Walker Construction (UK) Ltd v Quayside Homes Ltd & Or

The appeal and cross-appeal in this case arise out of the judgment of His Honour Judge Edward Bailey given in the Central London County Court (Technology and Construction List) on 20 September 2012 ("the judgment"), whereby he awarded a net judgment sum of £10,885 to the defendant/respondent, Quayside Homes Limited ("Quayside"), in respect of its counterclaim, and his decision in a separate judgment of the same date (“the costs judgment”) to award Quayside the majority of its cost of the action. At the end of the hearing before him the judge gave Quayside permission to appeal against his decision not to award it the sum of £8,941.16 by way of counterclaim. The appellant, and claimant in the action, Walker Construction (UK) Limited ("Walker"), was given permission to appeal against the judge’s order for costs by Tomlinson LJ at an oral hearing in the Court of Appeal on 20 March 2013.

Because Quayside’s cross appeal concerns a question of liability and because its outcome is arguably capable of affecting the outcome of Walker’s costs appeal, it is logical to consider Quayside’s cross-appeal first.

The principal issue at the hearing before us, however, was whether the judge was right to make an order for costs which required Walker (subject to certain exceptions) to pay Quayside's costs, for the period from 16 December 2008 to 24 May 2011 assessed on the standard basis, and from 25 May 2011 assessed on the indemnity basis. We were informed that the costs of the proceedings below, so far as both sides were concerned, were substantial. The bill submitted by Quayside in respect of its costs for the period from 16 December 2008 to 24 May 2011 on the standard basis, and for the period from 25 May 2011 on the indemnity basis, claims a total of £345,758.73.

Because the appeal challenges the judge's order in relation to the costs of the action, it is necessary to set out the procedural chronology of both the action and the various offers for settlement in somewhat tortuous detail.

Walker is a civil engineering contractor, which carries out, amongst other things, drainage and highway works.

Quayside is a developer of residential homes. In July 2003, planning permission was granted to construct over 300 residential homes on land known as “Willowbank”, which previously formed part of the Sandwich Industrial Estate (“the site”).

On 3 November 2003 Walker successfully lodged a tender return with Quayside for drainage and highways works (“the works”) at the site. In December 2004 Walker signed two NEC contracts with Quayside whereby the former agreed to complete the works directly for, and be paid directly by, Quayside. There were separate contracts for what were described as the section 38 works (on-site works) and the section 278 works (off-site works). There appears to have been some dispute previously as to whether the contracts were subsequently consolidated in a contract dated 23 December 2004, but the precise contractual structure is of limited relevance for present purposes. I shall simply refer to the contract or contracts between the parties as "the Contract". It was common ground that the Contract was a contract for the purposes of the Housing Grants Construction and Regeneration Act 1996 ("the Act") and that, because the parties did not make their own contractual provisions for adjudication, the result of section 108 (5) of the Act was to incorporate the adjudication provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme"), which was promulgated under section 114 of the Act.

The Part 20 defendant in the action, Peter Brett Associates ("PBA”), was Quayside's consulting engineer and project manager. PBA is no longer a party to the action, as Quayside's claim against it was settled on the terms of an order dated 4 April 2012.

At the conclusion of the works, a dispute arose between Walker and Quayside in respect of the final payment sought by Walker. PBA had issued Walker with various site instructions to carry out certain drainage and other remedial works, and Quayside had withheld parts of the retention and other payments reflecting the costs that it considered were incurred in rectifying what it alleged were Walker's defective works.

Walker issued court proceedings on 19 February 2008 in the Ashford County Court claiming the sum of £23,572.36. This was made up as follows:

£11,345.96 in respect of an outstanding application for payment under certain invoices;

£11,916.01 in respect of retentions made by Quayside in respect of the section 38 and section 278 works; and

£310.39 VAT due on the retention.

Quayside served a "holding" defence on 20 March 2008. That defence asserted, without providing any particulars, or quantifying any counterclaim, that Walker had failed to complete the works properly and that they were defective. The defence referred to the fact that, as at that date, "Contract Administrators" were dealing with Walker in relation to the defects alleged by Quayside. A stay of proceedings was agreed in the hope of settlement.

On 29 August 2008 Walker issued a notice of adjudication pursuant to the Scheme. By its notice, Walker claimed:

£13,298.36 for the balance of application 28061 dated 11 May 2007;

£11,916.01 of retention (comprising Quayside's retentions in respect of the section 38 and section 278 works).

The adjudicator's decision was given on 2 December 2008. By his award the adjudicator rejected Quayside's claim that Walker was not entitled to be paid for the remedial works because the damage exhibited by the drainage was due to failings in the construction of the drainage by Walker. He also rejected Quayside's claim for set off and/or abatement in respect of damage allegedly suffered as a result of Walker's allegedly defective drainage works and awarded Walker the sum of £23,440.72 plus interest. The sum was made up as follows:

the full sum claimed against application 28061 dated 11 May 2007, namely the sum of £13,298.36; and

the further sum of £10,142.36, being the full amount of the section 38 works retention.

On 15 December 2008 Quayside paid Walker the sum of £23,440.72 plus interest pursuant to the adjudicator's award.

Walker’s claim for the section 278 works retention (£1,773.65) had been withdrawn from the adjudicator following concerns as to the adjudicator’s jurisdiction to determine that issue. Accordingly, after the publication of the adjudicator's award, the claim for £1,773.65 retention in respect of the section 278 works remained outstanding as a claim in the proceedings, which had been adjourned pending the adjudication.

On 29 January 2009 Walker's solicitors, CJ Hough & Co Ltd, made a Part 36 offer to Quayside's solicitors, Furley Page LLP, offering to discontinue Walker's claim (which, as I said, at that stage stood in an amount of £1,773.65) with no order as to costs. The letter stated as follows:

On 2 February 2009, Quayside's solicitors responded to the Part 36 offer stating that it was "not yet in possession of the relevant information required to properly assess [Walker's] offer", and requesting a stay whilst its investigations were completed. As a result, the case management conference, which had been scheduled for 6 February 2009, was adjourned to the first open date after 11 May 2009. Thereafter nothing appears to have happened until 17 September 2009, when Quayside's solicitors wrote to Walker's solicitors asserting that there were a number of defects in the work carried out by Walker and that, in carrying out the works, Walker had failed to exercise reasonable care and skill. Quayside required confirmation that Walker would return to the site and rectify the alleged defects and, in the event that Walker refused to do so, Quayside claimed damages.

On 20 October 2009 Walker’s solicitors responded to the defects claim and suggested a site meeting. On 23 November 2009 Quayside's solicitors responded to that letter, agreeing to a site meeting, but stating as follows:

On 23 April 2010 Quayside's solicitors wrote to Walker's solicitors enquiring as to Walker's position in relation to certain of the defects. Quayside informed Walker that Quayside would be giving instructions to a third party to proceed with rectifying the defects on 4 May 2010 and that, accordingly, if Walker wished to inspect the defects, it should do so before that date.

On 13 October 2010, Quayside issued its third party claim form against PBA. On 15 October 2010 the County Court gave permission to Quayside to amend its defence and counterclaim in the form appended to its application notice dated 25 August 2010 and directed that such defence and counterclaim should be served no later than 15 December 2010.

On 15 December 2010 Quayside served its amended defence and counterclaim, which replaced its original defence dated 20 March 2008 in its entirety. The amended defence denied that Quayside owed Walker the sums claimed in the latter's particulars of claim and gave full particulars of Quayside's defects claim, and also claimed damages for delayed completion, "additional preliminaries" and ongoing costs together amounting (on my arithmetic) to £151,735.97. In addition, in paragraph 12 of the amended defence, Quayside claimed that, of the sum of £23,440.72 plus interest paid by Quayside pursuant to the adjudication, the sum of £8941.16 (claimed by Walker under application number of the 28061 in respect of repair work to defects in some drains allegedly caused as a result of Quayside's piling operations) was not properly due to Walker and should not have been awarded by the adjudicator. Quayside denied "that the defects [in the drains] were caused by [its own] piling work and averred that [Walker] should have rectified the defects at no cost pursuant to its obligations under the Contract". It claimed that Walker had repeatedly been invited to return to site to rectify the alleged defects but had consistently refused. Accordingly, in its defence, Quayside claimed repayment of the sum of £8941.16. Quayside also claimed that it should be entitled to abate, or set off against, Walker's claim, certain additional sums which Quayside had paid pursuant to the award, namely interest of £2639.51 and £5822.16 in respect of the adjudicator's fees. In total Quayside counterclaimed the sum of £169,138.80. Although the counterclaim, according to its wording, appeared to be limited to Quayside's claim for damages in respect of its claim for defects, delay and additional preliminaries, the figure actually counterclaimed, namely £169,138.80, suggests that such sum included Quayside's claim for repayment of the sum of £8941.16.

On 24 December 2010 Quayside, in a letter from its solicitors to Walker’s solicitors, made a Part 36 offer to settle Walker's claim and its counterclaim, on terms that Walker paid Quayside the sum of £55,000 within 14 days of accepting the offer plus Quayside's costs of the action up until the date of Walker's acceptance of the offer.

That offer was not accepted by Walker. Instead, on 5 January 2011, Walker's solicitors made a non-Part 36 offer to pay £30,000 to Quayside in full and final settlement of its claim inclusive of costs. The letter was in the following terms:

By letter from its solicitors dated 7 January 2011, Quayside rejected Walker's offer, stating that it did "not even come close to covering [Quayside's] costs let alone the sums claimed." On 9 February 2011 Walker served its Reply to the Amended Defence and Counterclaim. Walker denied that it had been in breach and relied on correspondence demonstrating that it had been willing to attend the site with a view to agreeing a defects list with Quayside, subject to independent verification. It was said, that this was at a time when there was no project manager, because Quayside was in dispute with PBA. At paragraph 22, Walker pleaded:

On 25 February 2011, at a case management conference, Quayside informed Walker in a written note that it would be withdrawing certain parts of its counterclaim, including certain claims for defective workmanship, the delayed completion claim and the claim for repayment of the adjudicator's fees. That was said to reduce Quayside's counterclaim to £86,839.24 before interest.

On 8 March 2011 Quayside made a non-Part 36 offer inviting Walker to pay £40,000 inclusive of costs in settlement of Quayside's claim. Quayside's solicitors' letter of that date set out the costs incurred by Quayside (not including the costs of the third-party claim or those arising out of the adjudication) as totalling £52,415.85. On 9 March 2011 Walker made a Part 36 offer inviting Quayside to pay Walker £100 plus costs in full settlement of the claim. On 14 March 2011 Quayside made a further Part 36 Offer inviting Walker to pay £15,000 plus costs in full settlement of Quayside's claim. On 3 May 2011 Quayside made a further Part 36 offer inviting Walker to pay £100 plus costs in settlement of Quayside's claim. On 10 May 2011 Quayside's solicitors informed Walker's solicitors that Quayside's costs as at that date were approximately £55,000.

On 11 May 2011 Walker made a non-Part 36 offer that it would pay £100 to Quayside and that each side would bear their own costs. On 7 July 2011 Quayside made a non-Part 36 offer that to Walker and PBA that they jointly should pay £120,000 inclusive of Quayside's costs.

On 21 July 2011 the third-party made an offer to Quayside to settle the latter's Part 20 claim as against the third-party. On 22 July the Central London County Court gave directions to take the matter through to trial. In August 2011 further requests for particulars of the respective pleadings were served.

On 2 September 2011 Quayside served its Re-Amended Defence and Counterclaim, and, as foreshadowed in its written note previously produced on 25 February 2011, reduced its pleaded counter-claim from £169,138.80 to £87.404.22. This reflected a reduction in the defects claim and the withdrawal of the claim for delay and additional preliminaries. In addition Quayside deleted the reference to the interest of £2,639.51 and a further sum of £5822.16 in respect of the adjudicator's fees, as amounts which Quayside had previously sought to abate or set off against Walker's claim. However an additional overpayment claim for £4570.98 was added. Again, although the counterclaim on its face only appears to refer to the claim for damages, the arithmetic demonstrates that the total figure of £87.404.22 counterclaimed included the claims for repayment of the £8941.16 and the £4570.98. The case then proceeded towards trial, with directions for disclosure and exchange of witness statements.

On 17 February 2012 Quayside's solicitors indicated to Walker's solicitors that Quayside was still amenable to settlement if Walker were to make an offer and that Quayside's Parts 36 offer remained open for acceptance. On 2 March 2012 Walker's solicitors replied, reiterating that in their view Quayside's claim faced serious difficulties and that Walker's previous offers were more than adequate to cover its possible liability. The letter ended with the following non-Part 36 offer being made by Walker for it to pay £10,000 inclusive of costs to settle the action:

On 8 March 2012 Quayside's solicitors repeated its invitation to Walker to accept Quayside's previous Part 36 offer (namely the offer dated 3 May 2011 whereby Quayside proposed that Walker should pay £100 plus Quayside's costs), with the additional term that Walker would be entitled to pay by instalments over a six-month period. In the alternative, Quayside's solicitors put forward a non-Part 36 offer for Walker to pay £50,000 over six months inclusive of costs. In a letter dated 12 April 2012 Quayside's solicitors informed Walker's solicitors of Quayside's settlement with the third-party and of the fact that £28,000 was paid to Quayside towards costs, in respect of which credit in respect of any generic element might have to be given to Walker, if it were to pay Quayside's costs.

On 8 June 2012 Quayside served a Re-Re-Amended Defence and Counterclaim, in which the sum counter-claimed reduced yet further to £84,168.22 plus interest. Again there was no apparent claim in the main body of the counterclaim for payment of the two sums of £8941.16 and £4570.98 referred to in the defence as entitling Quayside to set off or abatement, although once again the arithmetic suggests that the total figure of £84,168.22 counterclaimed included the claims for repayment of the £8941.16 and the £4570.98.

The trial took place on the 10-13 September 2012. The issues in contention at trial were:

Walker’s outstanding claim for sums not considered by the adjudicator; i.e. its outstanding claim for the retention in respect of the section 278 works in the sum of £1,773.65.

Quayside’s counterclaim for damages in respect of Walker's allegedly defective works relating to:

Highway Works;

electrical certificates; and

sewers.

Quayside's claim, as made in paragraph 12 of the Re-Re-Amended Defence and Counterclaim, for repayment of the sum of £8941.16 awarded to Walker in the adjudication (being part of the total sum of £13,298.36 claimed under application 28061 and in respect of which there had been no certification by the third-party's project manager.)

What allowance should be made for sums already recovered by Quayside from the contract administrator, PBA, in the Part 20 proceedings in respect of defect allegations, which, as described above, had been settled previously.

In the event, the judge awarded a net judgment sum of £10,035.91 to Quayside and dismissed its claim for repayment of the sum of £8941.16, which it had paid to Walker pursuant to the award. As part of his submissions, Lord Marks, leading counsel appearing on behalf of Walker, produced a helpful table setting out a summary of the figures claimed by Quayside and Walker, and the amounts awarded by the judge. I reproduce the table, as slightly amended by me, below:

Section 108(3) of the Act provides:

The relevant provisions of the Scheme provided:

As I have already said, the judge dismissed Quayside's claim for the repayment of the sum of £8941.16, but gave Quayside permission to appeal against his decision.

The judge accepted that he was in no way bound by the adjudicator's decision. He referred to the issue as a technical one:

He then went on to decide (in paragraph 115 of the judgment) that that there was an implied term in any construction contract to which the Housing Grants Construction Regeneration Act 1996 ("the 1996 Act") applied, that the contractor would repay to the employer any money paid by the employer under the terms of an adjudicator's award in respect of which the liability to pay was not substantiated in subsequent legal proceedings. But he held that, although Quayside had a cause of action in contract, its pleading had failed to identify the breach of contract, or even assert that there was a breach of contract.

The judge then went on to consider whether there was a basis for Quayside's recovery in restitution. Although his reasoning is somewhat hard to follow, he appears to have concluded that Quayside had sufficiently pleaded a restitutionary claim (see paragraphs 117 to 118 of the judgment), but that no such claim for restitution could exist as a matter of law. In so doing he cited, but disagreed with, the obiter decision of His Honour Judge Stephen Davis in Jim Ennis Construction Limited v Premier Asphalt Limited [2009] EWHC 1906 (TCC) and appears to have drawn a distinction between decisions of courts and decisions of adjudicators. At paragraphs 122 to 126 of his judgment he concluded:

Mr Simon Browne QC and Mr Tim Sharpe submitted that the judge had been wrong to reject Quayside's claim for £8941.16. In summary they contended that the judge should have found for Quayside on this issue and should have entered judgment for Quayside in the sum of £18,977.07 together with interest on the basis that:

as a claim for a set-off against Walker’s claim, it was sufficiently pleaded and made out;

as a claim for damages for breach of contract, it was sufficiently pleaded such as to allow Walker to know the case which it had to meet;

as a claim in restitution it was sufficiently pleaded and was made out; and/or

the sum ought to have been returned to Quayside under CPR 25.8.

In support of this contention they submitted as follows:

Pursuant to section 108(3) of the 1996 Act, the decision of an adjudicator was only binding until the dispute was finally determined by legal proceedings, arbitration or agreement. The judge rightly found that he was not bound by the adjudicator’s decision.

Thereafter the contractor had to prove its entitlement to the sum in the usual way; see Coulson on Construction Adjudication, paragraphs 14-47 and following. Walker was the claimant in the action and accordingly the burden of proof was upon it to prove its entitlement to this sum; the burden of proof did not shift because there had been an adjudication. At trial, Walker had merely submitted that: “this claim must fail. There is insufficient evidence to overturn the adjudicator’s decision on this point.”

The judge accepted that Walker had failed to adduce any evidence of its entitlement to this sum; see paragraph 126 of the judgment. The judge also described Walker’s arguments on this point as being “part of a high risk strategy and incidentally incorrect”; see paragraph 125 of the judgment. Quayside, however, paid this sum over as required by the adjudicator’s decision. In circumstances where the question of Walker’s entitlement to that sum had been validly raised by Quayside in the pleadings, and the judge had found on the evidence against Walker, the judge should have set that sum off against Walker’s claim, as pleaded. Pursuant to CPR 16.6, where a defendant contends that he is entitled to money from the claimant and relies on this as a defence to the whole or part of the claim, the contention may be included in the defence and set off against the claim, whether or not it is also a Part 20 claim. As such, the right of set-off existed irrespective of the quality of the pleadings in relation to breach of contract and the judge failed to correctly analyse the consequences of his factual findings.

By way of analogy and confirmation of the error into which the judge fell, Walker succeeded in recovering the sum of £3,909.14 in respect of adjudicator’s fees. That claim had not been referred to in the Particulars of Claim and was only pleaded by way of set-off in Walker’s Reply.

The matter was sufficiently pleaded in contract, and sufficiently clear and compliant with the CPR, such that the judge ought not to have found against Quayside on what the judge himself accepted to be “purely technical grounds”; see paragraph 126. The pleadings referred to the particular contract and the express or implied terms thereunder to carry out the work with reasonable skill and care. The counterclaim clearly arose out of the same contract as that relied upon by Walker. Quayside's pleadings referred to the sum not being properly due under the adjudicator’s decision, which itself was predicated upon the contract. The pleadings also referred to the fact that “the Claimant should have rectified these defects at no cost, pursuant to its obligations under the contract” (emphasis added). While the specific phrase “breach of contract” may not have been pleaded, or the implied term set out in full, the pleadings as a whole set out the nature of the claim sufficiently, and the facts relied upon. It was therefore clear that Walker had received a sum that was not properly due to them under the contract.

That Quayside's pleadings were sufficiently clear was demonstrated by:

the fact that Walker chose not to avail itself of the opportunity provided by the Order of HHJ Madge of 22 July 2011 to seek clarification of the pleadings;

the fact that Walker did not seek to amend its Reply to the Amended Defence and Counterclaim (either in response to the Re-Amended Defence and Counterclaim or the Re-Re-Amended version), ultimately finding themselves debarred from filing and serving an amended reply and defence to counterclaim pursuant to an order of Mr Recorder Cole dated 22 November 2011;

that, in its only Reply and Defence to Counterclaim, in relation to the relevant paragraph in which the £8,941.16 was claimed, Walker stated only “as to para 12, the Claimant maintains its entitlement to payment. Insofar as the defects were not caused by the Defendant’s piling operations they were caused by matters that were the responsibility of the Defendant as detailed above”;

that, at trial, Walker’s skeleton argument took no issue over the sufficiency of pleadings;

that Walker put Part 18 requests for further information or clarification to Quayside which were responded to, but such requests never questioned the basis on which this sum was sought;

that, but for the alleged deficiency of pleadings, the judge would have found for Quayside.

So far as the restitutionary claim was concerned, the judge wrongly drew a distinction between decisions of courts and decisions of adjudicators, in reliance on a passage in Goff & Jones The Law of Unjust Enrichment. That distinction was wrong, as per the obiter judgment in Jim Ennis Construction Limited v Premier Asphalt Limited [2009] EWHC 1906 (TCC). The claim in question was clearly a claim for “money had and received”.

Further or alternatively, the judge ought to have treated this sum as an interim payment and either ordered Walker to give credit for this sum or ordered the return of this sum pursuant to CPR 25.8. That rule allowed the court to order the repayment of an interim payment (whether made under an order or voluntarily), and such an order may be made without an application by any party; see CPR 25.8(4)). Having found that Walker did not deserve this money (see paragraph 125 of the judgment), he ought to have exercised his discretion in favour of Quayside.

Lord Marks QC and Mr Hirst contended that the judge’s conclusion in relation to this issue should be upheld. In support of this contention, they submitted, in summary, as follows:

The effect of section 108(3) of the 1996 Act was that if litigation or arbitration was brought in which the decision of the adjudicator was challenged, that decision did not bind the subsequent tribunal in any way, nor did it alter the burden of proof in the litigation or arbitration. The court or arbitrator was free to determine the issue de novo. That was the effect of the Act as explained by Lord MacFadyen in City Inn Limited v Shepherd Construction Limited [2002] Scots Law Times 781 at paragraph [58]; and by Sir Peter Coulson in Coulson on Construction Adjudication, 2^nd Edition, at 14.47 -14.48, the passage referred to by the judge at paragraph 113 of his Judgment.

The decision of Akenhead J in Aspect of Contracts (Asbestos) Ltd v Higgins Construction PLC [2013] EWHC 1322 (TCC) had rejected both the implied contract analysis and the restitutionary basis suggested by the judge obiter in Jim Ennis Construction Limited v Premier Asphalt Limited supra.

On the simple construction of section 108(3), it was not the law that the mere issue of proceedings to challenge the adjudicator’s decision displaced that decision. In the absence of agreement to the contrary, until there was a final judgment in the litigation or an arbitrator’s award, the adjudicator’s decision bound the parties.

Quayside’s argument that it was for Walker to prove its entitlement to the sum in the action in the usual way was inconsistent with the plain words of section 108(3). It followed that the judge was right to rule that there was no claim in restitution. There could be no right to restitution until there had been a final determination of the dispute in the litigation in Quayside’s favour.

It also followed that the judge was right that Quayside would have to have pleaded a cause of action to recover the money it had paid as a result of the adjudicator’s binding decision. The judge rightly held that there was no cause of action pleaded in contract.

There was also no counterclaim on the pleadings for repayment of the £8,941.16, but only a claim for abatement of Walker’s claim in respect of it. By the time the Defence was amended on 15 December 2010 the only sum that actually formed part of Walker’s claim that had not been paid on 15 December 2008 pursuant to the adjudication was the sum of £1773.65, being the retention which had been made by Quayside in respect of the section 278 works (see paragraph 38 of the judgment). Thus there was no basis for awarding the balance of the £8,941.16, even if a cause of action had been established.

The reality of the case was that, as was apparent from the pleadings, there was a factual dispute between the parties, as to Walker’s entitlement to the sum of £8,941.16 under application 28061. But in relation to that dispute the onus of proof was fairly and squarely on Quayside. There was no dispute that the work consisted of repair work to defects in certain drains, and that the work had indeed been carried out by Walker, nor was there any dispute as to the agreed contractual price for such work. The dispute was as to whether, as Quayside contended, the relevant defects in the drains had been caused as a result of defective drainage construction works originally carried out by Walker, and that accordingly Walker should have rectified the defects at no cost, pursuant to its obligations under the Contract; or whether, as Walker contended, the relevant defects in the drains had been caused as a result of Quayside's subsequent piling operations.

There was nothing in the point taken by Quayside that because the sum had not been certified by the Contract administrator, PBA, it was not contractually due. Walker's contractual right to payment flowed from the issue of site instructions by PBA dated 9 April 2007 (wrongly referred to on the instruction as 2005). The relevant instructions read:

Because Quayside's claim was effectively a claim to set off damages in respect of allegedly defective works, the burden of proof at trial was on Quayside. Accordingly the judge was correct to reach the conclusion that he would not order repayment of the £8,941.16 or any part thereof.

I accept Lord Marks’ submission that, because Quayside's claim was effectively a claim (or counterclaim) to set off damages in respect of allegedly defective works, the burden of proof at trial was on Quayside. At trial Walker was not seeking to recover any sum in respect of these works, as it had already been paid pursuant to the adjudication. Quayside never called any evidence at trial in support of its contention that Walker's original drainage works had been in breach of contract as defective. Accordingly, irrespective of any pleading point, the judge had no basis, on the material before him, on which he could reach a final determination in relation to Quayside's claim for damages for breach of contract. The adjudicator’s award was therefore bound to stand. Accordingly the judge was correct (although not for the reasons he gave) to reach the conclusion that he would not order repayment of the £8,941.16 or any part thereof.

Speaking for myself, I have to confess to some difficulty with the concept of the "temporary finality" of an adjudicator's decision pursuant to section 108(3) of the Act and paragraph 23 (2) of the Scheme and as to what, precisely, are the consequences of the provision in the latter that an adjudicator's decision is

As Buxton LJ said in Bouygues (UK) Ltd [2000] EWCA Civ 507 at [2], one can readily see that:

But the more difficult question arises in relation to the status of the adjudicator's decision after it has been complied with and payment has been made pursuant to the award, in accordance with the losing party's obligations under the Scheme, but prior to the final determination of the relevant dispute in court or arbitration proceedings. In other words, how "binding" is the adjudicator's decision, or how significant is the fact that payment has been made under the award, when the court comes to consider the outstanding disputes between the parties, and their respective obligations, as at the date of trial but before the court "finally" determines the dispute?

The issue was considered by Lord MacFadyen in City Inn Limited v Shepherd Construction Limited supra. The pursuers and defenders to the action were respectively the employer and contractor under a building contract. The dispute between the parties concerned whether, as the pursuers/employers maintained, the completion date specified in the contract remained the relevant completion date, or whether as the defenders/contractors maintained, they were entitled to various extensions of time as certified by the architect, and subsequently awarded by the adjudicator to whom the dispute was initially referred, prior to the start of the action. Lord MacFadyen said:

That approach appears to have been adopted in Coulson on Construction Adjudication, 2^nd Edition, at paragraphs 14.47-14.50, where the author (Sir Peter Coulson) states:

I comment that the suggestion made in the last paragraph of 14.50, by reference to the Scottish decision of Stiell Ltd v Riema Control Systems Ltd however, appears to support the proposition that, until the court has finally determined the case, the parties are bound to proceed on the basis that the award is correct and binding.

It is clear (and indeed was common ground on the appeal) that the court in subsequent litigation is not bound by the decision of the adjudicator and may come to a completely different conclusion on the relevant issues. It was also common ground that the adjudicator’s decision did not give rise to res judicata. But I have real difficulty with Lord MacFadyen's analysis that the adjudication has no effect whatsoever on the onus of proof in subsequent proceedings. In litigation following an award, the unsuccessful party in the adjudication, who has paid under the award, is claiming repayment of sums, which it contends it has wrongly paid. Necessarily, the defendant, the successful party in the adjudication, who has been paid, has no need whatsoever to bring court proceedings to claim payment, or even to seek a declaration that it was entitled to have been paid. Moreover section 108(3) provides that, until the final determination by the court, the decision of the adjudicator is binding. In those circumstances, why should the defendant contractor, for example, on the facts of City Inn Limited v Shepherd Construction Limited not be entitled to contend that, until the contrary was proved to the court's satisfaction, the adjudicator's decision that the contractor was entitled to an extension of time remained binding, and that therefore the onus of proof was on the claimant employer (the losing party in the adjudication) to adduce evidence, and prove on that evidence, that no such extension was justified and it was entitled to its money back? Why should the court have to proceed on the incorrect hypothesis that the court action was one being brought by the defendant contractor claiming an extension of time? We were not referred in the course of the hearing to any academic or industry commentary on City Inn Limited v Shepherd Construction Limited, and, no doubt because of the small size of the sum involved, we did not have the benefit of detailed argument on the issue generally. In those circumstances I would be reluctant to decide that City Inn Limited v Shepherd Construction Limited was wrongly decided unless it were necessary to do so.

Fortunately, in my judgment there is no need to do so in the present case. That is because, in the context of this action, it was, on any basis, incumbent on Quayside to establish the set off and counterclaim it was asserting in response to Walker's claim in the action for the payment of £1773.65 in respect of a retention in respect of the section 278 works (which had nothing to do with the drainage works). Quayside could not merely turn up, and say in response to Walker's claim:

In my judgment both the evidential burden and the burden of proof in establishing Quayside's set off and counterclaim, at all times rested fairly and squarely on Quayside. It was for Quayside to plead and adduce evidence that the original construction by Walker of the drainage works had been defective, to support its claim as per paragraph 12 of its defence for abatement and/or set off against Walker’s claim. Likewise, in so far as Quayside was asserting a counterclaim for damages in the sum of £8491.60 in respect of Walker's allegedly defective drainage construction works, or repayment of a sum which it contended had been wrongly awarded by the adjudicator, it was similarly incumbent upon Quayside to adduce evidence, and prove on that evidence, that Walker's original drainage construction works had been defective and caused damage. The action was not a claim for payment by Walker in respect of the section 38 works; there was no dispute that the remedial works had been done pursuant to the site instructions and no dispute as to the costs of the work. The mere absence of a certificate from PBA did not, as Lord Marks correctly submitted, prevent Walker from having a contractual entitlement to payment, which the adjudicator had duly awarded. Quayside was not entitled simply to point to the absence of a certificate to support its assertion that it was entitled to repayment because the adjudicator was wrong.

It was thus for Quayside to plead, adduce evidence in support of and prove its set off and counterclaim. It did not do so.

I deal first with the pleading point. In this context I reject Lord Marks’ technical submission that there was no pleaded counterclaim in respect of the sum of £8491.60. I do so because: first, arithmetically, the final figure claimed in the counterclaim appears to include that figure; and, second, because, in repeating the defence, the counterclaim can be assumed to have included the claim for repayment made in paragraph 12 of the defence. However more importantly, Quayside's pleading is, in my view, defective because there is no identification or particularisation in paragraph 12 of the "defects in the drains", or allegation that they amounted to a breach of contract, or as to why, under the terms of the Contract, it was Walker's obligation to rectify them at no cost, or as to the basis for Quayside's entitlement to repayment of the sum. However, as Mr Browne pointed out, it is fair to say that no request for further particularisation of the pleading was sought by Walker.

On its own, the absence of a satisfactory pleading of breach of contract probably would not have mattered if Quayside had called evidence at trial to support its claim that Walker’s original drainage construction works had been defective and in breach of the Contract; that consequently Walker had never been entitled to payment; that, accordingly, Quayside had suffered loss and was entitled to repayment or damages. No doubt the evidence, which had been before the adjudicator in relation to the cause of the defects present in the drains (i.e. whether they were caused by Walker's original construction works or by Quayside's piling works), could have been rehearsed once again before the judge. But, as was common ground, Quayside did not choose to adduce any of that evidence. It simply adopted the attitude that it was incumbent upon Walker to prove its contractual entitlement to payment of the sum of £8491.60.

In circumstances where Walker was not making any claim in respect of the sum of £8491.60, I cannot see that Walker had any obligation to do so. For that simple reason the judge was, in my view, entitled to conclude that Quayside had not established its entitlement to set off the sum of £8491.60, or to be paid that sum by way of damages for breach of contract, or to be repaid that sum on the basis that the adjudicator's decision was wrong.

In the court below there was considerable discussion, in the context of the adequacy of the pleadings, as to the nature, or characterisation, of the claim for repayment. In particular the debate focused on whether the claim was based on:

an implied term in the underlying construction contract, that in the event of a subsequent determination by a court or arbitration proceedings which reached a conclusion contrary to the adjudication decision, the unsuccessful party in the adjudication was entitled to be repaid all sums paid by it in compliance with the award; and/or

a restitutionary claim in unjust enrichment.

As I have already said, the judge decided (following the decision in Jim Ennis Construction Limited v Premier Asphalt Limited) that that there was such an implied term in the Contract, that Quayside indeed had such a cause of action in contract, but had failed to plead any allegation that there had been a breach of contract or identify any such breach. He also held (not following the decision in Jim Ennis Construction Limited v Premier Asphalt Limited) that there was no restitutionary claim as the payment had been made under the terms of the Scheme, and had not been paid by mistake or without consideration.

In Jim Ennis Construction Limited v Premier Asphalt Limited His Honour Judge Davies concluded:

that there was an implied term of the underlying construction contract, whereby an unsuccessful party to an adjudication was entitled to be repaid all sums paid by it in compliance with an adjudication decision, in the event that it succeeded in a subsequent action;

that, accordingly, there was a new cause of action, arising as at the date of payment pursuant to the terms of the adjudication, if and to the extent that, as a matter of fact or law, that party was not liable to pay the sums decided as due by the adjudicator;

that, additionally, the unsuccessful party in the adjudication had a restitutionary claim for repayment, the limitation period in respect of which ran from the date of payment.

In Aspect of Contracts (Asbestos) Ltd v Higgins Construction PLC, another limitation case, Akenhead J rejected the analysis of His Honour judge Davies in Jim Ennis Construction Limited v Premier Asphalt Limited. Akenhead J held that there was no implied term under the Scheme giving rise to a new right to the losing party in the adjudication to sue as from the date of payment for the recovery of sums paid. Similarly he held that there was no separate cause of action in restitution enabling the losing party in the adjudication to bring a restitutionary claim for payment within six years from the date of payment pursuant to the adjudication. He held that the relevant cause of action in court proceedings following an adjudication flowed from the underlying construction contract itself and was thus subject to the six year limitation period applicable to that contract. Depending on the circumstances, the claim in subsequent court proceedings by the unsuccessful party to the adjudication might be a claim for payment under the contract, a claim for a negative declaration that it had no contractual or tortious liability in damages to the other party or a claim for damages for breach of contract. All such claims were subject to the six year limitation period applicable to contract or tort claims.

No limitation issue arises in the present case. For present purposes the only possible relevance of the correct characterisation of a claim brought in subsequent court proceedings by the unsuccessful party to the adjudication would be in relation to the issues whether:

the onus is on the unsuccessful party to the adjudication who is claiming repayment of sums paid pursuant to the adjudication, to plead the basis of its claim to repayment and adduce evidence in support of such claim; in other words to justify its entitlement to repayment; or whether it is for the successful party to the adjudication, who has already been paid in respect of its claim, to plead and adduce evidence which satisfies the court; and

if the former, whether Quayside adequately pleaded and proved, by adducing appropriate evidence, its claim for pro tanto set off and payment, or repayment, of the sum of £8491.60.

I prefer the analysis of Akenhead J in Aspect of Contracts (Asbestos) Ltd v Higgins Construction PLC to that of His Honour Judge Davies in Jim Ennis Construction Limited v Premier Asphalt Limited. I agree that, for limitation purposes, no new cause of action arises either as a result of an implied contractual term, or on the basis of a restitutionary claim, and that, when an unsuccessful party to the adjudication subsequently brings court proceedings, it is doing so on the basis of its original rights under the construction contract to claim payment under the contract, damages for breach of contract or a negative declaration that it is not in breach. However, neither analysis in my view actually assists the resolution of either of the issues identified above, although it could perhaps be said that the concept of a claim for a negative declaration (that the unsuccessful party to the adjudication was not in breach of contract) described in paragraph 44 of Akenhead J’s judgment, supports the analysis that it is for the unsuccessful party to the adjudication to prove his entitlement to repayment in subsequent proceedings.

As I have already said, in my judgment, the simple point here was that it was Quayside which was seeking to set off, arguably counterclaim and obtain payment in respect of the sum of £8491.60 in circumstances where Walker had obtained payment of that some pursuant to an adjudication award which remained contractually binding. In those circumstances, in accordance with basic principles, it was incumbent upon Quayside, as the party asserting its right to set off, repayment and/or damages, to plead and adduce evidence to prove its entitlement.

Accordingly I agree with the judge, although for somewhat different reasons, that, in circumstances where it chose not to adduce any evidence to support its claim, Quayside was not entitled to set off, or to repayment of, any part of the £8491.60. Accordingly, the judge was right to restrict the amount recoverable in respect of Quayside’s counterclaim to the sum of £10,885.

The judge’s order in relation to the cost of the action (“the costs order”) was in the following terms:

The Defendant shall pay the Claimant’s costs up to 15 ^th December 2008 to be assessed on the standard basis if not agreed.

The Defendant shall pay the Claimant’s costs of and occasioned by the amendment to the Defence and Counterclaim for which permission was granted by Order 1 of 15 October 2010;

Save as aforesaid, the Claimant shall pay the Defendant’s costs for the period from 16 ^th December 2008 to 24 ^th May 2011 to be assessed on the standard basis and from 25 ^th May 2011 to be assessed on the indemnity basis . ”

The significance of the date of 15 December 2008 was that that was the date of payment under the adjudicator’s award, before which there was little dispute that Walker had been entitled to its costs. 24 May 2011 was the date when the 21 day period allowed by Quayside’s Part 36 offer dated 3 May 2011 (namely that Walker should pay £100 plus Quayside’s costs) expired.

In the course of his judgment on costs, the judge considered a number of offers to settle and the consequences he attributed to them. In summary:

First, he considered Walker’s Part 36 offer dated 29 January 2009 to forego its claim for £1,773.65 on condition that there be no order for costs. That was at a time when the counterclaim stood in the sum of £160,000. He held that this offer did not “bite” given the final judgment sum on the counterclaim of £11,802.79.

Secondly, the judge considered Walker’s Calderbank offer dated 5 January 2011 to pay Quayside £30,000 plus VAT in full and final settlement of all the claims and counterclaims, inclusive of costs. The relevant letter specifically referred to Walker’s expectation that its primary liability for Quayside’s costs would be reduced significantly upon consideration of Quayside’s conduct (in particular in relation to the investigation and rectification of defects). Both parties respectively contended at the hearing that they had “beaten” this offer, Walker contending that the offer had been sufficient to cover Quayside’s proper costs to the date of the offer, Quayside contending that it was not. The judge concluded in relation to this offer:

that, although he was not “in a position to judge whether costs incurred by them were reasonably or unreasonably incurred”, he was prepared to accept at face value Quayside’s assertion, two days later, that the offer of £30,000 did not come close to covering the Defendant’s costs, let alone the sums claimed;

that he was assisted in his view by Quayside’s letter dated 8 March 2011 (not 2 March as stated in the judgment), 9 weeks later, in which Quayside set out its costs to date as £52,415.85; contrary to his earlier view that he was not “in a position to judge whether costs incurred by them were reasonably or unreasonably incurred”, the judge then said “it seems very possible to me that [sic] level of costs might well have been incurred reasonably, and certainly not wholly unreasonably”; he then concluded that, working back to the time of the Calderbank offer on 5 January 2011, “it would then appear that over £30,000 worth of costs certainly had been incurred on a standard basis.”; and

accordingly that Walker’s Calderbank offer dated 5 January 2011 had been beaten by Quayside.

Third, the judge went on to consider Quayside’s Calderbank offer dated 8 March 2011 to accept £40,000 inclusive of interest and costs in full and final settlement of its claims and counterclaims; he commented that, a little surprisingly, this offer had not been accepted.

Finally, the judge considered Quayside’s Part 36 offer of 3 May 2011 to accept £100 in settlement of the claim and counterclaim, plus payment of its costs. He found that Quayside had beaten this offer and therefore awarded Quayside all of its costs on the indemnity basis from 21 days thereafter (24 May 2011).

At the conclusion of his judgment the judge went on to award the costs which had been reserved by order of District Judge Burgess, relating to the amendment of the defence and counterclaim, to Walker. Nothing arises on the appeal in relation to this order.

Lord Marks and Mr Hirst recognised that issues of costs were matters for the trial judge’s discretion and that appellate courts were generally reluctant to interfere with costs orders. Nevertheless, they submitted that the judge made serious errors of principle in making the costs order. In summary, they submitted:

The judge’s approach produced a result that was completely disproportionate to Quayside’s actual recovery.

The effect of his judgment was to impose a liability on Walker for the entirety of the costs of the action, in an amount of about £350,000, in respect of a case which largely failed, despite a reasonable and proportionate offer of settlement, when the costs incurred were largely attributable to contesting these proceedings in a way that befitted a major piece of litigation, when, in reality, only a minimal recovery was in prospect. Measured against the overriding objective, the outcome ordered by the judge was perverse.

In the circumstances the judge did not merely err in the exercise of his discretion. He adopted an approach to the question of costs that was inconsistent with his statutory duty under CPR 44.3(4) and inconsistent with authority and common sense.

The judge failed to consider the relevant factors under CPR part 44.3 (2), (4) and (5) and had had exclusive regard, in an unduly mechanistic and inaccurate way, to the offers and counter-offers made by the parties, on an “all or nothing” basis.

Furthermore, when the judge came to consider both the Calderbank offer made by Walker on 5 January 2011 and the Part 36 offer made by Quayside on 3 May 2011, he fell seriously into error in his consideration of these offers.

The judge should have recognised that Walker could not realistically have made a Part 36 offer, because that would have carried the consequence, by CPR 36.10(1), that Quayside would have been entitled to its costs of the proceedings if the offer was accepted; see Medway Primary Care Trust v Marcus [2011] EWCA Civ 750, at paragraph 51.

Quayside’s argument that the abandonment of £90,000 of its claim was not unreasonable, and therefore Quayside should not be penalized for adopting a proportionate approach, missed the point. Walker had to face an inflated counterclaim from Quayside until such time as it was largely abandoned. Walker should not have to pay Quayside’s costs of that part of the claim.

The judge should have assessed Walker’s Calderbank offer of 5 January 2011 as representing a reasonable offer on costs given Quayside’s ultimate recovery of about £11,000. The judge should have taken into account (against the figure of roughly in excess of £30,000 claimed to have been the overall costs incurred by Quayside (on an indemnity basis)) various sums, including:

the proportion (at least 50%) for partial failure of Quayside’s counterclaim;

Walker’s costs incurred before 15 December 2008;

Quayside’s costs before 15 December 2008;

the costs of the amendment of the Defence and Counterclaim;

the costs occasioned to Walker by the amendment of the Defence and Counterclaim;

a further 30% or so to allow for taxation on the standard basis.

The judge should therefore have come to the conclusion that a recovery of costs in the net sum of £19,000 as at 5 January 2011 would have been generous and should consequently have found that Walker’s Calderbank offer of £30,000 inclusive of costs dated 5 January 2011 was effective.

There was nothing in Quayside’s submission that Walker’s argument that its Calderbank offer should be evaluated on the basis that Quayside was only entitled to a proportion of its costs (having regard to its ultimately paltry recovery) was a new argument not taken below.

The judge’s reasoning in relation to Quayside’s Part 36 offer of 3 May 2011 was also wrong.

In considering Quayside’s Part 36 offer, just as in considering Walker’s Calderbank offer, the judge should first have taken a view as to the appropriate proportion of costs to award. That should have only been a modest proportion of the overall costs.

In all the circumstances it was for the Court of Appeal to exercise its discretion afresh. An appropriate order that recognised the effectiveness of Walker’s Calderbank offer would be:

as per paragraph 2(a) of the judge’s order;

as per paragraph 2(b) of the judge’s order;

that Walker should pay a proportion (not more than 50%) of Quayside’s costs from 16 December 2008 to 19 January 2011, the date by which Quayside should have responded to Walker’s Calderbank offer of 5 January 2011, to be assessed on the standard basis if not agreed;

that Quayside should pay Walker’s costs from 20 January 2011 to judgment.

Mr Browne and Mr Sharpe submitted that the judge’s costs order should be upheld for the reasons given by the judge and additionally for the reasons set out in Quayside’s notice. These were as follows:

In the exercise of his discretion, and taking into account all of the circumstances (including the Appellant’s conduct) the judge made a costs order that was within the reasonable parameters of his discretion. In those circumstances the Court of Appeal should not interfere

In the light of the decision in Fox v Foundation Piling Ltd [2011] EWCA Civ 790 (which was not cited to the judge or on the application for permission to appeal) his decision was correct.

The judge was not invited by Counsel appearing for Walker below to make the costs order now sought. The appeal was originally framed as a failure in the exercise of discretion. But Walker now submitted that it was a failure of law on the part of the judge not to deduct a proportion of Quayside’s costs.

In the costs context, these were pre-eminently matters of discretion and evaluation. That was particularly so where, as in this case, the trial judge had heard all of the evidence and submissions and was more aware than anyone of the time and expense spent upon the issues. The costs judgment followed on the extensive judgment in the case delivered earlier the same day. Accordingly, the judge made a costs order that was well within his discretion and the circumstances did not justify interference by the appeal court.

The judge in his costs judgment did consider all elements of Part 44.3, despite, rather than because of, the submissions made.

“Success” was not a technical term but “a result in real life”; see BCCI v Ali (No 4), The Times 02/03/2000). It could “easily be determined by deciding who has to write the cheque at the end of the case.”; see Day v Day [2006] EWCA Civ 415. In commercial litigation, where each party had claims and asserted that a balance was owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.”; see per Jackson J in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2008] EWHC 2280 (TCC).

In the present case Walker was ordered to pay the net sum of £10,885.91 in damages and interest of £850. The gross sum it was awarded, prior to set off of sums due to Walker was £22,067 including interest. The judge therefore correctly identified that Quayside was the successful party.

Whereas the judge did not recite a “checklist” of the factors listed under CPR 44.3(4), he nonetheless considered all the relevant circumstances listed under the rule, including the specific criteria of conduct, success and offers.

The fact that the successful party has won on some issues and lost on others was not normally a reason for depriving the successful party of part of his costs; see Goodwin v Bennets UK Ltd [2008] EWCA Civ 1658. Walker also denied the claim in its entirety based upon a contractual argument; see paragraphs 22- 32 of the judgment.

A litigant will often lose on some points along the way. It is a fortunate litigant who wins on every point; see Travelers Casualty and Surety Company v Sun Life Insurance Company of Canada Ltd [2006] EWHC 2885 (Comm) and it may be inappropriate to make separate costs orders for costs in respect of issues upon which he has failed, unless the points were unreasonably taken. Here, while Quayside elected not to pursue a large element of the counterclaim (losing some £90,000 of claim in the process), that was not unreasonable as it prevented a further 190,000 documents having to be considered, and Walker was awarded their costs of the amendment in any event. A party should not be penalised for taking a proportionate approach.

The judge was right not to place any reliance on Walker’s all inclusive Calderbank offer dated 5 January 2011. All inclusive offers of damages and costs have no place in modern litigation with regard to costs protection and subsequent orders of the court as to costs. They are impractical, lack any certainty and place any trial judge in an impossible decision of assessing what costs of a party would have been at a certain stage of the litigation and assessing the costs element of an offer. The proper approach, which brought practical clarity and certainty to both litigants and the court, was that offers made in order to achieve costs protection should also cater for the payment of reasonable costs to be assessed if not agreed, be it by way of Part 36 or an otherwise admissible offer.

The extensive rules and powers vested in costs judges permitted points to be taken on a detailed assessment not only in relation to proportionality but also in relation to discrete issues in the case. In the Court of Appeal case of Lahey v Pirelli Tyres [2007] EWCA Civ 91 it was held that acceptance of a Part 36 offer gave an automatic entitlement to 100% of costs to be assessed; and that it was not open to the costs judge to reduce the percentage that the receiving party would recover prior to the assessment. The costs judge was however, as part of the assessment, entitled to reduce the bill by a percentage; see paragraph 20 of the judgment. The costs judge retained a jurisdiction to disallow costs that had been unreasonably incurred.

The judge was correct to take into account Quayside’s Part 36 offer of £100 dated 3 May 2011. Quayside clearly beat that offer and, as such, the judge had been right to find that it was effective.

It was not the function of the judge to conduct some rough and ready summary assessment of costs at some historic point of the litigation, with the benefit of hindsight (as Walker now contended, to include a sweeping reduction of “30% or so to allow for taxation on the standard basis”).

Walker’s approach below was wrong as the all-inclusive offer would have elevated its Calderbank offers to the same status as a Part 36 offer. The judge considered and (rightly) rejected that argument.

Accordingly the judge’s order in relation to costs should be upheld.

I accept that, as was common ground, an appellate court should not lightly interfere with a trial judge’s exercise of discretion in relation to costs. As Davies LJ said in F&C Alternative Investments (Holdings) Limited & Ors v Barthelemy & Anor [2012] EWCA Civ 843 at [42]:

However I have reached the conclusion that the judge was plainly wrong in this case to make the costs order which he did and that his order is unsustainable. My reasons are as follows.

First, in my view, the judge, when considering the history of the matter and assessing the various offers, failed adequately to take into account the commercial reality of this litigation, how it was conducted on each side, its ultimate outcome, and who, on an objective basis, was the more successful party. These were matters to which he was obliged to give appropriate consideration under CPR Part 44.3(2), (4) and (5). By failing to take into account these relevant matters, and simply focusing on the various offers, the judge in my view adopted too mechanistic an approach, and failed to address the costs issues in their proper commercial context.

The relevant provisions of CPR Part 44.3 for present purposes are the following:

Whether costs are payable by one party to another ;

The amount of those costs; and

When they are to be paid.

Walker’s claim had originally started out as a claim for approximately £25,000 – on any basis a small claim. Walker then recovered through the adjudication process the full sums claimed in respect of application 28061 and in respect of the section 38 retention (approximately £23,000). In the course of the adjudication process the adjudicator considered in detail the evidence relating to Quayside’s contention that the defects in the drainage work were attributable to Walker’s defective workmanship and rejected it. As both parties accepted, the judge was therefore correct to award Walker its costs of the action up until the date of Quayside’s payment of the adjudicator’s award.

From that date (December 2008) Walker’s claim in the court proceedings was a claim for the modest sum of £1,773.65 in respect of the section 278 retention (which the adjudicator had not considered on jurisdictional grounds and which Walker was ultimately awarded). It was not until two years later, in December 2010, that Quayside put forward its amended defence and counterclaim for £169,138.80, which included its claim to repayment of the £8941.16 awarded by the adjudicator, or which additionally claimed that sum. That claim was pursued until 25 February 2011, when Walker was notified that it was going to be reduced to £86,839.24, although the counter- claim was only formally amended on 2 September 2011 to £87,404.22 and subsequently, shortly before trial, to £84,168.22. At trial, as I have indicated, Quayside made a net recovery, after set offs, (including the £1,773.65) of only £10,035 plus interest of £850 and did not obtain repayment of the sum of £8941.16 which it had paid pursuant to the adjudication. Thus its recovery amounted to only 5.93% of its original claim of £169,138.80 and 11.92% of the claim of £84,168.22 as finally revised.

Against that commercial background, and the overall outcome, it seems to me to be impossible that a proportionate, or principled, result in costs terms could be that Walker should have been subjected to a liability to pay Quayside’s costs in an amount of £345,758.73 (subject to detailed assessment), in circumstances where Quayside had failed to establish all but a very small part of its counterclaim. As Lord Marks submitted, those costs were largely attributable to Quayside having contested the proceedings in a way that befitted a major piece of substantial litigation, when in reality only a minimal recovery was ever in prospect. On any basis, when one stands back and looks at the result, Quayside’s recovery of costs in an amount of £345,758.73 appears disproportionate. At best, and without taking into consideration the various offers, one might have thought that Quayside should only have been entitled to have recovered costs attributable to a counterclaim of £10,035.

As demonstrated in the first six paragraphs of the costs judgment, the judge seems to have been unaware that the huge costs incurred, which he referred to as "dwarf [ing]" the contractual payments and damages involved in the litigation, were largely, if not wholly, attributable to Quayside's counterclaim. These apparently included the costs of a five-day trial, two experts, counsel from specialist building chambers and a large quantity of documents.

Mr Browne submitted that success in litigation could "easily be determined by deciding who has to write the cheque at the end of the case”; see Day v Day [2006] EWCA Civ 415. He relied on the statement of Jackson J (as he then was) in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2008] EWHC 2280 (TCC) at paragraph 72(i) that:

However the person who writes a cheque at the end of the day is not the only consideration that has to be taken into account, as Jackson J himself recognised when he went on to state the following seven additional principles:

The present case was essentially one where the exercise of the discretion to award costs had to reflect the reality that Quayside had substantially failed on its counterclaim, which on any basis was substantially exaggerated. Moreover consideration clearly had to be given to whether an issue based, or partial, costs order was appropriate.

Second, in my judgment the judge failed adequately to consider the respective conduct of the parties of the litigation and adjudication processes.

In paragraph 6 of his costs judgment the judge appears to be criticising Walker for not having utilised the pre-action protocol and for having started the action prior to seeking adjudication. In the event neither of those matters justified criticism or resulted in unnecessary, or increased, costs. On the contrary, adoption of the pre-action protocol would have been a waste of time. The parties were already in discussion and Quayside was clearly being dilatory in formulating its counterclaim, as can be seen from the fact that Quayside took some two years from the date of the adjudicator's decision in December 2008 to formulate its counterclaim in the sum of £169,138.80.

By way of contrast, the judge failed to level any criticism at Quayside in respect of the manner in which it conducted the litigation or pursued its counterclaim. Criticism was clearly justified. Quayside’s claim for repayment of the sum of £8941.16 awarded by the adjudicator, effectively involved re-litigation of the drainage issues which had been explored in some considerable detail in the adjudication. Quayside attempted to avoid that task by the erroneous arguments to which I have already referred on the cross-appeal. Viewed on any basis, Quayside's counterclaim was exaggerated, whether regarded as a claim for £169,138.80 as it stood in December 2010, or as subsequently reduced to £84,168.22 shortly before trial. But the judge, in coming to his costs decision, appears to have paid no regard to Quayside’s conduct in pursuing an inflated claim, which must have involved considerable exploration of evidence at trial, nor to its continued assertion that the adjudicator had wrongly awarded sums to Walker. Nor does the judge appear to have considered Quayside's delay in formulating its claim, with the result that its claim for a mere £10,000 odd dragged on for a further 5 years after the adjudication.

Third, I accept Lord Marks’ submission that, in those circumstances, the judge should have approached the question of costs on the basis that the very best Quayside could do - on the basis of an application of the general rule and before he came to consider the Calderbank offers – was to secure an order that Walker pay a proportion of its costs; and that that approach should then have governed the judge’s approach to the Calderbank offers when he came to consider them.

Fourth, the judge, when considering Walker's Calderbank offer dated 5 January 2011 does not appear to have given appropriate weight to the fact that Walker could not realistically have made a Part 36 offer in January 2011, because that would have had the automatic consequence that, if the offer were accepted, Quayside would have been entitled to all its costs of the proceedings to date; see CPR 36.10(1). As Tomlinson LJ pointed out in Medway Primary Care Trust v Marcus [2011] EWCA Civ 750 at paragraphs 51 and 52, in those circumstances a Part 36 offer can have unjust and disproportionate cost consequences:

However the judge does appear to have recognised at paragraph 18 of his costs judgment that, if Walker had accepted Quayside’s Part 36 offer made on 3 May 2011, that would have involved Walker in:

Mr Browne sought to suggest that the decision in Fox v Foundation Piling Limited [2011] EWCA Civ 790 was inconsistent with the decision in Medway. He submitted that the fact that a claimant had succeeded in part only should not lead to a reduction in the recovery of costs and should not have been expected to lead to such a reduction when the Calderbank offer was made. I do not accept that submission. All costs cases are highly fact-dependent. Fox was a personal injury case. At paragraphs 46 - 49 Jackson LJ said:

Fifth, in my judgment the judge failed adequately to consider whether Walker's Calderbank offer of 5 January 2011 (£30,000 inclusive of costs) represented a reasonable offer to settle, having regard to the judgment ultimately achieved by Quayside, the appropriate proportion of Quayside’s costs that Walker might reasonably have expected to pay on the basis of such a recovery, and the amount of such costs, assessed on a standard basis, subject to relevant set offs and reductions. In their letter dated 7 January 2011 in response to Walker's Calderbank offer, Quayside's solicitors wrote:

At paragraphs 12 and 13 of the costs judgment the judge said:

In other words the judge appears to have accepted that a figure in the region of, or possibly in excess of, £30,000 had been incurred by 5 January 2011 in respect of costs on the indemnity basis. As Lord Marks submitted, the judge should then have asked himself whether the allowance of about £19,000 for costs, in Walker's Calderbank offer, given Quayside's ultimate recovery of about £11,000, represented a reasonable offer on costs. I accept Lord Marks' submission that such an offer was indeed a reasonable and proportionate one. The judge was entitled to look at the matter with the benefit of hindsight and in the knowledge that Quayside had made a very small recovery on its counterclaim. Whether or not he went into the detailed arithmetic, there were certainly grounds for calculating on a rough and ready basis that, against a figure of £30,000 plus of costs on the indemnity basis, substantial deductions would have needed to have been made to reflect:

the fact that Quayside’s counterclaim had been exaggerated, that it had made a very modest recovery and therefore a substantial proportion of its costs would have had to have been regarded as attributable to issues on which it failed; I agree with Lord Marks that any discount in this respect would have been at least 50%, if not more;

Walker’s costs incurred before 15 December 2008 which, on the basis of the judge's order, Quayside was going to have this to pay Walker in any event; in fact, although this was not known to the judge at the time, these stood at about £2,800;

the fact that Quayside would not have been able to have recovered any costs before 15 December 2008 (probably an equivalent sum, i.e. another £2,800 odd);

the fact that Quayside would not have been able to have recovered its own costs of the amendment of the Defence and the Counterclaim, which were not likely to have been less than Walker's costs of the amendment;

the fact that Quayside would have had to have paid Walker's costs of the amendment of the Defence and Counterclaim; in fact, although the figure was not known to the judge, these stood at about £8,500;

a further 30% or so to allow for taxation on the standard basis.

In my judgment, on any realistic appraisal of the position as at 5 January 2011, the judge should have come to the conclusion that, given the ultimate outcome, an offer to pay costs in a net sum of £19,000 as at 5 January 2011 was in fact generous and that Quayside had not beaten that offer. He should consequently have found that Walker's Calderbank offer of £30,000 inclusive was an offer which Quayside should have accepted. Moreover a reality crosscheck would have demonstrated that a recovery of £19,000 in respect of costs at the early stages of this case was proportionate. There was therefore no reason for Walker to have accepted Quayside's subsequent Calderbank offer dated 8 March 2011 which invited Walker to pay £40,000 inclusive of costs.

Mr Browne submitted that the fact that Quayside "elected not to pursue a large element of the counterclaim" and abandoned £90,000 of its claim, was not unreasonable and that, accordingly, Quayside should not be penalized for adopting a proportionate approach. I disagree. In the context of this particular claim, where quite clearly a large proportion of Quayside's costs must have been attributable to its abandoned claims for defects, I see no reason why any offer from Walker had to cater for what would have been irrecoverable costs.

Nor was there anything in Mr Browne's submission that these were not arguments put forward by Walker below. While junior counsel may not have given the argument the prominence they received in Lord Marks' submission before this court, they clearly featured in his arguments below. Indeed the Calderbank letter itself took the point that Quayside should not have all its costs to the date of the letter, even though the ground upon which the letter relied was Quayside’s conduct.

Nor was I impressed by Mr Browne's submissions that a Calderbank offer should not be all-inclusive, that it could not provide costs protection or that, for the judge to have paid more regard to Walker's Calderbank offer, would have wrongly elevated Calderbank offers to the same status as Part 36 offers. I see no reason why requirements of certainty or the desirability of the clarity which a Part 36 offer provides, should, in the particular circumstances of the present case, where a Part 36 offer would, for the reasons which I have already indicated, have been disproportionate and unjust, prevent a judge from properly analysing the effect of one party’s Calderbank offer. This was not a case where the judge needed to go into a minute analysis of the position as at January 2011. A general consideration of the features which I have set out above was all that was required.

Sixth, I take the view that the judge's consideration of Quayside’s Part 36 offer dated 3 May 2011 (i.e. Walker to pay £100 plus the entirety of its costs) and his conclusion that Walker should have accepted that offer and therefore should pay the entirety of Quayside's costs from 16 December 2008 to 24 May 2011 on the standard basis and from 25 May 2011 on the indemnity basis, was also flawed. Although the judge appeared to have recognised in paragraph 18 of his judgment that for Walker to have accepted that Part 36 offer would have rendered Walker liable for “a wholly disproportionate sum of costs”, he did not act on that conclusion in making his award. On any basis, after a trial, there were strong grounds for disallowing a substantial proportion of Quayside's costs in so far as they related to the abandoned, or unsuccessful, elements of its counterclaim. This was not a case, contrary to the arguments put forward by Mr Browne on the basis of Lahey v Pirelli Tyres [2007] EWCA Civ 91, where, if Walker had accepted the Part 36 offer in 2011, it would have been in any way realistic to have supposed that the costs judge on an assessment would, in effect, have attempted to ascertain which, if any, elements of Quayside's counterclaim, which then stood at £86,839.24, were unsustainable and then exercised his residual power to disallow costs post issue on the footing that they were costs "unreasonably incurred" under rule 44.4(1). Nor is it realistic to suppose that, following the judge's costs judgment, a costs judge on an assessment would be likely to reduce or disallow the costs recoverable by Quayside in the exercise of his powers under the rule. That would in effect be relitigating issues that were fairly and squarely before the judge and within his knowledge.

Although he did not expressly say so, the judge clearly exercised his discretion on the basis that rule 36.14 (1) (b) applied (because Quayside's Part 36 offer had been bettered at trial). But even on that basis he should, in my judgment, have taken into account whether it was just to apply the consequences set out in that rule.

In circumstances where the judge has exercised his discretion in a manner that is wrong in principle, it is for the Court of Appeal to exercise its discretion afresh. I accept Lord Marks' submissions that an appropriate order which recognised the effectiveness of Walker’s Calderbank offer would be:

for paragraphs 2(a) and 2(b) of the judge’s order to stand;

that Walker should pay 50% of Quayside’s costs from 16 December 2008 to 19 January 2011, the date by which Quayside should have responded to Walker’s Calderbank offer of 5 January 2011, to be assessed on the standard basis if not agreed; and

that Quayside should pay Walker’s costs from 20 January 2011 to judgment on the standard basis. (Walker did not make a Part 36 offer and I see no reason to award costs on the indemnity basis in favour of Walker since rule 36.14 does not apply).

Had it not been for the time wasted by Walker at trial in litigating the contractual issues referred to at paragraphs 22-32 of the judgment, I might have awarded Quayside a lesser percentage of its costs than 50% under (ii) above. But in his oral submissions Lord Marks wisely did not press for any lower percentage than 50%.

Accordingly I would allow Walker’s appeal and dismiss Quayside’s cross-appeal.

I agree.

I also agree.