Epsom College v Pierse Contracting Southern Ltd

This is an appeal about costs. It is an unhappy story: although not as unhappy as it might have been had it involved uninsured litigants. This litigation is effectively between two sets of insurers.

The essential issues on this appeal are whether the judge was wrong to give effect to the claimant’s Part 36 offers by ordering costs on an indemnity basis and granting enhanced interest rates on judgment sum and costs; but also whether he was wrong even to have given the claimant all of its costs, rather than only 60% of them.

On 10 April 2006 there was a flooding incident in the dining hall at Epsom College, a school in Epsom, Surrey, the claimant in these proceedings and in this court the respondent. The school blamed contractors who had been working in the dining hall in 2003, namely the defendant (here the appellant) Bisley Construction Limited, now in liquidation and renamed Pierse Contracting Southern Limited (the “contractor”). The claim was in the modest sum of £25,537.72. At trial in January 2011 the school recovered damages of £21,075 (plus interest).

The flood was caused by an escape of water running at pressure through a pipe buried beneath the floor of the dining hall. Dampness had appeared in the carpet and when this was investigated and the carpet and plywood boarding taken up and then a duct cover removed, a jet of water which reached right to the ceiling shot up out of a hole in the top of the pipe. It had always been the school’s case that the hole had been caused by a nail (or screw) which had been driven through the duct cover in order to nail it down to wooden battens below but which had been negligently misplaced so as to penetrate the pipe. The nail had made such a tight fit in the hole that for three years there was no, or no apparent, leakage. Then, however, with corrosion and/or movement of the nail, water had started to leak and wet the carpet above. It was the removal of the duct cover which had lifted the nail out of its hole and caused the jet of water. The water was stopped first by a finger and then by tapping another nail into the hole. The incident was witnessed by the school’s clerk of works, Mr Bateman, and its foreman of works, Mr Blann. At trial Mr Bateman’s evidence was not relied on by the judge because he had said some inconsistent things over the years. But the judge regarded Mr Blann to be a reliable witness.

At trial it was common ground that the leak had been caused by a nail driven into the pipe. However, the contractor said that it had not performed any work to the relevant pipes, that the pipe in question had been there since the dining hall had been built, that it was improbable in any event that a contractor working there would have negligently driven a nail into the pipe, and that the likeliest explanation was therefore that someone else had at some time, whether before or after 2003, driven a nail, not just through the duct cover, but through carpet, plywood and duct cover as a whole. In any event, the school could not prove that it was the contractor which had put the nail through the pipe.

The judge rejected the defence. As I have already said, he accepted the evidence of Mr Blann who said that he had seen the nail in the duct cover itself (which he could not have done if it went through carpet and all). But the credibility which the judge ascribed to that evidence was supported by his findings that the copper piping in question had probably been replaced in 2003, by the contractor, in place of the original iron piping. He was assisted towards that conclusion by a number of factors, such as that the copper piping had a metric and not an imperial measurement, and had been wrapped in Armaflex, an insulating material which was not available when the dining room had been built. And Mr Blann had seen the original iron piping at some time in the early 1990s, when a new radiator had been installed.

At the time of the flood, the relevant section of the pipe, with the replacement nail in it, was photographed and the pipe put away in an envelope in a filing cabinet. Unfortunately, it came to be forgotten where the pipe had been put, and the school thought that it had not been retained. The duct cover with the nail in it was not retained, nor was it photographed. Ultimately the pipe was found, but not until October 2010, when it was immediately disclosed to the contractor. Its expert witness, Mr Stephen Watts, inspected it on 28 October 2010. He realised immediately that his previous opinion, that the likeliest explanation for the pipe’s failure was corrosion over its life-time (on the assumption that it went back to the beginning of the dining hall) was impossible: for the pipe showed no signs of corrosion, and the hole in the top of it had clearly been made by a nail or some such intrusion.

No claim form was issued until 30 March 2009, but there was an almost immediate letter of claim dated 22 May 2006 (we have been given its date, but not its contents). On 5 June 2006 Mr Bateman’s first witness statement, taken on 19 May and dated 30 May 2006, was served on the contractor. He described how on 10 April that year he had gone with Mr Blann to examine the wetness problem in the dining room, had lifted the floor coverings and the duct cover, how water had shot out of a hole in the top of a 22mm copper pipe serving the radiators, how the hole had been plugged with a nail, and how photographs had been taken of the nail in the pipe and of the damage to the hall. The photographs were attached. Nothing was said as to how the hole in the pipe had been made, nor was reference made to an original nail, but it was pointed out that the contractor had carried out work in the dining hall in August 2003 which had involved works to the heating pipes, and that there had been no work there since. He concluded that “I therefore believe that Bisley Construction are responsible for puncturing the central heating pipe which caused this incident.” Other than reference to a hole and the use of the word “puncturing”, no mechanism was ascribed to the cause of the hole. No statement was obtained from Mr Blann.

On 7 February 2007 the contractor’s insurers’ solicitors (henceforward the contractor’s solicitors) faxed the school’s insurers’ solicitors (henceforward the school’s solicitors) to request information, such as invoices in respect of the 2003 works (which ought to have been obtainable from the contractor itself) and confirmation that the pipe was still in the school’s possession. A reply was sent on 23 March 2007 which said that no paperwork could be located, and (wrongly) that “the damaged copper pipe had been disposed of having retained copy photographic evidence which clearly indicated the nail in the pipework in situ”. That was not of course the original nail, but the replacement nail.

On 21 August 2007 the school (ie its insurers) instructed Dr T H Leek to report on the flooding incident. He sought further information from Mr Bateman, who wrote a letter dated 19 October 2007 which stated inter alia that “The nail was in the duct cover and into the pipe…It was when the duct cover was being lifted that the water started escaping under pressure up into the air.” That was the first express reference to an original nail.

In the meantime the contractor’s solicitors had written on 13 September 2007 to decline liability. They said they were “somewhat incredulous” that the pipe had been disposed of. They pointed out that Mr Bateman nowhere in his statement had referred to the cause of the hole in the pipe, or to seeing any original nail; and that the nail in the photograph was obviously the nail inserted by Mr Bateman himself. From a further letter from the contractor’s solicitors, dated 8 November 2007, it is clear that it had become perfectly clear that the school’s case was that the hole had been caused by a nail, not being the nail shown in the photographs. The contractor’s case, on the other hand, was that there was every likelihood that “the defect was a latent one in the pipe”; and that on the school’s case any original nail should have been capable of being seen protruding through the lifted duct cover, and yet Mr Bateman had not referred to it.

On 15 January 2008 Dr Leek spoke to Mr Bateman on the telephone. Dr Leek noted his conversation and appended it to his ultimate report. He recorded that “Mr Bateman did not check for either a specific nail [that punctured the pipe] or a nail hole in the duct cover corresponding to where the hole in the pipe was found.”

Dr Leek’s report was not completed until 10 September 2008. In it Dr Leek concluded that “the hole in the pipe was made by a nail driven through the timber duct cover, or perhaps a screw”, at the time in 2003 when the contractor was working in the dining room renewing pipework. He accepted that the pipe, the duct cover and the nail (or screw) did not survive. He dealt with an alternative scenario which appears to have been suggested by the contractor’s insurers, which was one of corrosion of the pipe. He said that there was no sign of corrosion on the pipe photographs, and the presence of just one hole in the top of a pipe, which would have been plugged by the nail which had made it until the fit began to weaken over the years and was then undone by the removal of the duct cover, causing a sudden jet of water strong enough to reach the ceiling, all suggested the piercing of the pipe by a nail driven through the duct cover. Dr Leek’s report was served on the contractor’s solicitors on 27 November 2008.

On 13 March 2009 the school’s solicitors made a Part 36 offer, in the sum of £19,200 inclusive of interest, plus costs. It was said that –

“This offer will remain open for acceptance 21 days from the date of receipt of this letter by you. We calculate date of receipt as Friday 13 March 2009 [the offer was made by fax] and as such diarise expiry as 4.00 p.m. on Friday 3 April 2009.

If you do not accept within 21 days and we meet or beat this offer we shall refer the Court to this offer in relation to the issue of costs. This offer is intended to have Part 36 consequences.”

There is an issue between the parties as to whether this offer was invalid as a Part 36 offer because it was a time limited offer: cf C v. D [2011] EWCA Civ 646.

A second fax of the same date explained the reasoning behind the offer. It referred to Dr Leek’s report and stated that it had discounted other potential causes including latent defect that had been raised by way of defence. It was noted that no expert evidence had been disclosed supporting the denial of liability. The figure of £19,200 was expressed to be a discount of 25%: the gross claim, inclusive of interest, was therefore then £24,000. The offer was not accepted.

It was presumably as a result of the offer’s rejection that proceedings were commenced by issue of the claim form on 30 March 2009, a few days before the expiry of the 21 day period (which Part 36 describes as the “relevant period”). Particulars of claim described the mechanism of damage in the terms of Dr Leek’s report, which was attached. Reinstatement costs were claimed as damages in the sum of £25,537.72.

On 22 May 2009 Mr Stephen Watts, the engineering expert consulted by the contractor’s insurers, reported, albeit his report was not served on the school until 15 December 2009.

Mr Watts concluded that Dr Leek’s theory was unlikely. He did so principally because the understanding that he had formed from the information with which he had been provided was that the contractor had undertaken no work on the pipes beneath the duct covers, and that those pipes were the original ¾ inch copper pipes with which the dining room had been built. On that basis, he had to explain the presence of the hole in the pipe. He rightly did not misunderstand Mr Bateman’s first statement to say that the nail in the photographs was the original nail rather than the nail inserted at the time of the flooding incident. His primary theory was that of corrosion: he accepted that such corrosion was unlikely to have taken place over the three years from 2003 to 2006, but was more likely over a period of 20 years or more. That was why his corrosion theory depended on the pipes beneath the ducts being original and there having been no replacement work performed by the contractor in 2003. He commented: “Obviously…if Dr Leek is correct and the pipework underneath the dining room is new pipework replaced during the works undertaken in 2003, then I consider that a theory of internal corrosion leading to pitting and eventual leak from the copper pipe is less likely.”

On 16 April 2010 the school made its second Part 36 offer, this time at £12,768.50 inclusive of interest, plus costs. This was again expressed to “remain open for acceptance for 21 days” and the fax again went on to refer to diarising “expiry”, this time on 7 May 2010. The offer referred to the Part 36 consequences available under rule 36.14. It stated that the new offer did not constitute a withdrawal of the first Part 36 offer, which the school continued to rely on.

This offer represented a willingness to accept half of the claim and to forego interest. We do not have the reply, but it was not accepted. There is a similar issue as to whether this was a time limited offer and as such invalid as a Part 36 offer. It is clear that the school considered that its first offer could still be accepted.

On 26 July 2010 a third offer was faxed to the contractor’s insurers’ solicitors. It was not expressed as a Part 36 offer but simply as a “Without prejudice save as to costs claimant’s offer to settle”. There had been a discussion which had clearly resulted in a stalemate, with the school’s “success fee” (ie the success fee available to the school’s insurers’ solicitors under a conditional fee agreement) possibly being a sticking point. The letter stated:

“We maintain that the evidence supports the claimant’s claim and there are far more risks for your client in defending this claim than there are for the claimant in pursuing it. We therefore remain of the view that our client’s Part 36 offer which expired on 7^th May 2010 is protective and therefore your clients have been at significant risk on costs since its expiry. Nevertheless in the absence of any counter proposals of settlement from you and in light of our recent telephone discussion on settlement in which you indicated that the claimant’s success fee may be the sticking point, our clients are prepared to accept the sum of £62,000 in full and final settlement of the whole of the claim inclusive of damages, interest, profit costs, VAT, disbursements and success fee (additional liabilities).”

In effect, therefore, the school’s insurers were prepared to cap costs at approximately £50,000.

This was not expressed to be a Part 36 offer, nor was it, for a Part 36 offer cannot be inclusive of costs: Mitchell v. James [2002] EWCA Civ 997, [2004] 1 WLR 158.

In October 2010 the case took on a somewhat different shape with the discovery of the holed pipe in a filing cabinet at the school.

On 12 October 2010 there had been a case management conference before the trial judge, HHJ Stephen Davies. We do not know much about what then happened: but it seems that the contractor was asking for an invasive site visit to the school’s dining hall, which the school was resisting on the grounds of disturbance, cost and the need to adjourn the trial. We do not know when the contractor applied for the visit. Its purpose was to remove the floor coverings in order to get at the pipe-work beneath. That would reveal more about the age and condition of the pipe-work. The judge gave directions for a visit between 23 October and 1 November, with an experts’ joint report to be produced by 19 November and further reports from the experts to be exchanged by 26 November. It followed that the trial listed for 1 November was vacated. A draft amended defence was to be served by 26 October: if the school objected to it, permission would have to be sought by the contractor.

In the course of or following attendance for the purposes of the case management conference there was a discussion about settlement between the school’s solicitor advocate and the contractor’s counsel (not present counsel, Mr Roger Mallalieu). We know of this from a later exchange of emails to which I will refer below. It appears that the school’s solicitor referred to at least the possibility of settling the case at £45,000 all inclusive of costs and everything.

It is possible that it was under the impetus of the inconvenience and cost of the site visit that the school made another attempt to find the pipe which it had all along assumed had been disposed of. Whether for that reason or by virtue of mere coincidence (which I am personally inclined to doubt), the pipe came to light within the following week. The judge, in his costs judgment dated 20 January 2011, said that the pipe was discovered “by chance” (we are told that it had been put away in a filing cabinet in a paper envelope). I suppose that I ought to consider myself bound by that observation by the judge (“by chance”), since there may well have been evidence at the trial concerning it.

The discovery of the pipe led to the school’s solicitors writing two letters on 20 October 2010. The first informed the contractor’s solicitors of the discovery of the pipe (with Mr Bateman’s nail still in it). The letter said: “Mr Bateman had no idea that another member of staff had retained this in a filing cabinet in its paper envelope. He thought that it had been disposed of.” The letter did not say who the other member of staff referred to was, or under what circumstances the pipe had come to light. The letter said that the pipe was being couriered to Dr Leek and suggested that Mr Watts should liaise with him for a joint inspection, which would probably avoid the need for the site inspection at the school.

The second letter of that date withdrew the school’s second and third offers, that is to say the offers of 16 April 2010 and 26 July 2010. It was emphasised, however, that the first offer dated 13 March 2009 remained open for acceptance and had not been withdrawn. It may have been obvious even to a non-expert that the pipe was not corroded.

On 25 October 2010 the contractor’s solicitors emailed to ask for confirmation that “the oral Part 36 offer your Miss Hindle made at the hearing on 12 October 2010, in the all inclusive sum of £45,000, is withdrawn”. Miss Hindle herself replied:

“We confirm for the avoidance of doubt that during our without prejudice discussion when we indicated that our clients may be prepared to accept £45,000 inclusive of costs as a bottom line figure, to the extent that this represented a formal offer this offer is now withdrawn.”

The two experts met on 28 October 2010. This is referred to in the supplementary report written by Mr Watts dated 4 November 2010. It was obvious both that the pipe was not corroded and that the hole in the pipe had been “caused by a nail or a screw as alleged”. As I commented at the outset of this judgment, that had therefore become common ground by the time of trial. Nevertheless, Mr Watts persisted in a theory that the pipe was an original pipe which went back to a time before the 2003 works, and that it had not been proved that the contractor had worked beneath the duct covers in 2003. In effect, he argued that it remained for the school to prove its case as a matter of evidence. He said:

“Whilst I do not think it could be denied that the most probable cause of the leak was a nail or screw being introduced into the pipe, I do not consider it is possible to determine when that occurred. On Dr Leek’s theory that the nail formed a seal with the copper pipe when it was introduced then that nail could have been introduced many years earlier. On a balance of probabilities, the nail was introduced the last time the duct covers at that location was lifted and there is no evidence to suggest that that occurred in 2003, in my opinion. However the fact that there appears to be no aroma, mould or wet rot suggests that the leak occurred only relatively recently before it was discovered. This may well suggest that it is more likely that the nail was introduced only a relatively short period of time before the leak was discovered. However, this would mean that the nail was either driven through the carpet on the floor or part of the carpet was peeled back at that location. Ultimately, these are of course all now a matter of evidence upon which I am unlikely to assist further. It is of course for the Claimant to prove its case.”

On this basis, a speculative and incorrect theory of pipe corrosion, which had been premised on the assumption that the pipe in question was in its original form because it had never been worked upon by the contractor in 2003, was jettisoned: but the contractor simply maintained its case that it was for the school to prove that the contractor had ever worked on the pipe beneath the duct covers. If, however, the contractor had, it was accepted that that was the likeliest time for the intruding nail to have been introduced.

The school was right to think that the intrusive site visit directed by the judge at the October case management conference would be superseded by the pipe’s discovery. The site visit was called off by agreement.

However, on 17 December 2011 there was a further hearing before the judge at which the contractor sought permission to amend its defence and also to carry out a non-intrusive inspection of the site. That meant that there would be no lifting of carpet etc, but merely an inspection of the dining hall and the taking of further photographs. The amended defence dropped reference to corrosion, but inserted a plea of non-admission that the contractor had ever worked replacing pipe-work in the area below the duct covers. It may be that this had always been inherent in the defence. At any rate the judge was not impressed by the lateness of the applications. He said:

“It is also an application made on short notice, for which the defendants are to be condemned and the claimants are to be congratulated for being able to deal with the application substantively on short notice.”

The reasons for the site inspection application are explained by the judge, but are nevertheless not very obvious. It was suggested that it would be helpful for Mr Watts to see the site for himself. It was also suggested that the contractor had recently located a witness, a Mr Ingram, its employee, who could support the case that it had never done work in the area of the holed pipe, who “would like to visit the premises to refresh his memory of the site”. The application was opposed, on the grounds that the defence was entirely speculative, the school had external functions through the next week (it was the Christmas period), there was limited availability of Mr Bateman, and there was a danger to the new trial date of 17 January 2011.

The judge considered that an inspection could be fitted in and the trial date kept, and that any unexpected new evidence, for instance from Mr Ingram, could be challenged as inadmissible. So the judge allowed the amendment, ordered a site inspection within the next week, and reserved the costs of the application and hearing. He reserved the costs partly because he did not have time for the argument then and there, but also because it might be premature to deal with costs before knowing what if any benefit really had been achieved from the exercise. Subject to that, he repeated the provisional view with which he had begun, which was that the contractor was in a difficult place and “it is likely that the defendant will have to pay the costs in any event”.

In the course of his judgment he also criticised the school about the late discovery of the pipe. He said:

“But when the cost and inconvenience of that process [the October direction for an intrusive site inspection] had been explained by the claimant’s solicitor, Miss Hindle, to the school it appears that this prompted some further search and the original section of copper pipe, which it had been said was lost, was mysteriously discovered. I do not intend to draw any adverse inference from this at this stage, but it does appear quite remarkable that it was only at this late stage in the proceedings and in those circumstances that the pipe was subsequently produced. On any view that is a poor state of affairs so far as the claimant is concerned.”

So, the December non-intrusive site visit went ahead, but it is not clear to what extent it was of any particular use (despite the contractor’s trial counsel’s submission after trial that it had been extremely useful for the experts). The judge rejected Mr Ingram’s evidence at trial as being more in the nature of speculation. He also said that the experts’ evidence was not of decisive importance (and it would seem from Mr Watts’ supplementary report that that must have been right). However, the judge did comment in his main judgment that the site visit did lead to Mr Blann by chance being identified as a relevant witness when his presence at the site inspection led to it being realised that he had been present on 10 April 2006. I am puzzled by that, however, since it had always been known that Mr Blann had been present (see Mr Bateman’s first witness statement dated 30 May 2006, referred to at para 8 above).

There was a three day trial in January 2011 following which the judge gave judgment in favour of the school, for the sum claimed less one item. His order was in the principal sum of £21,075, to which interest at the enhanced rate of 6% amounting to £6,045.35 was added.

The essential matters as they emerged at trial were that Mr Blann’s evidence that he had seen the nail in the duct cover was accepted by the judge; and the school’s case that the original iron piping of the dining room had been replaced in 2003 by the copper piping put in by the contractor was also accepted. Thus it was accepted that the contractor had worked on the pipes beneath the duct covers in 2003. Even though it was still submitted on behalf of the contractor that it was more likely that some rogue nail had been put through the carpet sometime after 2003 (and the judge described this as one of the two key issues canvassed at trial), it can come as no surprise that the judge ended up where Mr Watts himself had arrived in his supplementary report, namely that the nail had probably been hammered into the pipe on the last occasion when the duct covers had been lifted. On the evidence which the judge accepted, that was in 2003, when the contractor was working in the dining hall.

Following judgment on 20 January 2011 there was an argument about costs. It seems that there has been a heavy expenditure on costs in this case, which, in view of the relatively small amount at stake, is to be regretted. We have been told that the school’s estimated costs down to the end of trial stand at about £165,000 before a 92% uplift by way of success fee, and that the contractor’s costs are estimated at about £60,000.

Trial counsel for the school, Mr Mitchell, put his case on the first Part 36 offer dated 13 March 2009, and asked for rule 36.14 costs consequences (he took the judge to that rule): the judgment sum, even without interest, at £21,075, had beaten the Part 36 offer at £19,200. He pointed out the other offers that had been made, but said they had been withdrawn. (He erred in saying that the £45,000 offer had been made in December, rather than October, 2010, if he did say that: but that might be a transcription mishearing for October, and in any event the judge did not rest on that offer or mention it.) Mr Mitchell concluded:

“So constant attempts, never a counter offer, never, apart from on 16 December 2010 when the defendant’s solicitor suggested there should be a ‘drop hands’ and walk away. My Lord, in my submission completely unreasonable failure to engage with the commercial realities of a miniscule claim where the risks for both sides turning on oral evidence were obvious.”

On behalf of the contractor, trial counsel Mr Sellars had to accept the offers that had been made but focused on the fact that oral evidence at trial had developed. He emphasised Mr Blann’s oral evidence which he said went beyond even his (late) witness statement (but we have neither his witness statement nor a transcript of his oral evidence). He also emphasised the late production of the pipe. He said significant costs had been incurred “by the expert evidence on the question of internal corrosion, internal pitting”. The school ought to have produced the pipe expeditiously. Because of the school’s failure, “costs were incurred, so to that degree, my Lord, I do submit that any costs order ought to be reflective and indicative of that fact…I do ask that there be a costs order that reflects all of those points.”

In his submissions in reply Mr Mitchell again focussed on Part 36. He said that the defendant’s insurers simply did not want to settle the case.

The judge rejected Mr Sellar’s reliance on Mr Blann’s evidence, but went some way to accepting his criticism about late production of the pipe. He said:

“6.

In my judgment Mr Mitchell is right when he says that the court should not be influenced by the fact that the case turns on oral evidence. That is one of those inevitable risks and vicissitudes of litigation. Indeed it is unhappily often the case that evidence which is anticipated turns out differently, and new points come up in the trial, and one simply cannot regard that as being a relevant factor. As I described in my principal judgment, it was purely coincidence that it was only appreciated in late December 2010 that Mr Blann was a material witness, and there is no suggestion that the claimant deliberately or negligently failed to serve his witness statement before then. But it does seem to me that there is some force in saying that the claimant’s conduct, and by this I mean the insured claimant itself, was unsatisfactory, first in that it did not retain either the original nail which did the damage or the duct cover so that they were not photographed or inspected; and, secondly, that carelessly it internally lost the damaged section of pipe and the replacement nail with the effect that until it was by chance discovered in October of this year there was, not unsurprisingly, a significant debate between the experts as to whether in fact the cause of nail puncture damage had been made out. It is perhaps again not altogether surprising that in those circumstances the defendant took the view that this was a case where the claimant had a serious problem in proving its case on the balance of probabilities.

7.

I accept that this would not in most cases be decisive, but it does seem to me that taking that into account then overall it would be unjust to penalise the defendant for not accepting the offer of March 2009 in those circumstances where the offer gave very little discount of the risk of failure. By contrast, it does seem to me that the position is different when I consider the April 2010 offer, where a perfectly sensible offer on a sensible and commercial 50/50 allocation of risk was made but again not responded to and no constructive engagement, so that in the end what I am satisfied is that there should be an order for indemnity costs from the expiry date of that subsequent offer which is 7 May 2010 and that the appropriate enhancement to interest should reflect an enhanced interest rate from that date.”

The judge then considered where (up to the 10% above base rate allowed) he should pitch the enhanced interest rate, and decided in favour of 6% from damage to judgment.

So the judge granted rule 36.14 consequences to the second Part 36 offer of April 2010, but not to the first Part 36 offer of March 2009. He was influenced on the one hand by the school’s negligence in misplacing the pipe until October 2010, but on the other hand by the contractor’s failure to respond realistically to the April 2010 offer to settle for (less than) 50% of the claim.

Subsequently, the judge was asked to deal with the costs reserved on 17 December 2010 concerning the contractor’s application to amend and for a site visit. He was asked by Mr Sellars to award the costs of those applications to the contractor. He did not call on Mr Mitchell to respond on behalf of the school. He said:

“I on the last occasion made it clear that it seemed to me that in the absence of something really very unusual I would be making an order that the defendant pay the costs of that application. And the reason for that is that, although the defendant was successful, I made it clear that it was really an indulgence to the defendant who was asking for and being given a last opportunity to put in further evidence well after the date for doing so, and indeed well after the date for original inspection. And I am satisfied that it should in effect fall within the costs in the case order which I have already made. In other words the claimant should have its costs of the whole proceedings…”

Now, on this appeal, new counsel have appeared on both sides, Mr Mallalieu for the appellant contractor, and Mr Mark Friston for the respondent school. Each has made excellent submissions, but it is unhappy for this court to be asked (by both sides, for the school has served a respondent’s notice) to revisit the approach of the judge who, because he conducted the interlocutory case management hearings as well as the trial, knew more than this court could ever do about the ins and outs of this litigation.

On behalf of the contractor, Mr Mallalieu has essentially three points. First, he submits that the judge should have taken the school’s failures to preserve the duct cover and original nail, to find and produce the holed pipe, and to advance the evidence of Mr Blann until the last minute, into account so as to award only 60% of its costs to the school. The judge had simply failed to consider his Part 44(3) discretion to take the conduct of the school into account in awarding costs. (That would be a huge discount. If the parties’ costs were equally balanced, it would be the equivalent of awarding 20% of its costs to the contractor. As it is, since the school’s costs far exceed the contractor’s, the effective discount is even greater.) Secondly, he submits that the judge should not have awarded indemnity costs or enhanced interest rates pursuant to rule 36.14, but should have said that it would be unjust to do so (see rule 36.14(3)). In any event, it should not have done so until 21 days after the production of the pipe in October 2010. In this connection he submitted that in any event, the Part 36 offers had not been valid offers within Part 36, for they had been time limited offers (see C v. D), and the second offer had been withdrawn as soon as the pipe had come to hand and thus could not support Part 36 consequences (French v. Groupama Insurance Company Ltd [2011] EWCA Civ 1119). Thirdly, he submits that the judge was wrong to have awarded the costs of the December application for a site inspection to the contractor: the school had opposed that application, but had lost the argument and should have had those costs awarded against it.

On behalf of the school, on the other hand, Mr Friston submitted that the first offer had never been withdrawn; that it was not a time limited offer, since reference to its being open for acceptance for 21 days and to the expiry of the 21 days was merely reference to the 21 day “relevant period” under Part 36 (see C v. D); that the first offer, which had never been withdrawn, was therefore a valid and continuing offer bearing with it rule 36.14 consequences; and that there was nothing in the circumstances of the case which could justify the judge in not granting Part 36.14 consequences. It was true that the judge had not been taken to the provision in rule 36.14(6) that stated that the consequences of rule 36.14(3) do not apply to a Part 36 offer “that has been withdrawn” (see C v. D at para 13(7) and French v. Groupama at para 41) and therefore had at any rate to some extent rested his decision on the second Part 36 offer that had been withdrawn. In the circumstances, however, his reasoning could best be regarded as the equivalent of founding on the surviving first offer of March 2009 which had not been withdrawn, but as from 21 days after the second offer; or else as exercising a Part 44 discretion (under rule 44.3) to impose indemnity costs in all the circumstances of the case as from 21 days after that second offer. In any event, this court could and should so decide in its own discretion, if for any reason it was forced to exercise a new discretion. As for the submission that the school should recover only 60% of its costs, there was nothing in the litigation which would justify such a decision. The absence of the pipe until October 2010 was not deliberate but accidental, and the decision to run a corrosion defence was the contractor’s own decision, the risks of which lay entirely on itself. As for the costs of the December 2010 applications, the judge was perfectly entitled in his discretion to award them as part of the costs in the case to the successful school, whether or not the contractor was at fault, as the judge said it was, in making those applications as late as it did.

It was therefore common ground, or became so, that the judge’s resting of his award of Part 36 costs consequences on the second Part 36 offer, if that was what he had done, was technically illegitimate where that offer had been withdrawn.

The question therefore arises whether the judge’s award of indemnity costs under Part 36 from 21 days after the second Part 36 offer can or properly should be translated into indemnity costs under Part 36 pursuant to the surviving first Part 36 offer, albeit from 21 days after the second Part 36 offer; or whether it should be translated into indemnity costs under Part 44 pursuant to the second Part 36 offer but bearing in mind that that offer was withdrawn and therefore could not carry with it the costs consequences of Part 36.

In such situations, it seems to me that this court should as far as possible seek to put itself in the shoes of the trial judge and to look at matters through his eyes, if I may be permitted to make use of those metaphors. Particularly in a case such as this, where the trial judge was also the case management judge in pre-trial proceedings, an appeal court should be slow to impose or substitute its own views, and should recognise that the judge’s instinct is likely to have been informed by a wealth of experience to which brief submissions from counsel and his own brief reasons in dealing with costs will almost inevitably do less than full justice. Therefore, even if matters which the judge may have overlooked, as here Judge Davies appears to have overlooked that a withdrawn Part 36 offer cannot have automatic or presumptive Part 36 consequences, may upset or detract from his solution, necessitating a revisiting of a discretionary power by the appeal court, nevertheless this court should as far as possible build on the findings and assessments of the judge.

So in this case I would wish to maintain, unless it could be shown that the judge erred in principle, the various constituent assessments that went to make up his decision: for instance that the outcome of oral evidence at trial was “one of those inevitable risks and vicissitudes of litigation”; or that the school’s failures to retain the duct cover and original nail and/or to produce the retained but temporally lost pipe amounted to “unsatisfactory” conduct; or that in such circumstances “it would be unjust” to penalise the contractor for not accepting the first Part 36 offer of March 2009; or that what was highly relevant for these purposes was that, while the first offer granted comparatively little discount on the claim, the second Part 36 offer of April 2010, by granting a 50/50 split, rendered it just, in the absence of any constructive engagement, to impose or rather maintain the default Part 36 consequences of indemnity costs and enhanced interest rates. I would also wish to bear in mind that, while the judge clearly thought that, in the light of the second Part 36 offer, the contractor ought to have accepted that offer (but he did not say the first offer), he did not look at matters through his general discretion under rule 44.3 so as to award indemnity costs on an entirely discretionary basis, because of something to be disapproved of in the conduct of the contractor or in the way in which it had defended its case.

Thus, contrary to Mr Friston’s submission, I do not think it is possible to rationalise the judge’s reasons as amounting to a decision to award indemnity costs under Part 44. He was only ever concerned with Part 36. That was the submission made to him, and it was never submitted by the school’s trial counsel that the judge should mark the contractor’s conduct with indemnity costs under rule 44.3. Moreover, the awarding of enhanced interest on judgment sum and costs shows quite clearly that the judge was exercising a Part 36 power and not a Part 44 discretion. I do not therefore think that it is realistic or right to urge this court to start over again by considering its Part 44 powers, for that would be to raise for the first time a discretionary issue in this court which had not been raised before the judge. It may be that in a clear case, for instance (to take a possibly extreme example which is not intended as being exhaustive) where a claim or a defence had been pursued dishonestly, as found by the judge, that it would be possible for this court to revert to Part 44 where a Part 36 order had been made by a judge which was then upset for technical reasons. However, on the judge’s costs findings and assessments, this is not a case where all the merits of the argument are on one side. In any event, for reasons which will become apparent, I believe that this case can be resolved under Part 36, making resort to Part 44 unnecessary.

Even so, it is in my judgment not possible, entirely consistently with the way in which the judge regarded matters, to do what we are urged by Mr Friston to do, that is to premise a Part 36 award of indemnity costs (and enhanced interest) on the surviving first Part 36 offer. This is because, for better or worse, the judge’s view of things was that the first Part 36 offer, at £19,200, did not provide a sufficient discount on the claim to make up for the fact that the school had conducted itself unsatisfactorily in relation to non-production of the pipe. It was only in relation to the offer to settle at £12,768.50 that the judge thought that a sufficient discount had been offered on the amount claimed to make it just in the circumstances to grant rule 36.14 consequences. However, with the withdrawal of the second Part 36 offer, that offer to settle at £12,768.50 was no longer available: the only offer which was available to support rule 36.14 consequences was the first offer at £19,200: but the judge said that “it would be unjust” to found himself on that offer in circumstances where, in the absence of the pipe, it was “not altogether surprising” that the contractor took the view that “this was a case where the claimant had a serious problem in proving its case on the balance of probabilities”.

The reference to it being unjust to apply Part 36 consequences was a reference to rule 36.14(3) itself, where, the Part 36 consequences are to be applied “unless [the court] considers it unjust to do so”. Rule 36.14(4) provides that in considering whether it would be unjust to make an order under rule 36.14(3) for Part 36 consequences the court is to take into account “all the circumstances of the case” including the terms of any Part 36 offer, the stage in the proceedings when such offer was made, in particular how long before the trial started the offer was made, the information available to the parties when the offer was made, and the “conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated”.

In such circumstances, it appears to me to be undesirable and in practical terms impossible for this court to go behind the judge’s exercise of discretion with regard to the first Part 36 offer. As for the second Part 36 offer, which was the basis of the judge’s decision, that offer was withdrawn and therefore could not be made the basis of a rule 36.14(3) order. As I have said, that had become common ground before us.

Mr Friston submitted in effect that the first offer could be relied on as from the expiry of the date of the second offer. However, that is illogical. The pipe had at that time still not been produced, and the second offer, although at a lesser sum than the first offer, was an offer which, ex hypothesi, could not be relied on, because withdrawn, for the purposes of Part 36 consequences. The judge’s reasoning, that it would be unjust to exact Part 36 consequences in the absence of production of the pipe when the offer was at the level of the relatively modest discount of the first offer at £19,200, would still prevail.

For these purposes, it seems to me not to matter that, if I were considering these matters entirely anew for myself, I might be inclined to think that the 25% discount granted by the first offer was quite generous (more than the judge’s “very little discount for the risk of failure”); and that Mr Watts’ allegation of corrosion was not based on any evidence but merely on an assertion, which was never substantiated, that the contractor had not worked in the dining hall beneath the duct covers (the judge found that it had), and that, in line with that assertion, the pipe was the original pipe (the judge found that it was not), which was the only basis on which Mr Watts had suggested, speculatively and contingently, that more than 20 years of corrosion could explain the pipe leaking by way of a hole in it. As I have said above, I do not consider that it would be appropriate for me to revisit these evaluative judgments which are part and parcel of the judge’s discretionary view of what would be unjust for the purposes of rules 36.14(3) and (4).

Nevertheless, Mr Friston submitted, as a fall-back position, that the first Part 36 offer could be relied upon to generate Part 36 consequences at any rate as from the production of the pipe in October 2010. It seems to me that here he is on much firmer ground. From the time of the production of the pipe, the contractor knew that the pipe was in good condition, was in a position to know that, as the judge found, it was not an original pipe and therefore had been substituted for the original pipe presumably in 2003 by the contractor, and, above all, as became common ground with Mr Watts’ supplementary report, that the hole had been made by a nail.

In these circumstances, Mr Mallalieu was entirely frank with the court about the consequences for the contractor and its insurers of the new information. They fully understood why the school had withdrawn its second and third offers: because the school’s case had improved and the contractor’s position had deteriorated correspondingly. Consideration was therefore given as to what the defence strategy should be. It was decided that as capitulation would bring with it liability for the costs which had been incurred to that date, and as the contractor’s insurers were unwilling to meet those costs, already said to be in the many tens of thousands of pounds, therefore it would be better to soldier on to the bitter end. In answer to a question from the court, he accepted that in essence the insurers’ position was that of “double or quits” (the court’s expression, not his). In other words, it was a gamble. Mr Mallalieu in effect relied on the difficulties of the insurers’ position to exculpate them: what else could they do? They had been trapped into that position by the school’s failure all along to produce its best evidence (and Mr Blann was even so not yet on the scene). The school had caused the contractor’s insurers to waste the costs of Mr Watts’s first report. How were they to recover those wasted costs?

It seemed to me that these submissions were in themselves totally unhelpful to the contractor and its insurers. They realised they were in difficulties, they contemplated capitulation, but they were prepared to go on to the bitter end in the hope that something would turn up and the school would fail to make good its case. Moreover, as Mr Friston pointed out, if the contractor had a good argument, as was suggested on this appeal that it had, to resist costs to the extent that it had been led to waste them in connection with its corrosion case, there was never anything to prevent it advancing that argument to the judge: see rules 36.10.(4)(b) and (5), which leave it ultimately to the court’s discretion (“unless the court orders otherwise”) to impose some costs regime other than the presumptive regime (ie that, following the acceptance of a Part 36 offer after the expiry of the relevant period, the offeree will be liable for the offeror’s costs from the date of the expiry of the relevant period to the date of acceptance). Such a dispensation could not have helped the contractor before the pipe was found and produced, because the school could not at that time have been criticised for not producing what it had retained, only for failing to retain the pipe. But once the pipe had been produced (even if, as the judge ultimately said “by chance”), the contractor would have been able to argue that the school had had the pipe all along, and negligently had failed to produce it. So, as from the production of the pipe, the contractor was in a position both to accept the first Part 36 offer and to argue before the court that it should not be liable for all of the school’s costs, let alone on an indemnity basis.

Therefore, subject to the question whether the first Part 36 offer was a valid Part 36 offer, I would substitute reliance on that offer, as from a suitable period after the production of the pipe, for an order for Part 36 consequences, in place of the judge’s reliance on the second Part 36 offer as from 21 days after its making.

I therefore turn to the question whether the first Part 36 offer was a valid Part 36 offer. Logically this question may come first, but it has been more convenient to deal with it in this order. Mr Mallalieu submits that it was not a valid Part 36 offer, because the offer’s language (“remain open for acceptance 21 days…We…diarise expiry as…3 April 2009”) can, in distinction from the language of the offer considered in C v. D, be said to amount to a time limited and therefore invalid form of offer. The language of the C v. D offer was “will be open for 21 days…(the “Relevant Period”)”. In my judgment, however, there is no sufficient difference of language to take this case outside the rationale of C v. D. As in C v. D the language can appropriately be viewed as referring to what Part 36 calls the relevant period of 21 days and to the consequence that within the 21 days there will be no attempt to withdraw the offer but after 21 days the offer may be withdrawn. As was pointed out in C v. D, “open for acceptance for 21 days” was the language required of a Part 36 offer by the rules of (the old) Part 36, before 6 April 2007, and yet those rules showed that such an offer would survive for acceptance after 21 days: see C v. D at [27]. As for the reference to “expiry”, that merely picks up the language of Part 36 itself, which refers repeatedly to the expiry of the relevant period: see, for instance, rules 36.3(3)(a), (5) and (6). Moreover, as Stanley Burnton LJ said in C v. D at [84]:

“Any ambiguity in an offer purporting to be a Part 36 offer should be construed so far as reasonably possible as complying with Part 36. Once it is accepted that a time-limited offer does not comply with Part 36, one must approach the interpretation of the offer in this case on the basis that the party making the offer, and the party receiving it, appreciated that fact.”

In sum, the first Part 36 offer of 13 March 2009 was a valid Part 36 offer. Although, in accordance with the judge’s general view of the matter for the purposes of rule 36.14(3), it would not have been just, in the absence of production of the pipe, to have given effect to the Part 36 consequences of that offer until a still lower offer had been made, it seems to me that there would be no injustice, and would have been none in the judge’s eyes either, to give effect to the first Part 36 offer from a suitable time after the production of the pipe. Since the contractor’s expert, Mr Watts, saw the pipe on 28 October 2010, I would date the effectiveness of the offer for the purposes of Part 36 consequences from 1 November 2010. I would therefore grant indemnity costs and an enhanced rate of interest (at the judge’s 6%) on judgment sum and costs from 1 November 2010 inclusive.

That leaves for decision Mr Mallalieu’s submission that in any event the contractor should not be responsible for all of the school’s costs, but only for a percentage of them, he submits no more than 60%, because of the school’s failure over the production of the pipe. In my judgment, however, the submission fails, and Mr Friston was not called upon in this connection. Nothing quite like this submission was made to the judge, who was merely asked to say that “Because of that [the pipe’s late production] costs were incurred so to that degree, my Lord, I do submit that any costs order certainly ought to be reflective and indicative of that fact.” The contractor’s contract was a major contract, amounting to over £0.5 million. The contractor ought to have known that it was involved in replacing pipe beneath the duct covers in the dining hall, instead of denying its involvement and thus speculating on the corrosion of an original pipe. The corrosion defence had nothing to support it apart from a speculation as to a possible cause for a leak in circumstances where some explanation other than the contractor’s involvement in working on the pipe-work had to be found for a hole in a pipe. Even in Mr Watts’ original report, the corrosion explanation was only an embellishment which was itself premised on the contractor’s alleged non-involvement with work on the pipe, a defence which was persisted in down to trial. The school’s case, on the other hand, remained to the end what it had always been from the beginning: see its particulars of claim and Dr Leek’s first report. Although the school was negligent in losing sight of the pipe in its filing cabinet, there was nothing misleading about its conduct of its claim, and nothing about its claim properly led to the contractor’s suggestion that an old piece of pipe had corroded. It is in any event a sufficient allowance for that negligence for the school to lose an entitlement to indemnity costs from the end of the relevant period attached to its first Part 36 offer down to 1 November 2010. The mere fact that earlier production of the pipe would have shown that it was not corroded does not mean that the contractor is entitled to be indemnified for taking a wrong point.

As the judge remarked, the contractor’s application, to amend and for a site inspection, was late and prima facie he considered that the contractor should pay the costs of it. Nevertheless, in part because he lacked time to deal with the costs of the application there and then, and in part because he thought that costs should perhaps depend on what might emerge from the visit, he reserved the question of costs until after trial. As it happened, nothing that emerged from the visit suggested that the losing party in the trial should nevertheless be entitled to those costs. If the judge had dealt with those costs as merely costs in the case, no possible complaint could have been made. That, in the end, was how he did regard such costs, for he said: “I am satisfied that it should in effect fall within the costs in the case…”. I would reject this ground of appeal.

I revert to Mr Friston’s submission that the judge could have awarded, or might be regarded as having been prepared to award, indemnity costs under Part 44, so that we should be prepared to award them on this appeal: either from the expiry of the second offer or at least from the time of production of the pipe. For reasons which I have sought to express above, this question does not appropriately arise on this appeal: and even if it did, it would only be necessary to answer it for the sake of the gap between the judge’s start-date for indemnity costs of 8 May 2010 and my date of 1 November 2010. As to that gap, however, I cannot conceive that it would be right to order indemnity costs at the earlier date pursuant to the court’s general powers under Part 44 in circumstances where it would not have been just to order indemnity costs during that period pursuant to the default powers under Part 36. Therefore the question does not arise.

I would merely briefly state that I would allow the possibility that the general requirements before indemnity costs are imposed, namely that the case in question falls outside the norm, and that conduct must be unreasonable to a high degree (Reid Minty (a firm) v. Taylor [2001] EWCA Civ 1723, [2002] 1 WLR 2800, Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson [2002] CP Rep 67) can be met where there has been an unreasonable failure to accept offers of settlement, or a party has unreasonably resisted a sensible approach to finding a solution to the proceedings; even if such a case deserving of indemnity costs has been described as “a rare case indeed” (Kiam v. MGN Ltd (No 2) [2002] 2 All ER 242, per Simon Brown LJ at [13]).

In this connection, the notes to Civil Procedure 2011, Vol 1, at para 44.4.3, cite Franks v. Sinclair (Costs) [2006] EWHC 3656 (Ch), [2007] WTLR 785 (David Richards J) as an example of a case where the “claimant’s refusal of two reasonable offers to settle would have been enough in itself to warrant an order on the indemnity basis”. However, that was a case where the unsuccessful claimant had indemnity costs awarded against him because he had known from the start that he had been putting forward a false case. The two offers which he had refused were the icing on the cake: they were mentioned, but it was not said that they would have been enough in themselves to have justified indemnity costs, see at [28]. On the other hand, indemnity costs have been awarded from a certain date in special circumstances where an offer which ought to have been accepted was not: see Southwark LBC v. IBM UK Ltd (Costs) [2011] EWHC 653 (TCC), [2011] NLJ 474 (Akenhead J) and Barr v. Biffa Waste Services Ltd (Costs) [2011] EWHC 1107 (TCC), [2011] 137 Con LR 268 (Coulson J).

It is sometimes said that the difference between indemnity costs and standard costs is small in practice, since it merely reverses the burden of proving that costs have or have not been reasonably incurred: the burden of showing that the successful party’s costs are not reasonable is on the party against whom the order for indemnity costs has been made. However, as Lord Woolf CJ pointed out in the Excelsior case at [15] –

“The other important distinction between a standard order and an indemnity order is the fact that, whereas in the case of a standard order the court will only allow costs which are proportionate to the matters in issue, this requirement of proportionality does not exist in relation to an order which is made on the indemnity basis. This is a matter of real significance.”

It seems to me that it is of all the greater significance in cases where a successful claimant who has made a conditional fee agreement with his solicitors may be claiming huge costs which the solicitors may have considered it to be worth while for them (rather than for the claimant) to risk, to which is added their success fee uplift. This is a matter which it may be that the courts will have to take into account.

I would therefore uphold the essence of the judge’s disposal of the question of costs, save that, because of the technical fact that the second Part 36 offer’s withdrawal meant that it could not be made the basis of Part 36 costs consequences, I would substitute reliance on the first, unwithdrawn, Part 36 offer but postpone its operation for the purpose of costs consequences until 1 November 2010. Otherwise I would dismiss the appeal.

I am concerned at the costs which have arisen in this case. The school’s estimate that on its side alone it has incurred £165,000 in costs before success fee uplift on a claim for £25,000 is deeply worrying. It is also worrying that no attempts appear to have been tried, despite the offers which the school was repeatedly making, at finding some common ground, as might have been achieved with the aid of a mediator. Thus, one would think, for instance, that the proposal, however informally suggested, made on 12 October 2010, that the claim might be settled for £45,000, inclusive of costs, would have been jumped at, even if that was before the production of the pipe. I am also concerned that this is another case in which the existence of a conditional fee agreement has made it practically impossible to obtain a settlement. It is all the more disturbing that this has occurred in a case which has been handled on both sides by insurers, who after all may be said to be expected to approach litigation with professionalism and realistic insight, and to have the experience to do so. On the one hand the school’s insurers or their solicitors have spent what would seem to be a disproportionate amount of costs on the claim. On the other hand the contractor’s insurers appear to have calculated, on behalf of a company in liquidation and in the absence of any witnesses who knew anything much about the case, that there was safety in a speculative defence, and to have gambled that the claim would come unstuck. Ultimately it is the public which pays for such miscalculations, either through higher premiums, or through the unwarranted expenditure of public resources.

I agree.

I also agree.