Issue based costs orders and Part 36 offers: Terracorp and IT Protect analysed

Colm Nugent considers issue based costs orders and Part 36 offers.

The current paucity of trial litigation is reflected in the daily law reports in which interlocutory hearings get reported in a manner which they may otherwise have done.

There have been two costs decisions which deserve a wider audience outside the narrow field in which each was decided.

Terracorp v Mistry

In  Terracorp v Mistry (& Ors) [2020] Ch D (Miles J) [2020] 10 WLUK 42 the parties were engaged in litigation over fees due under covenants attached to parcels of land.    C had sold a parcel of land divided into plots of land, by way of investment.  Known as land banking, the owners retain the land in the hope that planning may one day be granted and the value of the plot (absent planning) will rise considerably.

The covenants attached to the land required the owners to pay fees for upkeep and maintenance of things like roads.  The plots, of course, had no roads or anything else, they were just sections of a field.  C sued and the defendants (D) sought declarations that they didn’t have to pay on a wide variety of bases.

Ultimately C was unsuccessful at trial and D was granted their declaration.

The interest (to PI lawyers) in this case concerns not the vagaries of paying for things that don’t exists, but the costs dispute which followed and the decision is both useful and comprehensive guidance on the operation of discretion concerning costs and issue-based costs orders in particular.   Although this was a dispute concerning bits of land land, the costs decision is of much broader and general application.

The winning defendants ran a variety of defences, only some of which were successful.  The paying claimant said that as a consequence, the six-day trial was longer than it otherwise needed to be and the costs overall had been increased needlessly.   The Judge at first instance, it seemed agreed:

“[The Judge] also said (with some justification) that a number of the defences or counterclaims were barely comprehensible, were bad in law, or were effectively abandoned at trial.” [para 75]

At trial the defendant said they should have all their costs, as the winning party; the claimant urged an issue-based costs order in which they paid 10% only of the defendant’s costs.

Issue based costs order were  – at one point – very much considered to be the default position and seen as a way to perhaps reduce the costs of litigation overall.

In considering the issue of costs, the trial judge adopted the principles in Sycamore Bidco v Breslin [2013] EWHC 583 (Ch) and these principles were adopted by the appellate court.  These were (this is a precis) a staged consideration of the conduct of the case, the conduct of the parties and a broad based assessment of who had won, and who lost.

(i) In commercial litigation …, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action. [Note: the principle has been applied outside of the confines of commercial litigation]

(ii) … the court should take as its starting point the general rule that the successful party is entitled to an order for costs.

(iii) The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.

(iv) The judge should hesitate before making an issue-based costs order, because of the practical difficulties which this causes and because of the steer given by Rule 44.3(7).

(v) In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.

(vi) In considering the circumstances of the case the judge will have regard not only to any Part 36 offers made but also to each party’s approach to negotiations (insofar as admissible) and general conduct of the litigation.

(viii) It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he has won but also the common costs.

(ix) The fact that a party has not won on every issue is not, of itself, a reason for depriving that party of part of its costs.

(x) The reasonableness of taking a failed point can be taken into account

(xi) The extra costs associated with the failed points should be considered

(xii) One still has to stand back and look at the matter globally, and consider the extent, if any, to which it is just to deprive the successful party of costs

(xiii) The conduct of the parties, both before and during the proceedings, is capable of being relevant (CPR 44.3(5)).

The Judge considered the criteria above and made a broad-brush order that the losing party pay 50% of the winning party’s costs.    This is not an unusual approach.

Given the criticism made of the winning party by the judge, it may have been thought this was not a bad outcome, and the archetypal discretionary balanced decision with which an appellate court was highly unlikely to interfere.

The losing claimant appealed on the substantive merits (concerning contractual interpretation) of the costs award saying that that:

“the award of 50% of the Defendants costs of the trial (when the interpretation issue took up approximately 15-20% of preparation and court time) is not just, fair or proportionate as it fails to reflect the Defendants’ conduct and level of success at trial” [para 82]

The costs appeal prospects was made somewhat more difficult because, in giving permission, Fancourt J limited the Appeal on costs to whether the 50% was unjustifiably high and therefore wrong, but determined that the Defendant had been correctly designated as the winning party.

As anyone who has appealed a contributory negligence finding will know, the appeal courts are loathe to interfere with percentage splits by the trial judge, as regards almost anything.   And this was explicitly referred to in the judgement:

“An appellate court will only interfere with a judge’s exercise of discretion in relation to costs in limited cases. The appellate judge does not simply ask whether he or she would have reached the same decision, but, in a spirit of self-restraint, recognises the advantage the trial judge enjoys from being immersed in the case, and having a better feel for the way the case has been run” [para 85]

There was implicit criticism of the brevity of the explanation for adopting the 50% approach:

“The judge’s core reasoning on the exercise of his discretion was expressed concisely and would perhaps have benefited from some expansion”  [para 89]

“The Claimant’s principal criticism is that the judge failed to undertake the exercise, at least expressly, of assessing what proportion of the Defendants’ costs were properly attributable to the interpretation issue. There is some force in this submission. The judge did not spell out assessment of the amount of the costs attributable to the interpretation issues.”  [para 93]

But:

“Hence a judge should give reasons where he makes an order out of the ordinary. But it is not enough to say that the judge has failed to give sufficient reasons. The Court will only intervene where there is no obvious (or rational) explanation for the order.” [para 95]

In ultimately rejecting the Appeal, the court said as follows:

• The court could not conclude that the decision was not rationally open to the judge or that he erred in the exercise of discretion;
• The overall judgement shows the judge was alive to the fact that the defendant has lost on a number of issues;
• It was important to remember that the defendant won on the principal point which was “the target of the proceedings”
• The judge was in the best position to determine how long each successful element of the case took, certainly more so than the Appeal court.
• The Appellant had no established that the judges exercise of his discretion was flawed.

The decision emphasises some well-established points for practitioners:

• The judge should be encouraged to address the criteria above when making (or rejecting) an issue-based costs order;
• The Judge should identify the winner of the litigation and – perhaps – identify the ‘target of the proceedings’ – when considering the overall exercise of his/her discretion;
• The exercise of discretion is always a difficult hurdle to surmount on Appeal, even more so when one is dealing with percentage attribution by a trial judge who has head the evidence and knows the case.

Lawtel Link: https://www.lawtel.com/MyLawtel/Documents/AC5013057
Bailli link: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2020/2623.html&query=(terracorp)

IT Protect & Ors v Pye & Ors

In the second decision IT Protect ltd (in liquidation) sub nom (1) Bramston (2) Harris (as joint liquidators v (1) Pye (2) Montague [2020] the costs issue concerned competing offers to settle and the effect on the costs of the complicated (and presumably expensive) litigation concerned.

The offers were as follows:

1. The Applicants (A) made a Calderbank offer to accept £57,000.
2. The Respondents (R1 and R2) rejected that.
3. R1 and R2 made an offer to settle after witness evidence was exchanged at £57,000 (the same figure) but to be paid over a three-year period.
4. ‘A’ rejected that.
5. ‘A’ then made a P36 offer to R1 and R2 to settle for £39.500 (plus costs in the usual way)
6. (R1 and R2) rejected that.
7. At trial ‘A’ was awarded £114,00 as against R1 and lost as against R2

A wanted to obtain the costs and interest advantages of having beaten their part 36 offer (by some margin).

R1 sought to escape the part 36 consequences by arguing it would be unjust to make an order under CPR r.36.17(4) because:

The part 36 offer had been made jointly and therefore it was not open to R1 to accept it absent R2’s agreement.

The court therefore had to consider what unjust meant’ and determined that it had to include a consideration of all the circumstances including the terms of a part 36 offer in accordance with the principles enunciated in Smith v Trafford Housing Trust (Costs) [2012] EWHC 3320 (Ch)

On a proper construction, the Smith principles included consideration of the reasons for refusing the offer was to be taken into account.

The court worked on the basis that 36.17(4) applied in this instance, but it could not be accepted by one party on the basis of the manner in which it was made.  If R2 had accepted it, she would have been obliged to pay costs and damages, which the trial revealed she was not liable to pay.

If R1 had accepted, he would have been liable for those costs incurred in pursuing the unsuccessful claim as against R2.

Accordingly, the court determined that it would be unjust to impose the 36.17(4) consequences.

The court also rejected making an issue-based costs order and ordered that R1 paid 50% of A’s costs and R2 was entitled to recover her costs.   This was primarily based on the way A had pleaded various cases in the alternative.

The decision has the following learning-points for practitioners:

• Part 36 offers made jointly as against more than one party are unlikely to attract the automatic consequences of 17(4);
• Parties should consider the tactical advantages of making different P36 offers against different defendants/claimants unless the claim is genuinely indivisible;
• Where the claim does not lend itself to part 36 offers against more than one litigant, parties should consider the benefits of separate Calderbank proposals – which may not carry the automatic consequences but will be taken into account when the issue of costs falls to be decided.
• In this particular case, A could have considered a separate part 36 offer as against R1 for the full sum, and a drop-hands Calderbank as against R2 conditional upon acceptance of the part 36 offer by R1.

Lawtel Link: https://www.lawtel.com/MyLawtel/Documents/AC5013139
Bailli link to the underlying decision: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2020/2473.html&query=(bramston)

Part of this article was published by Thomson Reuters in the Practical Law Dispute Resolution blog.