Speculative Claims, Indemnity Costs And The Effect Of An Approved Costs Budget

Lejonvarn v Burgess & Anor [2020] EWCA Civ 114

Following the dismissal of all claims by the High Court in this construction dispute, and an award of costs on the standard basis to the appellant (defendant), the Court of Appeal had to determine three issues, namely:

a) Whether it was a case in which the respondents’ pursuit of what were said to be “speculative, weak, opportunistic or thin claims” could properly be described as out of the norm such as to warrant an order for indemnity costs.

b) Whether the respondents’ failures to accept and subsequently to beat the appellant’s Part 36 offer, made at a very early stage in the proceedings, also meant (either separately or taken cumulatively with the pursuit of these particular claims) that an order for indemnity costs was warranted.

c) The relevance, if any, of the fact that the appellant’s approved costs budget was said to be £415,000, but that any assessment on the indemnity basis would start at the appellant’s actual costs figure of not less than £724, 265.

Giving the lead judgment Coulson LJ found that the respondents (claimants) had continued to pursue their claims after it should have been apparent to them (following a decision of the Court of Appeal in April 2017) that the claims were “so speculative or weak or thin” that they should no longer be pursued.

“the claims maintained and/or modified after the Court of Appeal judgment did not need a long and expensive trial for it to have been apparent to the respondents and their advisors that they were, at the very least, speculative/weak claims… It was, in my view, out of the norm for these respondents to continue to pursue the appellant with these speculative/weak claims, each of which the judge himself described in very similar terms, beyond [7 May 2017, one month after the Court of Appeal judgment].” 

Accordingly, he awarded the appellant indemnity costs from 7 May 2017.

The judge went on to consider the effect of the appellants’ early Part 36 Offer.  He first addressed an argument that there should be an automatic right to indemnity costs where a defendant beats their own Part 36 Offer…

“there was a good deal of debate about the absence of an automatic entitlement on the part of a defendant to indemnity costs in circumstances such as these. Mr Flannery went so far as to say in his original skeleton for the purposes of the appeal that this was “scandalous” and, on any view, “an oversight” on the part of the Rules Committee. In my view, the making of these colourful submissions ended up blinding both Mr Flannery and the judge from the real position…

“as things presently stand, the CPR is clear. There is no automatic entitlement on the part of a defendant to indemnity costs if that defendant beats its own Part 36 offer… However … the absence of an automatic entitlement is the beginning, rather than the end, of the analysis. The fact that a defendant has beaten his or her own Part 36 offer is plainly a matter of importance in the exercise of the court’s discretion under CPR Part 44. The authorities repeatedly emphasise that. The question is how the judge addressed the Part 36 offer when exercising his discretion in the present case.”

Despite finding that the appellant had acted “sensibly and proportionately” in making an early offer with the intention of protecting herself on costs, the Judge went on to conclude that whilst it was appropriate to award indemnity costs, these should only be from 7 May 2017.

“On one view, it might be said that that conclusion should lead to an order for indemnity costs dating back to March or April 2015. But, taking into account all the circumstances of the case, it is I think appropriate to limit the indemnity costs to the period after they had had time to digest the Court of Appeal judgment of April 2017. It was unreasonable beyond any doubt that the respondents did not accept the Part 36 offer once they knew that their omissions case was not open to them. Accordingly, the answer to the question formulated in paragraph 80 above is 7 May 2017.”

Finally, addressing an issue over which there has been some speculation and debate, namely whether or not a party’s approved costs budget is of any relevance where costs are to be assessed on the indemnity basis, the Judge made clear:

“In principle, the assessment of costs on an indemnity basis is not constrained by the approved cost budget, and to the extent that my obiter comments in Elvanite or Bank of Ireland v Watts suggested the contrary, they should be disregarded… there is as a matter of principle no overlap between a costs budget, which will have been approved on the basis of a projected series of figures for costs that were assessed as reasonable and proportionate, and the actual costs to be assessed by reference to the indemnity basis (where reasonableness might still be an issue, but proportionality is not).”