Indemnity costs, exceeding Costs Budgets, beating Part 36 offers and the importance of evidencing offers
In the recent case of Car Giant Limited -v- the Mayor and Burgesses of the London Borough of Hammersmith  EWHC 464 (TCC) upon the paying party having significantly beaten their own Part 36 offer at trial, the trial Judge, amongst other things, refused to comment on the reasonableness of departing from the budget when asked and instead decided to leave the issues to the more experienced Costs Judge.
In the main proceedings the Claimant brought a claim against the Defendant for dilapidations to its property at the end of a lease. The Claimant pleaded their claim in the value of £500,000 and despite the Defendant admitting to breaching the repair covenants, quantum could not be agreed and so the matter proceeded to trial, at which the trial judge valued the Claimant’s losses in in the sum of £179,125.00 plus interest. The key reason arising for the discrepancy between the pleaded value and the court value was the Claimant’s failure to evidence key aspects of their claimed losses.
During the proceedings the Defendant had made a Part 36 offer on 16 April 2014 in the sum of £250,000.00, which was significantly beaten when the Claimant was awarded £179,125 plus interest at trial. At the end of the trial Deputy Judge Mr Stephen Hurst confirmed he would hear arguments on costs.
The costs judgment can be found here.
The parties returned to court on 2 March 2017 for arguments on costs, at which it was commented by the Judge, that the usual order would be that the Defendant paid the Claimant's costs up until the expiry of the offer on 7 May 2014 and that thereafter the Defendant be awarded its costs subject to a detailed assessment on the standard basis, however, in this case the Defendant was seeking an alternative order, as follows:
1) For payment of its costs incurred before 7th May 2014;
As the Court has wide discretion under CPR 44.2, the Judge considered the history of the matter and the conduct of the parties. There had been previous offers made by the Defendant but none were Part 36 offers and some of the offers could not be evidenced. Even though the Judge’s reasoning was closer to the Defendant's, he determined that the Claimant was the winner up to 7 May 2014 and that it could not be said that the Claimant's conduct was so egregious as to deprive it of its prima facie entitlement to costs in this period as the successful party and in fact as the party that brought the claim to recover damages they were successful and there was no Part 36 offer until April 2014. The Defendant was not awarded costs prior to 7 May 2014.
2) That the basis of assessment of the costs both before and after 7th May 2014 should be on the indemnity basis;
The Judge considered the case of Franks v Sinclair (Costs)  EWHC 3656 (Ch), whereby failure to accept reasonable offers could justify indemnity costs. The Judge found there was no rule to award indemnity costs for the Claimant failing to beat the Defendant's offer, however there was the discretion to order the same but the Court should be slow to make such an award. The Judge concluded there was only one Part 36 offer and the other offers could not be substantially evidenced it was not sufficient reason to award indemnity costs.
The Judge also considered Garritt-Critchley and Others v Ronnan and Solarpower PV Ltd  3 Costs LR 453, which found that refusal to mediate was grounds to award indemnity costs. In the current case the Judge deemed that there had been suggestions of ADR but no formal offer was put forward until the Defendant suggested mediation in May 2015, the Claimant did not respond until August 2015, where they agreed to mediation but not until expert reports were exchanged. Mediation was mentioned again in 2015 and in 2016 and took place in January 2017, where it was unsuccessful. The Judge suggested that whilst early mediation could sometimes be more successful it was not true of all cases and it could not be said that had mediation taken place in the current case in May 2015 that it would have been or was likely to be successful or that the delay in undertaking mediation increased costs, therefore the Judge confirmed costs would be assessed on the standard basis.
3) To amend the Costs Budget in accordance with the application issued on 20th February 2017;
The Defendant sought to increase the costs budget by £8,084 for costs incurred post-trial and in particular for the costs hearing, however as the Defendant had been unsuccessful on most points and the Judge had reached the decision that the Defendant should pay the Claimant's costs of the hearing on costs, the point was moot. Insofar as the additional costs, which the Defendant had pleaded as being attributable to considering the original judgment, the court was not satisfied any such increase was justified.
4) For an indication as to the reasonableness of exceeding the Costs Budget in certain respects;
The Defendant sought an indication from the court that certain costs which had been incurred in excess of the last budget had been reasonably incurred and thus met the test at CPR Pt 3.18 that there was good reason to depart. In particular the phases in question and the reasoning for departure were that the expert attended mediation which was not budgeted for, as well as having a greater involvement in the trial, the Defendant incurred significant costs preparing the trial bundle and for a Grade D fee earner to attend trial as he had primary knowledge of the bundle. The Judge referred to the matter of Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB) (Click here to read our article detailing the judgment) in relation to what constituted a good reason to depart from a budget. However he reached the decision that unless the Trial Judge had a particular view on costs, having conducted the trial, or has to decide on an issue relevant to the assessment of costs then the Trial Judge should not seek to trammel the Costs Judge's jurisdiction. His reasoning was that as the Costs Judge has more experience of costs and there was nothing in the nature of this application to exceed the costs budget that could not be explained to a Costs Judge who would exercise CPR 3.18 in the assessment of costs. The Judge therefore gave no indication.
5) For interest on costs;
In accordance with CPR 36.17 (3)(b) both the Claimant and the Defendant were awarded interest on their costs at 1% above base rate and in each case the interest was payable from the date that the party in question discharged any relevant invoice or disbursement.
6) For a payment on account of costs.
When deciding the appropriate level for a payment on account of costs the Judge took into account that the Defendant's costs would be significantly higher than the Claimant's and that the Claimant would be able to offset their costs against the fees payable to the Defendant. The court noted that the Defendant's present approved costs budget was in the sum of £110,000 and assuming that sum was a reasonable estimate for the recoverable costs of the whole claim, and that it was unlikely the Claimant would recover more than £25,000 for 50% of its costs to 7th May, then a reasonable sum on account of costs would be 80% of £85,000. The Judge therefore ordered a payment on account of costs in the sum of £68,000 to be paid within 14 days.
Cost of the applications
Lastly the court determined that as the Defendant had been largely unsuccessful in the applications made that it would be liable for the Claimant’s costs of the same, on the standard basis.
There are several interesting points raised in this Judgment. The first and most obvious is that where there is an approved costs budget and the matter has proceeded to trial, a payment on account of cost of 80% is a reasonable amount to award. This is similar to the outcome in Thomas Pink Ltd v Victoria's Secret UK Ltd  EWHC 3258 (Ch) where 90% of the budget was awarded. This supports the assertion following a number of recent cases, in particular Merrix, where it suggests that once at trial the full budgeted amount is a reasonable sum.
The second thing we can take from this Judgment is that if there has not been a particular issue arising from the trial that would impact on the assessment of costs then it is not for the Trial Judge to comment on an area that could be decided by a more experienced Costs Judge, such as whether there was good reason to exceed the budgeted trial phase. There are several issues with this approach, the first is that the Trial Judge may have valuable insight that would be useful to the Costs Judge when assessing costs. Additionally by giving such views this could be of significant aid to the parties in the negotiation process and the absence of the same from the Trial Judge may in fact stifle negotiations and mean the receiving party has little choice but to go before a Costs Judge at assessment to get clarification, which is what the process of budget was implemented to reduce. For example, in this case, at this point the Defendant does not know if they will be allowed to depart from the budget and those costs will likely remain in dispute until decided by the Court.
In the Judgment the Court confirmed previous established Judgments on indemnity costs in that refusing to mediate would be cause for awarding indemnity costs. However delaying mediation to obtain relevant evidence is not the same as refusal and if the delay would leave the parties in a better position to mediate then it would not be fatal.
The final important take away from the Judgment is the importance of evidencing your offers. If the Defendant was able to properly evidence the various offers they made as well as the various attempts to mediate, the Trial Judge may have been more inclined to Order indemnity costs or costs prior to expiry of the Part 36 offer. As the receiving party has struggled to evidence key aspects of the work undertaken it may also cause problems for them at a detailed assessment as the paying party may then wish to push to an assessment as any doubt of the reasonableness of the work done, due to lack of evidence, would be found in the paying party's favour. This therefore supports the importance of evidencing the work undertaken.