Sugar Hut Group Ltd & Ors v A J Insurance Service (A Partnership)

This is an appeal against a costs order made by Eder J in the Commercial Court after a three day hearing to assess the quantum of damages to which the Claimants/Appellants were entitled, liability having earlier been compromised on terms that the Defendant/Respondent pay 65% of the Claimants’ recoverable losses.

The claim arose out of a serious fire on 13 September 2009 at a well-known nightclub in Brentwood, Essex, the Sugar Hut Club. The fire destroyed one wing of the Club and all of the office areas. There was also extensive water, extinguishing and carbon damage. The Club was effectively unusable for a period of some 49 weeks until it eventually reopened on 25 August 2010. During that period repairs and reinstatements were carried out. The capacity of the Club was increased by minor changes to the design. It was common ground at trial that the time taken for the repair works was reasonable.

The First Claimant is the ultimate holding company of the Sugar Hut Group and the Claimants compendiously may be regarded as the owners and operators of the Sugar Hut Clubs in Brentwood, Fulham, Basildon and Hertford. The Defendant firm was the Claimants’ insurance broker. The Claimants alleged that the fire gave rise to loss under the following heads:-

Property Damage – capped at the policy limit, £345,000;

Business Interruption Losses of £1,345,794;

Accountants’ costs of £19,275 excluding VAT;

The insurers with whom the Defendant had placed cover on the Claimants’ behalf for “All Risks of Physical Loss or Damage Including Material Damage and Business Interruption” avoided the policy for material non-disclosure. The Claimants sued the insurers, and there was a trial of liability in the Commercial Court in October 2010 before Burton J. The Judge dismissed the claim, upholding the insurers’ right to avoid for non-disclosure and, additionally, holding that there had been breaches of warranty under the policy. The Judge awarded the insurers their costs on the standard basis.

Having failed against their insurers, the Claimants sued their brokers, the Defendant, alleging negligence in and about the placement of the policy. To the heads of loss itemised above was added the Claimants’ own and the insurers’ costs in the failed action.

Following the compromise of liability, which included resolution of the issue of the costs of the liability issue, the parties were able to narrow their differences. Property Damage costs were agreed at a mediation to be £310,000. The costs of the failed claim against insurers were agreed at £573,136.88. Payments on account were made by the Defendant in the sum of £813,000.

The parties were however unable to compromise their differences over the level of Business Interruption losses, accountants’ fees, the rate of interest to be applied and whether the period for which interest was claimed should be reduced to reflect delays by the Claimants in bringing the matter to trial, compounded by a failure to provide adequate disclosure on a timely basis. These matters all went to trial before Eder J on 6, 7 and 8 October 2014.

The effect of his judgment delivered on 20 October 2014 was as follows, expressed in gross terms before application of the agreed 65% recovery:-

Business Interruption losses were held recoverable in the sum of £568,670;

The accountants’ fees were held irrecoverable as not having been “required by the insurer under the General Claims Conditions” as would have been a condition of their recovery under the “professional accountants clause” of the policy;

Interest was payable at 5% for the entirety of the periods claimed.

The overall gross level of recovery was therefore in the event £1,676,955.30. The amount recoverable from the Defendant was 65% thereof, being £1,090,021.02, inclusive of interest. After taking into account the two interim payments, the effect of Eder J’s judgment was that a further £277,021 was payable by the Defendant to the Claimants.

Part 36 and Calderbank offers had been made by both sides, but it was common ground that none had been “effective”, in that each of the Claimants’ offers had been for sums higher than in the event recovered, and each of the Defendant’s offers had been for sums lower than in the event allowed. The last of the Part 36 offers made by the Defendant was on 23 May 2014. It offered to settle the claim for a payment of a further £250,000 in addition to the payments made on account. The letter explained that the basis for the calculation of the Defendant’s offer was a figure of £600,000 for Business Interruption losses. It also explained that interest was calculated at 2.5% over various periods reduced from those claimed by the Claimants.

The Judge heard the parties’ submissions on costs on 10 November 2014. He announced his decision at the end of the hearing and gave his reasons in a reserved judgment handed down on 19 November 2014. In summary, the Judge allowed the Claimants their quantum costs up to 13 June 2014, but subject to a reduction of 30% by reason of the issues on which the Claimants had failed at trial. Secondly, the Judge ordered that in relation to the period from 13 June 2014 the Claimants should receive no costs save for the costs of the issue of interest, and should pay the Defendant’s costs, save again for the costs relating to the issue of interest. This was reflected in the Judge’s Order of 19 November 2014 which, so far as material, provided:

It is against paragraphs 2 and 3 of the Judge’s costs order that the Claimants now appeal with permission of Lewison LJ. They submit that the Judge has effectively treated the Defendant’s Part 36 offer of 23 May 2014 as having been successful. True he has not awarded the Defendant interest on its costs incurred after 13 June 2014, as pursuant to CPR 36.17(1)(a) and 3(b) he would have done if the Part 36 offer were regarded as effective and he did not consider it unjust to do so, but in all other respects the Judge has, subject to the costs relating to the assessment of interest, treated the 23 May 2014 offer as having been a successful and effective offer under Part 36. Furthermore the Judge justified his order denying the Claimants their costs as from 13 June 2014 and awarding the Defendant its costs incurred over the same period by his conclusion that the Claimants had after 13 June 2014 acted unreasonably in persisting in pursuit of a claim for Business Interruption losses in excess of the £600,000 on which the Part 36 offer was based. This the Claimants submit involved an element of double counting or double penalty. The Judge had already reduced the costs recoverable by the Claimants in respect of the period up to 13 June 2014 to reflect the issues on which the Claimants had failed at trial. To justify depriving the Claimants of their costs and requiring them to pay the Defendant’s costs incurred in the period after 13 June 2014, the run-up to trial, amounted to penalising the Claimants twice for the same shortcoming.

Although the Judge directed himself correctly by reference to the relevant authorities concerning the exercise of the court’s discretion under CPR 44.2, I have no doubt that he fell into error in his approach to the Part 36 offer and, partly in consequence thereof, mischaracterised the conduct of the Claimants as unreasonable. His award of costs fell outside the ambit of reasonable decision-making.

The Judge acknowledged that the general rule pursuant to CPR 44.2(2)(a) is that the unsuccessful party will be ordered to pay the costs of the successful party. He acknowledged too that the Claimants were here properly regarded as the successful party. Furthermore, whilst noting that CPR 44.2(2)(b) provides that the court may nonetheless make a different order, the Judge notes also that the court is enjoined to give “real weight” to the overall success of the winning party. He further noted the observation of Simon Brown LJ in Budgen v Andrew Gardner Partnership [2002] EWCA Civ 1125 at paragraph 35 that: “the court can properly have regard to the fact that in almost every case even the winner is likely to fail on some issues”. To similar effect, in Travellers’ Casualty v Sun Life [2006] EWHC 2886 (Comm) Christopher Clarke J said, at paragraph 12:-

The structure of the Judge’s judgment is that he focused first on CPR 44.2(4)(b) which provides, in effect, that in deciding what order to make about costs, the court will have regard to all the circumstances including “whether a party has succeeded on part of its case, even if that party has not been wholly successful”.

The Judge then proceeded to point out (a) that the trial before him had been concerned with quantum alone, not liability which had been compromised earlier, and (b) that there had been three discrete claims in respect of which there had been a nil recovery. These claims were as follows: (i) losses at Fulham and Hertford (claimed at £171,677); (ii) wages/phone costs, alternative accommodation and redundancy costs (£139,466); and (iii) the claim for the Marriot invoices (£19,275). Head (iii) is the accounting costs which I have already mentioned. That claim failed not because the loss was not made out or not shown to have been reasonably incurred but because it would not have been recoverable under the policy, as not required by the insurers. Heads (i) and (ii) were part of the overall Business Interruption loss. Under Head (i) it was said that the destruction of the database at Brentwood prevented proper marketing to the existing customer base of the Fulham and Hertford venues, in consequence of which those venues suffered a downturn in turnover. The Judge was unpersuaded that the admitted downturn was in fact attributable to the destruction of the data held at Brentwood. The principal component in Head (ii) was wages paid to certain staff following the fire because the Claimants did not wish to lose their skills from the business. This claim failed on the basis that all of the staff thus identified in fact continued to work for the group both before and after the fire and continued at all times to add benefit to the group business. There was insufficient evidence of their precise roles to justify a claim.

The Judge went on to refer to another aspect upon which the Claimants had failed in advancing their claim for Business Interruption losses, reliance upon an exercise conducted by their forensic accountant expert witness Mr Fred Brown, the Client Service Director at Messrs Grant Thornton. This was an attempt, described as the “second perspective” or “P2”, to consider the extent to which turnover actually achieved after the Club reopened should be taken into account in calculating losses during the period of closure. As the Judge pointed out, this exercise was both potentially relevant and was an exercise expressly contemplated by the terms of the insurance policy, the failure to recover pursuant to which formed the basis for the claim against the brokers. In the event the Judge had decided that the P2 exercise could not be relied upon for three reasons. One, some of the figures relied on by Mr Brown as part of the P2 exercise extended even beyond 2011, and were too far distant from the relevant period 2009/10. Second, the Club had been refurbished following the fire in a manner which substantially increased its capacity to the extent that it was, to all intents and purposes, a new Club. Third, the Club’s increase in turnover had been due in some part to its featuring in a popular television programme “The Only Way is Essex”.

The Judge decided that failure on these discrete issues merited a 30% reduction in the costs to which the Claimants would otherwise be entitled. In discussion after handing down judgment he explained that he had estimated that somewhere between 10% and 20% of the costs incurred related to these issues on which the Claimants had lost. He had taken a mid point, 15%, and rather than expose the parties to the possibility of two assessments, he had deducted 30% from the Claimants’ costs rather than deducting 15% and at the same time directing the Claimants to pay 15% of the Defendant’s costs.

This ruling was reflected in paragraph 1 of the Judge’s Order of 19 November 2014 which provides that the Defendant shall pay 70% of the Claimants’ costs of the assessment of damages up to and including 13 June 2014. Although they would have wished to challenge this deduction from their costs the Claimants were refused permission so to do. The challenge to the second limb of the Judge’s costs ruling to which I next turn has accordingly proceeded on the footing that, if successful, it will result in an award to the Claimants of 70% of their costs of the assessment of damages, with no differentiation drawn between those incurred before and those incurred after 13 June 2014.

The Judge himself then turned to “the second matter that needs to be considered” viz the Part 36 offer made by the Defendant on 23 May 2014. As he records, at paragraphs 11 and 12 of his judgment:-

It was Mr Piper’s submission before the Judge, as it was before us, that had the Claimants accepted the figure of £600,000 for Business Interruption losses, the need for a three day hearing on quantum would have been obviated together with all the attendant expenditure of trial and the preparation therefor. Interest could have been dealt with in half a day or less. Mr Piper pointed to the ensuing correspondence which revealed, he suggested, that whilst the Claimants had not rejected the offer out of hand, they had nonetheless continued to insist upon an unrealistic figure, valuing their Business Interruption loss claim in their letter of 30 May 2014 at £862,024, a figure repeated in a letter of 30 September 2014. Mr Piper submitted that the Claimants should in consequence be deprived of any of their costs following a period of 21 days after 23 May 2014 and that similarly the Defendant should have its costs from that date.

The Judge reminded himself that in exercising his discretion he had to follow the precepts of CPR 44.2(4) and (5) which provide, so far as relevant:-

The Judge rightly observed that the offer of £250,000 inclusive of interest contained in the letter of 23 May falls within sub-paragraph (4)(c) but equally accepted that the fact that the offer was based on a figure for lost profit i.e. Business Interruption losses of £600,000 gross, was not of itself “an admissible offer to settle” on that basis. There was no free-standing offer, capable of acceptance by the Claimants, to pay £600,000 in respect of the Business Interruption aspect of the claim. The Judge also pointed out that a valid offer in that form could have been made pursuant to CPR 36.2(2)(d) – now 36.5(1)(d). Nonetheless, he concluded that “given the terms of the [23 May] letter” it was not reasonable for the Claimants to pursue a claim for Business Interruption losses of £862,024. Indeed, the logic of the Judge’s position is that it was unreasonable to pursue that claim for a figure in excess of £600,000. The essence of the Judge’s reasoning is to be found in his paragraph 20, as follows:-

The Judge has effectively characterised as misconduct the Claimants’ pursuit of a claim for Business Interruption losses in excess of £600,000 after receipt of the Defendant’s letter of 23 May 2014. In doing so, as Mr Andrew Post QC for the Claimants submitted, he converted what was not an offer to compromise the claim in respect of Business Interruption losses at £600,000 into just such an offer. That this is what the Judge has done is underscored by his different treatment of the costs relating to the assessment of interest. The Judge has treated the letter of 23 May as containing distinct offers in relation to (i) Business Interruption losses and (ii) interest, and has treated the Claimants on the footing that they could and should have accepted (i), notwithstanding his acknowledgement that (i) could not in fact be accepted without acceptance also of (ii). That with respect is an approach which is wrong in principle. The Defendant had made no offer to that effect capable of acceptance by the Claimants. Furthermore it cannot be misconduct, or unreasonable conduct, simply to pursue a claim in an amount greater than that at which it is valued by the opponent party. Something more is required to render pursuit of the claim unreasonable. The Judge so recognised at paragraph 20(iii). However, he regarded the matters set out in paragraphs 20(i) and 20(ii), when taken with the specific conclusions which he had reached in his main judgment, as justifying the characterisation of the Claimants’ conduct as unreasonable. I do not agree.

The Judge suggests at paragraph 20(i) that the conclusions set out in his main judgment are themselves indicative that the overall claim and certain individual components were very much exaggerated. Nowhere in his main judgment does the Judge describe the claim or any part thereof as “exaggerated”. It is true that significant parts of the Business Interruption claim failed for the reasons which I have briefly summarised. But that does not mean the claim was exaggerated. The P2 exercise was potentially relevant, and contemplated by the policy, but failed for the reasons explained. The undoubted downturn in turnover at Fulham and Hertford after the fire could not on the basis of the evidence be established to be properly attributable to the fire. However in the happy phrase once coined in this context by a distinguished maritime arbitrator, the question is whether the claim exceeded the bounds of permissible optimism. In my judgment the Judge made no findings upon the basis of which it could be said that it did.

Moreover it is plain that the conduct which the Judge here took into account as justifying his unusual order so far as concerns costs incurred after 13 June 2014 is the same as the considerations which had informed the withholding from the Claimants of 30% of their costs incurred prior to 13 June 2014, viz, the total failure of aspects of the Business Interruption claim. There is therefore in my view justification in the Claimants’ complaint that they have been twice penalised for the same shortcoming.

The reference to the Claimants’ conduct of the disclosure exercise is I think something of a makeweight. We were taken through the history by Mr Piper. It is true that the Claimants failed to comply with the initial standard disclosure order, in consequence of which the Defendant was forced to issue an application for specific disclosure. That application had not been heard by the time liability was compromised in Summer 2013. A split trial had been ordered and there was therefore no date fixed for the determination of the quantum issues. A CMC took place on 4 October 2013 at which directions were given for the quantum trial. An order for specific disclosure was made against the Claimants and they were ordered to pay in any event the Defendant’s costs related to the request for additional disclosure. There was substantial compliance with that order such that, in Mr Piper’s words, the Defendant “finally got a decent tranche of disclosure” in November 2013. As he also put it, “as at May 2014 we had enough to value the claim”. Manifestly the Defendant did, since its figure of £600,000 exceeded the ultimate recovery by a margin of only £30,000 or so. It was plainly a well-judged valuation with a sensible margin for error. Thus the Judge’s comment that the delay in giving disclosure “caused real difficulties to the Defendant in taking appropriate precautions to protect its position” is only justified insofar as earlier disclosure might have enabled the Defendant to make its offer earlier than it did. That may be so, but it cannot be inferred that an earlier offer would have resulted in a saving of costs.

Mr Piper also complains of late disclosure concerning interest. However the Judge rightly disregarded as irrelevant evidence of the rates of interest paid by the various companies within the Claimant Group and based his award upon reports published by the Bank of England relevant to the critical question, what rate of interest would generally be payable by a company like the Sugar Hut Group Ltd. Such reports may have been produced by the Claimants only on the second day of the trial but the Defendant could have had access to them earlier as they were in the public domain.

Mr Piper did not seriously press a point raised by Respondent’s Notice to the effect that the Judge’s Order could be justified by reference to the Defendant’s Calderbank letter of 23 September 2014. That letter offered £297,000 net damages, inclusive of interest, but only offered to pay the Claimants’ reasonable costs incurred until 13 June 2014. Although the Claimants’ ultimate recovery in damages and interest fell short of this figure by just under £20,000, the costs incurred by the Claimants between 13 June and 23 September substantially exceeded £20,000. Indeed, their costs were at least £79,000. Thus the value to the Claimants of the offer made on 23 September was significantly lower than the value of the offer made on 23 May.

Mr Piper suggested that the real relevance of the 23 September letter was in indicating a preparedness on the part of the Defendant to negotiate. I agree, but equally the correspondence shows a similar preparedness on the part of the Claimants. The Claimants’ response to this letter was a preparedness to accept the Defendant’s offer of interest at 4% and indeed everything else in the offer save the indicative figure of £600,000 for Business Interruption Losses and of course the question of costs incurred since 13 June 2014. As to that Mr Piper submitted that the Claimants’ refusal to recognise the Defendant’s valuation of the Business Interruption claim as reasonable was itself unreasonable. The Judge had, he said, rightly looked at the negotiations as a whole and had contrasted the parties’ attitudes. I have already dealt with this point. The Judge’s judgment provides no material on the basis of which the Claimants’ conduct can be regarded as unreasonable. The Claimants were simply mistaken as to the strength of their case.

For all these reasons I am satisfied that the Judge came to a decision which was outside the bounds of reasonable decision-making which was moreover in large part based upon an error of principle, treating the 23 May letter as containing a free-standing offer to compromise the Business Interruption claim at £600,000. In those circumstances paragraphs 2 and 3 of the Judge’s Order of 19 November 2014 must be set aside and we must re-exercise the Judge’s discretion afresh. The Claimants’ recovery exceeded the Part 36 offer by a comfortable margin and in any event there is no longer a “near-miss” rule. There is no basis upon which it is appropriate to deprive the Claimants of their costs after 13 June 2014, still less to require them to pay the Defendant’s costs. The Claimants’ failure to succeed on all of their claim is adequately reflected in the Judge’s Order depriving them of 30% of their costs. I would simply amend paragraph 1 of the Judge’s Order by deletion of the words “up to and including 13 June 2014” so that that paragraph now reads “the Defendant shall pay 70% of the Claimants’ costs of the assessment of damages on the standard basis, to be assessed if not agreed”.

I would allow the appeal and order accordingly.

I agree.

I also agree.