Court of Appeal: Indemnity costs order for “speculative” claims are not constrained by approved costs budget

In Lejonvarn v Burgess and Burgess [2020] EWCA Civ 114, the Court of Appeal have confirmed that the High Court was wrong not to punish the claimants who pursued a speculative professional negligence claim against an architect with indemnity costs, after they racked up hundreds of thousands costs simply in an effort to recover their earlier costs of the litigation.

In the substantive claim, although it was held by both the High Court and the Court of Appeal that the architect owed the claimants a duty of care, the architect had “provided very few services and not been negligent in any of them”. The High Court ordered the architect’s costs be assessed on the standard basis however, the Court of Appeal found that the claims were out of the norm such as to warrant indemnity costs.

Crucially, the assessment of indemnity costs is not constrained by the costs budget. The Court held that it is no objection to an order for costs on the indemnity basis that it is likely to permit the recovery of significantly larger costs than would be recoverable on an assessment on the standard basis having regard to the approved costs budget; that possibility is inherent in the different bases of assessment, and costs on the indemnity basis are intended to provide more nearly complete compensation for the costs of litigation.

What are indemnity costs?

An indemnity costs order provides a party in litigation with compensation to as full an extent as possible for the outlay and trouble of litigation. A court will not look at proportionality of costs if costs are assessed on the indemnity basis as there is a presumption of proportionality in favour of the receiving party (CPR 44.3(3)).

It is highly advatangeous for a perty to be awarded costs on the indemnity basis given that the onus is on the (losing) paying party to show that the costs claimed are unreasonable. Any doubt is in favour of the receiving party. This means that the receiving party is more likely to obtain a higher recovery than on the standard basis.

An indemnity costs order is often penal in nature as they are ordinarily ordered to compensate one party following another party’s wrongful conduct of proceedings. Although it is always up to the court’s discretion, case law demonstrates that indemnity costs are often ordered when there is some culpability or abuse on the part of the party who has to pay costs. 

The Facts

The appellant in these proceedings is a qualified architect, who was a friend and former neighbour of the respondents. She provided assistance to the respondents when they wanted to undertake major landscaping works in their London garden without charge. There was a falling-out which led the respondents to commence proceedings against the appellant for breach of contract and/or negligence. The appellant made a Part 36 offer in the sum of £25,000 three weeks after the start of proceedings, which was not accepted by the respondents.

Although it was found that the appellant owed the respondents a duty of care, the Court made plain that, in these particular circumstances, the duty of care related to only such professional services as the appellant in fact provided; in other words, she could have no liability in respect of any alleged omissions. That meant that what the appellant actually did was critical to any claim in negligence against her. Following numerous further interlocutory skirmishes and a 5-day trial, the judge concluded that the appellant had in fact provided very few services and had not been negligent in providing any of them. The claim failed in its entirety.

The High Court Decision: Costs to be assessed on the standard basis

The appellant’s costs were presented to the judge in the eye-watering amount of £724,265 (and even that was incomplete, because it excluded some items such as the costs of the earlier appeal). She sought assessment on an indemnity basis. The respondents argued, and the judge agreed, that costs should be assessed on the standard basis. When he considered the claim for indemnity costs by reference to CPR 44.2 and the relevant authorities, he rejected the contention that the respondents’ pre-action conduct and their non-compliance with the pre-action protocol justified an award for indemnity costs.

The costs issues on appeal

The first issue considered was, even leaving aside the question of the Part 36 offer, whether the judge erred in principle in failing to find that the respondents’ conduct was out of the norm, such that indemnity costs should have been ordered. The central element of this debate is whether or not, prior to trial, the respondents (or their advisors) should have realised that these were speculative/weak claims which were most unlikely to succeed and that, in pursuing them to trial, their conduct was out of the norm and should have been recognised by an award of indemnity costs in favour of the appellant.

The second issue is whether, when seen against the background of the respondents’ claims, the fact that the appellant bettered her own Part 36 offer meant, in all the circumstances of the case, that the judge again erred in principle in failing to make an award of indemnity costs. The question was and remains whether, in all the circumstances of this case, the respondents’ failures to accept and then to beat the offer meant that indemnity costs should have been awarded, not automatically, but in the exercise of the judge’s discretion pursuant to CPR Part 44.3.

Finally, there is the separate issue, raised by way of the Respondents’ Notice, as to whether an award of indemnity costs should not be made because of the gap between what is said to have been her approved cost budget of £415,000 and her actual costs of not less than £724,265.63. That raises potential questions as to the overlap, if any, between the cost budgeting regime on the one hand, and the basis of assessment of costs after trial, on the other.

The Court of Appeal decision

The judge found that indeed indemnity costs were right to be ordered given that the respondent’s conduct was out of the norm:

I have asked myself why, in all those circumstances, these speculative/weak claims were pursued to trial. The answer may very well lie in the judge’s comment at [108] of his main judgment: that the decision to continue was borne out of the respondents’ desire “to punish the appellant for her alleged negligent mistakes rather than seek fair and reasonable compensation for her alleged mistakes”. An irrational desire for punishment unlinked to the merits of the claims themselves is precisely the sort of conduct which the court is likely to conclude is out of the norm.

In summary therefore, although the judge dealt with the specific criticisms that were made of various aspects of the respondent’s conduct of the litigation, he was at no time invited to stand back and, on the evidence before him, consider whether or not there came a time when the respondents knew or ought to have known that their claims were speculative/weak and therefore likely to fail. That was the relevant question. For the reasons that I have given, I consider that, if he had asked himself the question, the judge would have concluded that such a time came not later than one month after the Court of Appeal judgment (namely by 7th May 2017). 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 that date.

Lord Justice Coulson, Lejonvarn v Burgess and Burgess [2020] EWCA Civ 114

In addition, LJ Coulson’s comments on the relationship between an approved costs budget and an order for indemnity costs are parituclatly interesting in that in principle, the assessment of costs of an indemnity basis are not constrained by the approved costs budget.

The figure produced by an approved cost budget mechanism (CPR r.3.12-r.3.18) is a different thing to the final assessment of costs following the trial. The former is prospective; the latter is retrospective. True it is that, in many cases, the approved costs budget will be the appropriate starting point for the final costs assessment. But that does not detract from the underlying proposition that they are different figures produced by different considerations with different purposes….

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.

Lord Justice Coulson, Lejonvarn v Burgess and Burgess [2020] EWCA Civ 114

Lessons for litigants

The lesson for litigants is clear, a litigant is at risk of indemnity costs (which are not constrained by an approved costs budget) if a litigant either:

  1. pursues a speculative or weak claim; and/or
  2. unreasonably refuses to accept a Part 36 offer that was made early which they then fail to beat

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