governor and Company of the Bank of England [2006] EWGC 816 (Comm). 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 making of a grossly exaggerated claim may also be a ground for indemnity costs.”
However, as Mr. Shivji emphasised, by reference to paragraph 8 of the decision in Noorani (supra),
conduct must be unreasonable “to a high degree” to attract indemnity costs. “Unreasonable” in this context does not mean merely wrong or misguided in hindsight: see per Simon Brown LJ (as he then was) in Kiam v MGN Limited (No 2) [2002] 1 WLR 2810 . In each case, it is a fact dependent question as to whether or not the paying party’s conduct has been unreasonable to a high degree.”
42. The emphasis is thus on whether the behaviour of the paying party or the circumstances of the case take it out of the norm. The merits of the case are relevant in determining the incidence of costs: but, outside the context of an entirely hopeless case, they are of much less, if any, relevance in determining the basis of assessment.
43. The cases cited show that
amongst the factors which might lead to an indemnity basis of costs are (1) the making of serious allegations which are unwarranted and calculated to tarnish the commercial reputation of the defendant; (2) the making of grossly exaggerated claims; (3) the speculative pursuit of large-scale and expensive litigation with a high risk of failure, particularly without documentary support, in circumstances calculated to exert commercial pressure on a defendant; (4) the courting of publicity designed to drive a party to settlement notwithstanding perceived or unaddressed weaknesses in the claims.
44. In my view, the like considerations apply in the context of discontinuance; but their application is made the more difficult because at that stage the Court will not itself have assessed all the evidence and reached an adjudication, and the reasonableness (or not) of the way the case has been conducted may be more difficult to assess. For example, it may well be difficult to dismiss a claim which has not proceeded to adjudication as “unwarranted”.
45. Discontinuance connotes (in the absence of agreed terms or particular different explanation) that the discontinuing party no longer considers its claim to be worth pursuing, or that it can no longer afford to pursue it.
However, whether that is on a cost/benefit analysis, or because of funding difficulties, or changed strategic priorities, the Court is unlikely to be in a position to know or determine.
Discontinuance does not necessarily connote an acceptance that the case was, is or has become hopeless; and a fair assessment of the merits will be difficult, if not impossible, at least if there remains any real issue by the date of discontinuance.
46. I accept also, in light of Chadwick LJ’s statement quoted at paragraph [36] above, that in the ordinary course, and given these uncertainties, any adjudication of the merits will ordinarily not be the court’s function at the discontinuance stage.
47. However,
I do not read that statement as precluding the Court from considering whether in the particular circumstances the sudden discontinuance confirms that a claim, though perhaps not susceptible to summary determination at an earlier stage, lacks or has come to lack any real vitality; nor is it precluded from examining the particular circumstances, including the documentary record, to assess whether it appears that it has been continued, not with a view to its adjudication on its merits, but with a view to extracting a settlement on account of its nuisance, expense, and any uncertainty as to the result inherent in almost all litigation.
48. Further,
I do not accept that the Court cannot assess whether the fact of discontinuance, where no other explanation is offered and no change in the forensic landscape which might excuse a change of perception or tack is apparent, raises an inference in all the circumstances that the discontinuing party has not only recognised weaknesses such as no longer in its perception justify pursuit of the claim but that such weaknesses were always an incident of that claim.
49. By the same token,
there is, in my view, no reason for particular reluctance, at the stage of discontinuance, to award an indemnity basis of costs if the conduct of the parties or the circumstances of the case are by then revealed as being ‘out of the norm’.
In that context, I do not accept the suggestion put forward on behalf of the Liquidators at the hearing of consequential matters that the fact that the express provision in the CPR for discontinuance provides for the payment of standard costs places some higher hurdle, or tips the balance, against an award on the indemnity basis. The CPR simply caters in this context for the norm: it does not fetter the Court in determining the appropriate response to cases which it is persuaded are ‘out of the norm’. If anything,
the sudden, unexplained discontinuance of a large claim, carried on for days at trial after enormous expense, invites the question whether it was reasonable to pursue it at all, or at least, so far.
50. As is apparent from paragraph [41] above, a recurring theme of these considerations, and a hallmark of cases falling ‘out of the norm’ in the relevant sense, is that the proceedings in question have been high risk, and apparently pursued, and usually publicised, to exert pressure in the hope of extracting a settlement, with frail evidential support and little regard to their prospects of success at trial or any real and realistic objective of securing vindication by adjudication.
51. Whilst that may not technically amount to abuse, it is close to it, since the Court is intentionally, though in the event, unsuccessfully, being used as an anvil for settlement rather than as an adjudicator; and it may cause the Court to set aside, in assessing costs of the victim, the ordinary constraints of proportionality and reasonableness, precisely because the court is persuaded that the victim has been pursued and subjected to legal process in a way and for a reason which is neither proportionate nor reasonable.
52. If the Court reaches the conclusion that this was, or at some point became, a fair depiction of the proceedings, discontinuance should not deter the Court in a case ‘out of the norm’ from an order of costs which better fits such circumstances. On the contrary, especially
where by discontinuance of the proceedings without explanation the victim in such a case is deprived of any prospect of vindication in which very serious allegations of impropriety or worse have been advanced, pursued, intentionally widely publicised and suddenly abandoned, it is right in my judgment for the Court to be inclined towards an indemnity basis of costs.
53. Whilst I would accept that neither Three Rivers DC v The Governor & Company of the Bank of England [2006] 5 Costs LR 714 per Tomlinson J (as he then was) at [24], nor Jordan Grand Prix v Vodafone Group [2003] 2 Lloyds Rep 874 (which he cited) is directly in point, since the one went to the question of whether there was a sufficient issue remaining, after the claimants had already abandoned their claims and agreed to pay costs on an indemnity basis, to warrant the Court making observations as to the substance of the case, and the other went to the question whether the Court should give judgment after discontinuance, both illustrate the Court’s reluctance to permit parties which have invoked its jurisdiction and pursued proceedings for purposes or in a manner of which the Court disapproves to withdraw silently and deprive the other party of some proper recompense or vindication.
54. That sharpens focus on why this claim, which was pursued all the way and yet suddenly dropped after four days of trial without apparent reason beyond the fact of failed negotiations, was pursued until then, and whether there are factors relating to the way it was so pursued which take it ‘out of the norm’.
…
95. The Liquidators submitted, and I agree, that neither of the following matters can be said of themselves to take a case ‘out of the norm’:
(1) Pursuit of a case to judgment which fails (even resoundingly);
(2) Pursuit of an arguable case raising issues of law and fact which could not be resolved without a trial, even if the court considers with hindsight that the case was unlikely to succeed.
96. They further submitted that their claim was plainly arguable and had a real prospect of success; that in any event the Court could and should not make a fair assessment of the merits; and that “once their attack on the merits is stripped away, the Respondents’ grounds for seeking an order for indemnity costs are thin at best.”
97. I accept that I should not seek at this stage summarily to determine the merits of the abandoned claims. But I do not accept that I should not make an assessment as to the purposes of pursuing the proceedings, or discount an overall view, after exchange of skeleton arguments, introduction of the primary documentation, four days of trial, and the sudden unexplained discontinuance, as to the weight of the difficulties in the way of establishing liability and more generally the egregious features of the case. Further, I consider that I am in a position to assess in broad terms the reasonableness of the pursuit and the manner of presentation of these proceedings having regard to the earlier proceedings abroad and the frailties and difficulties they had to overcome, and the sustained efforts to avoid the natural or ‘home’ jurisdiction. Put shortly, and in any event, I consider that I am in a position to determine in all the circumstances already apparent to the Court whether the case is such as fairly and properly to be characterised as ‘out of the norm’.
98. My assessment is that this was high-risk litigation aggressively and very expensively pursued after failure of one sort or another in multiple jurisdictions, without demonstrable support in the contemporaneous documentary evidence; that the shape of the proceedings abroad, and the publicity the claims seem to have been calculated to attract, committed the Liquidators to an inappropriate form of action, it being difficult, perhaps impossible, to force the complaints into the structure of section 423; that the case always depended on extracting in cross-examination support for a thesis which had no or no material support in the contemporaneous documentation and which it clearly contradicted; and that whilst the ultimate consequences of the Recap and its fall-out might elicit the support of a jury, the claims had a much lesser chance of success before a judge in this jurisdiction.
99. In my assessment, the attempts to litigate anywhere but in the natural home for the relevant claims seem to me to indicate an appreciation of the severe difficulties of establishing the case here. Further, the case appears to me to have been launched and pursued with a view to a settlement which the very hostile publicity against the Respondents which the way the proceedings were formulated had engendered in the USA, and the continuing echoes of that publicity in this jurisdiction, might have led the Claimants to suppose might be on the cards, whatever might be the merits of the claims in law. The desire for a jury trial in New York, which remained even after the issue of proceedings here (as demonstrated by the extraordinary and unsuccessful application for a stay of these proceedings), reinforces my perception that the Liquidators and their funders were wary of strict legal adjudication of their claims.
100. Moreover, and in any event, I consider the following factors (all elaborated above) take this case well ‘out of the norm’:
(1) The pursuit to the doors of the Court, and four days beyond, of serious allegations of commercial impropriety, which were suddenly abandoned only when settlement talks failed, and then without explanation and without visible change in the forensic landscape;
(2) The changing nature of and inconsistencies in the case, both internally and with the expert evidence put forward;
(3) The publicity attending the case, stoked up by the prior proceedings in the USA and the highly-coloured way in which the case was presented both there and in this jurisdiction;
(4) The overall unfairness of preserving for the Claimants the twin benefits of the ordinary basis of assessment whilst exposing the Respondents, having had to respond to an expensively presented case, to the twin detriments of facing a shortfall in costs recovery and being denied the chance of vindication without explanation.
101. In such circumstances, I do not consider the standard basis of costs would reflect the extraordinary nature of the case and its sudden discontinuance or provide a fair balance in the circumstances. I direct the costs payable by the Claimants to be assessed on the indemnity basis accordingly.
102. I do not, however, feel able to accede to the submission that I should state that the allegations of commercial impropriety made against the 6 TPG individuals were unwarranted. That should not be taken as an indication that I had been persuaded they had a real prospect of success: on the contrary, they appeared to me to be thin. But what is sought is in the nature of an adjudication of the merits summarily: and I do not consider that would be proper. Further, as previously indicated, the ultimate commercial consequences of the Recap are such as to give rise, and indeed have given rise, to real disquiet; and that is so even though the claims made in respect of the circumstances were inappropriately framed.
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Toby Moreton
Unreasonable conduct and costs in the First-tier Tribunal