London Tara Hotel Ltd v Kensington Close Hotel Ltd

I handed down the main judgment in this matter on 1 November 2010 (“the Judgment”) in which I dismissed the claim and upheld the counterclaim for a declaration: [2010] EWHC 2749 (Ch). Reference should be made to the Judgment for the facts and details of the case. Three consequential issues arise concerning costs that are addressed in this judgment:

Disallowance from defendant’s costs

Since the defendant was clearly the successful party, it is accepted that in principle it is entitled to its costs. However, the claimant submits that in two respects there should be a disallowance from those costs.

First, it is submitted that the defendant advanced a case that the claimant had actual knowledge of the change in ownership of the KCH. The court has held that the claimant had no such knowledge before 1996, which was therefore too late to establish a prescriptive right on that basis: Judgment, para 26. However, substantial disclosure was directed to that issue and, indeed, some time at trial was devoted to scrutinising invoices and similar documents that passed from the KCH to the Tara Hotel, as indicated in para 25 of the Judgment. The documents in that regard that were relied on were doubtless the fruits of a much larger disclosure exercise, which was consequent also upon an order of 2 December 2008 for specific disclosure made by Deputy Master Behrens on the defendant’s application. The claimant served witness statements for this hearing from the solicitor who had conduct of the case at the material time indicating that its costs of the disclosure exercise in compliance with the order for specific disclosure was some £120,000.

I do not think that this figure is a reliable indication of what the defendant’s costs of disclosure may have been regarding specifically the issue of actual knowledge, since the disclosure ordered on 2 December 2008 covered other matters as well. But I accept that in practice trawling through records, including computer data searches, over an extensive period undoubtedly caused significant expense.

When an issue in litigation can be isolated, on which one party was unsuccessful, the court may in its discretion choose to make distinct provision for the costs referable to that issue, notwithstanding that this is adverse to the party who has won the case overall. In practice, this may be achieved by allowing the wining party only a proportion of its costs: see White Book, Note 44.3.1. However, whether that is appropriate will depend upon the circumstances of the case. Here, in response to the claim for an injunction preventing use of the TRR, the defendant asserted an easement acquired by prescription and counterclaimed for a declaration accordingly. The grounds for that contention were pleaded by the defendant on the basis of 20 years user next preceding action brought, by virtue of s.2 of the Prescription Act 1832, alternatively for a continuous period of 20 years expiring earlier than that, on the basis of a lost modern grant. The defence makes no reference to the issue of actual knowledge. In its reply, served originally on 2 November 2007, the claimant pleaded as follows:

“The defendant is put to proof of any facts upon which it relies to show that the claimant and its predecessors in title knew or ought to have known that access by the Kensington Close Hotel was gained otherwise that pursuant to the [1973 Licence], whether before 14 July 1988 or thereafter.”

The claimant sought further information by a Part 18 request that included the question:

“Does the defendant assert that the claimant or its predecessors in title knew that the licence had come to an end?”

The defendant’s reply, served on 18 December 2007, stated:

“Yes, insofar as it is necessary for the defendant to make such assertion (as to which no admissions are made). Such knowledge is to be inferred from the fact that the claimant and its predecessors in title would have known of the existence of the licence, and therefore its terms.”

At trial, the defendant’s primary contention was that it was unnecessary to establish actual knowledge, and only if it was wrong in that contention did it assert that it could show such knowledge on the facts.

In these circumstances, it seems to me that the issue of actual knowledge was introduced into this case by the claimant. Of course, the defendant could have limited its stance to the submission that this was irrelevant as a matter of law and left it at that. But that is hardly realistic in the context of complex litigation where the stakes for both sides were high. In my judgment, since the defendant was here responding to an issue raised by the claimant, it would be unjust in the circumstances to deprive the defendant of its costs involved in doing so (or to make it responsible for the claimant’s costs). And once the issue was in play, proper disclosure of course had to be given.

The second ground on which the claimant submits that the defendant should not recover all its costs is quite different, albeit that there may be some overlap as regards the costs involved. By its amended defence dated 19 May 2008, the defendant introduced a new allegation that it had established a right over part of the TRR by user over a period of upwards of 20 years prior to January 1973. That claim was maintained until it was abandoned in the re-amended defence dated 4 December 2009.

Although that plea may have occasioned costs for both sides, it seems to me that the costs on this account would have fallen more heavily on the claimant than the defendant, since the Tara Hotel was only built in 1971-73. And since this would have involved seeking evidence, both documentary and (given the way evidence was presented at trial) from witnesses, over a period stretching back to 1953, those costs may have been significant. That is so even if the fruits of this labour were meagre (and if they had been promising, I suspect that the plea would not have been abandoned). Mr Dowding for the defendant realistically accepted that this may well be the position. Since those costs were caused by a specific plea which the defendant maintained for some 18 months and then abandoned, it seems to me only right that as regards that issue, the defendant should not recover its costs and that the claimant should be compensated for its costs. Since neither side was able to put forward at this stage any estimate for the relevant costs, this is a matter that can only be resolved at taxation, unless the figures are otherwise agreed. I shall therefore order that: (a) the claimant shall pay the defendant its costs on the claim and the counterclaim save for costs incurred solely by reason of the allegation in paragraph 6 of the amended defence served on 19 May 2008 that the defendant had used part of the TRR for 20 years prior to January 1973; and (b) the defendant do pay the claimant its costs incurred solely by reason of that allegation.

Indemnity or standard costs

The defendant seeks an order that its costs should be on an indemnity basis as regards two periods: (a) from 30 November 2007 to 15 February 2010 on the ground that during that period the damages claimed were enormously exaggerated; (b) from 19 April 2010 onwards, on the grounds that the claimant unreasonably rejected a Part 36 offer of settlement.

CPR Rule 44.3 provides, so far as relevant:

“(4)

In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including-

(a)

the conduct of all the parties;

(b)

whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(c)

any payment into court or admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply.

(5)

The conduct of the parties includes-

(a)

conduct before, as well as during, the proceedings…;

(b)

whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(c)

the manner in which a party has pursued or defended his case or a particular allegation or issue;

(d)

whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.”

Rule 44.4(1) sets out the two bases of assessment. The difference between costs on an indemnity and on a standard basis is essentially two-fold. First, on the standard basis, the court will allow only costs which are proportionate to the matters in issue. There is no such proportionality criterion on the indemnity basis. Secondly, on the standard basis, any doubt as to whether costs were reasonably incurred or reasonable in amount will be resolved in favour of the paying party. On the indemnity basis, any such doubts will be resolved in favour of the receiving party.

In its claim dated 24 September 2007, the claimant sought general damages for trespass, expressed in terms of the amount that the claimant would have been able to demand from the defendant for use of the TRR for the purpose of access to the KCH. However, on 30 November 2007, the claimant’s then solicitors sent an e-mail to the defendant’s then solicitors stating (in the form of a draft letter to the court) that the claimant would be claiming damages based on a notional licence fee of “several million pounds per annum”. A letter to the court in those terms was duly sent on 18 December 2007. Following a case management conference before Master Bragge on 19 May 2008, the defendant served a Part 18 request seeking information regarding the quantum of the damages claimed. The eventual reply from the claimant on 9 October 2008 quantified the damages at £13,298,000 over the six year period 2001-2006, with loss continuing thereafter at a rate of £2,642,656 p.a. This would have led to a claim to the end of 2009 of £21.2 million. Only on 25 January 2010 was this claim reduced, by an Amended Response to the Part 18 Request, to the sum of £532,534 to the end of 2006 and £354,940 for the further three years 2007-2009, making a total of £887,280. On the basis that this Amended Response was served at a very busy period when it was preparing its witness statements, the defendant contends that it should be allowed 21 days to have considered this Response, thus taking the period for which it seeks indemnity costs to 15 February 2010.

In Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson [2002] EWCA Civ 879, the Court of Appeal re-emphasised that under the CPR power to award indemnity costs is not restricted to cases where the conduct of a party deserves moral condemnation, and explained that the critical requirement is whether there is some conduct or some circumstance which takes the case outside the norm in a way that such an order is justified: see Lord Woolf LCJ at [31]-[32]; Waller LJ at [39]. The defendant relies on the observation of Lord Woolf at [31]:

“…there may be situations where the nature of the litigation means that the parties could not be expected to conduct the litigation in a proportionate manner. Again the conduct would not be unreasonable and it seems to me that the court would be entitled to take into account that sort of situation in deciding that an indemnity order was appropriate.”

I have no doubt that in appropriate circumstances the presentation of a grossly inflated claim might constitute conduct that could justify an award of indemnity costs, although there I apprehend that this would constitute unreasonable conduct that took the case outside the norm. In the present case, it is pertinent that already on 19 May 2008, Master Bragge ordered a split trial with the initial trial concerned with all issues other than quantum. Indeed, it is accepted by Mr Dowding for the defendant that his client did not devote time or incur costs in dealing with issues of quantum as such. His submission was that when faced with such a huge claim, the defendant, as he put it, could leave no stone unturned and that therefore there should be no constraint in confining the assessment of cost to those that were proportionate, the criterion which applies on a standard basis of assessment.

However, although the claimant evidently recognised that the original basis of quantification of its claim was misconceived, and the exaggeration of claims is certainly to be discouraged by the court, I am not satisfied that in the circumstances here that is sufficient to justify an award of indemnity costs. This case was hard-fought and, coming to it as the trial judge many months after the quantum of damages was reduced to a more realistic level, I gained the distinct impression that nonetheless it was conducted with virtually no expense spared. Moreover, proportionality as regards costs incorporates the criterion that the case is dealt with in a manner which is proportionate to the amount of money involved: CPR 1.1(2)(c). Insofar as during the period when it faced very large financial claim the defendant spent more conducting the case than otherwise, that is a matter which should be recognised in any argument over proportionality in the assessment of costs on the standard basis.

On 29 March 2010, the defendant’s solicitors wrote a letter titled “Claimant’s Part 36 Offer to Settle made on the Counterclaim -Without Prejudice save as to costs and Subject to Contract”. The second paragraph makes clear that the offer was in full and final settlement of the whole of the dispute, both claim and counterclaim. The offer was to enter into a deed recording the defendant’s right of way over the blue triangle, which deed would also contain a grant of right of way over the TRR for the benefit of the KCH for a term of 999 years on the same terms as in the 1973 Licence, but also granting a right of way to coaches, with payment of a “reasonable rent” to the claimant for use of the TRR. The letter stated that the defendant considers a reasonable rent to be £40,000 p.a. Further, the defendant offered to pay 10% of the claimant’s costs of the litigation. This was explained in the letter on the basis that the claimant had pursued a grossly exaggerated damages claim, as a result of which there would be a substantial reduction in the claimant’s costs even if it were successful.

The letter of 29 March stated that the offer was open for acceptance until 9 April. After the claimant’s solicitors had pointed out that this was less than the 21 days specified for a Part 36 offer, the defendant’s solicitors by a further letter on 9 April extended the date for acceptance to 21 days from 29 March 2010.

The defendant has of course succeeded in establishing a prescriptive right of way over the TRR, and therefore has obtained a significantly better outcome at trial than the contractual licence at a reasonable rent which it put forward in its solicitor’s letter of 29 March. On that basis, it seeks indemnity costs from the expiry of the 21 days for acceptance of the offer in that letter, i.e. from 19 April 2010.

Since the trial of this action commenced on 6 May 2010, it may well be that the difference in practice between indemnity and standard costs from 19 April is not very significant, especially as briefs for an action of this kind would almost certainly have been delivered before 19 April. Nonetheless, the matter has been argued and it is necessary to determine it.

CPR Part 36 is headed “Offers to Settle”. Rule 36.2 provides:

“(1)

An offer to settle which is made in accordance with this rule is called a Part 36 offer.

(2)

A Part 36 offer must-

(a)

be in writing;

(b)

state on its face that it is intended to have the consequences of Part 36;

(c)

specify a period of not less than 21 days within which the defendant will be liable for the claimant’s costs in accordance with rule 36.10 if the offer is accepted;

(d)

state whether it related to the whole of the claim or to part of it or to an issue that arises in it and if so to which part or issue; and

(e)

state whether it takes into account any counterclaim.

(3)

Rule 36.2(2)(c) does not apply if the offer is made less than 21 days before the start of the trial.”

Rule 36.14 addresses the consequences following judgment where a Part 36 offer has not been accepted. It provides, insofar as material:

“(1)

This rule applies where upon judgment being entered-

(a)

a claimant fails to obtain a judgment more advantageous than a defendant’s Part 36 offer; or

(b)

judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant’s Part 36 offer.

(2)

…where rule 36.14(1)(a) applies the court will, unless it considers it unjust to do so, order that the defendant is entitled to-

(a)

his costs from the date on which the relevant period expired; and

(b)

interest on those costs.

(3)

… where rule 36.14(1)(b) applies, the court will, unless it considers it unjust to do so, order that the claimant is entitled to-

(a)

interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired;

(b)

his costs on the indemnity basis from the date on which the relevant period expired; and

(c)

interest on those costs at a rate not exceeding 10% above base rate.

(4)

In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3) above, the court will take into account all the circumstances of the case including-

(a)

the terms of any Part 36 offer;

(b)

the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;

(c)

the information available to the parties at the time when the Part 36 offer was made; and

(d)

the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

(Rule 44.3 requires the court to consider an offer to settle that does not have the costs consequences set out in this Part in deciding what order to make about costs.)”

There is accordingly a difference as regards the question of indemnity costs according to whether a Part 36 offer is a claimant’s offer or a defendant’s offer: cp. Rule 36.14(2)(a) and 36.14(3)(b).

Pursuant to Rules 20.2-20.3, a counterclaim is treated as if it were a claim for the purpose of application of most of the CPR, including Part 36. Thus an offer made by a counterclaiming defendant that covers the counterclaim is to be treated as a claimant’s offer.

The initial question is whether the defendant’s solicitor’s letter of 29 March 2010 meets the requirements of a Part 36 offer at all. Rule 36.10 deals with the costs consequences where a part 36 offer is accepted. The material provision of that rule provide:

“(1).. where a Part 36 offer is accepted within the relevant period the claimant will be entitled to the costs of the proceedings up to the date on which notice of acceptance was served or the offeror.

…

(6)

The claimant’s costs include any costs incurred in dealing with the defendant’s counterclaim if the Part 36 offer states that it takes into account the counterclaim.”

Accordingly, when a Part 36 offer is accepted, the claimant is entitled to its costs up to the date of acceptance. This is not a matter of discretion but results by operation of the rules. The court has no power to disallow a proportion of those costs: see Lahey v Pirelli Tyres Ltd [2007] EWCA Civ 91, [2007] 1 WLR 998, where the Part 36 offer accepted by the claimant was for only a small fraction of the amount he had claimed. Here, the terms of the letter of 29 March offered the claimant only 10% of its costs. Whether or not that could be justified on the basis of the claimant’s conduct, in my view an offer in those terms clearly does not comply with the regime of Part 36. The fact that the letter does not state on its face that it is intended to have the consequences of Part 36 as required by Rule 36.2(2)(b), may not in itself be material. But here it would not in fact have the consequences of Part 36 since it incorporated a costs limitation that is inconsistent with Part 36. See also Rule 36.2(2)(c) which clearly was not satisfied. Since a settlement by acceptance of the offer would have been on the basis that the defendant did not have an easement over the TRR, it does not matter for this purpose whether the offer is to be regarded for the purpose of Part 36 as a claimant’s offer or a defendant’s offer. Accordingly, I consider that it did not constitute a Part 36 offer.

However, that is not the end of the matter since, as the parenthesis to rule 36.14 makes clear, the court is nonetheless required to consider an offer to settle in deciding what order to make about costs under Rule 44.3: see also Rule 44.3(4)(c).

Here, the defendant can fairly submit that the result of the case is much more advantageous for it than the terms of its offer of settlement. However, in Excelsior, Waller LJ stated (at [38]) that the mere fact that an offer of settlement has been made by a defendant and then bettered will not necessarily lead to an order for costs on an indemnity basis. And the Court of Appeal there reiterated what Simon Brown LJ said in Kiam v MGN Ltd (No 2) [2002] EWCA Civ 66, [2002] 2 All ER 242:

“…it will be a rare case indeed where the refusal of a settlement offer will attract under Part 44 not merely an adverse order for costs, but an order on an indemnity rather than standard basis.”

The question here again is whether there is something in the conduct of the action that takes the case out of the norm so as to justify an order for indemnity costs.

In the present circumstances, I see nothing exceptional in the nature of the exchanges between the parties following the letter of 29 March that could justify an indemnity costs order. The defendant’s settlement offer was made very close to trial. The claimant did not close the door to negotiations but responded with a counter-proposal, essentially on the basis of a licence fee calculated at about £112,000 p.a., revocable if either the Tara Hotel or the shares in the claimant were sold. This was a hard fought case, and it would not be just to penalise the claimant by an order for indemnity costs on the basis of an offer of settlement made at such a late stage.

Date from which interest should run

Two provisions of the CPR are directly relevant to interest on costs. Rule 44.3(6)(g) provides that the court may order that interest on costs runs from or until a certain date, including a date before judgment. Rule 40.8 provides that when interest is payable on a judgment pursuant to section 17 of the Judgments Act 1838, interest shall begin to run from the date judgment is given unless “the court orders otherwise”.

It is agreed in this case that interest on cost should run from the date on which the costs were paid at the rate of base plus 1.15%. But once a costs order is made, the liability to costs is payable as a judgment debt and, in the absence of a contrary order, the judgment rate will therefore apply. That rate is fixed by statutory instrument made pursuant to the Administration of Justice Act 1970, section 44. The issue arises in practical terms because the rate currently applicable is 8%, at which level it was fixed with effect from 1 April 1993. At that time, it was a little over 2% above the base rate (then 5.88%). But given the substantial fall in interest rates in recent years, the Judgments Act rate is very significantly above the commercial rates charged or paid today. However, until costs are assessed or agreed, the party liable to pay does not know the amount that has to be paid. Since interest is intended to compensate the receiving party for being kept out of his money, interest at 8% on costs can obviously provide him with a windfall.

It is for that reason that the claimant urges that interest at the judgment rate should be postponed pursuant to Rule 40.8 until the amount of costs has been assessed. The claimant referred in that regard to the observation of Kay LJ in the judgment of the Court of Appeal in Powell v Herefordshire HA [2002] EWCA Civ 1786, [2003] 3 All ER 253, that the judge can “come to a conclusion in relation to the payment of interest that fitted the justice of the circumstances of the particular case”. That was a striking case where the costs judge had felt that he had no alternative but to order that interest on costs had to run from a period before the costs had actually been incurred (ie from the date of an earlier judgment on liability). That would have been manifestly unjust. The problem there, accordingly, was one of dates rather than a consequence of the rate of interest.

The point now before the court could of course arise in many cases, especially where the costs are significant. Unsurprisingly, it has therefore been considered by several judges at first instance although not, so far as the researches of counsel have established, by the Court of Appeal. In Schlumberger Holdings Ltd v Electromagnetic Geoservices AS [2009] EWHC 773 (Pat), Mann J pointed out that the court has no power to adjust the judgment debt rate of interest payable under a costs order. He held that it would not be appropriate to postpone the commencement of the judgment rate in order, in effect, to achieve the same result. He said, at [22]:

“The heart of the problem lies only partly in the newly-arising differential interest rates. The other part lies in the anomaly referred to above, namely that the judgment debt rate applies from the date of the costs order whereas on the damages it applies from the date of the assessment. What Mr. Burkill is asking me to do is really to address that anomaly. If his arguments are good in this case, they are good in every case. The real problem is that anomaly. If the problem is to be addressed then it should be confronted head on and that anomaly addressed rather than trying to work around the edges and introduce temporary fixes by deploying provisions for the purposes of which they were almost certainly not intended with uncertain wider consequences. It is beyond the powers of this court to address the anomaly, the law having been fixed by higher courts than this.”

That case concerned substantial IP litigation where an interim payment on account of costs was in the amount of £1 million. However, in Colour Quest Ltd v Total Downstream UK plc [2009] EWHC 823 (Comm) (the Buncefield litigation) David Steel J took a different approach. He said at [43]:

“I conclude that justice requires a postponement of the liability for the interest until a later date. This was indeed a case very much out of the norm where the costs are very large indeed. Indeed the claimants themselves wish to double the time allowed for the presentation of a detailed account for assessment. The disparity between the claimants' costs and those assessed as due may, it is contended, run to millions. It follows that payments on account are exposed to an enormous margin of error. In my judgement the starting date should be extended to 6 months from today.”

In D Pride and Partners v Institute for Animal Health [2009] EWHC 1617 (QB), Tugendhat J largely followed that approach in a damages case which, although large, was of nothing like the scale of Buncefield and where the costs appear to have been less than those in the present case. He postponed the starting date of the judgment rate by four months, so that interest until then continued at a lower rate, so as to allow a period for the cost to be assessed.

In Cranway Ltd v Playtech Ltd [2009] EWHC 2008 (Pat), Lewison J preferred the approach of Mann J and refused to postpone the start of the judgment rate in a case which was substantial but not exceptional.

I respectfully agree with Mann J that it would be inappropriate to exercise the discretion under rule 40.8 to postpone the start of the judgement rate on costs until after assessment or agreement as a matter of course. But that does not preclude a limited postponement of the application of the judgment rate as applied to costs in a case where the costs are large and there may be real issues of proportionality and reasonableness on taxation. Whereas there may be some justification for the maintenance of a rate under the Judgments Act significantly in excess of the commercial rate in recognition of the fact that payment of a judgment debt is not to be viewed simply like another commercial debt, that reasoning does not apply before the amount which has to be paid is known. I note that in Hunt v R M Douglas (Roofing) Ltd [1990] 1 AC 398, where the House of Lords upheld the principle that interest under the Judgments Act which ran from the date of judgment applied to interest on costs, one of the main grounds for doing so was that at that time there was no provision to enable any interest to be awarded on costs from before the date of judgment: see per Lord Ackner at 415F. This was accordingly a very significant factor in determining what Lord Ackner subsequently referred to as “the balance of justice”: Thomas v Bunn [1991] 1 AC 362 at 380F. That is no longer the case: CPR 44.3(6)(g). Nonetheless, application of a higher rate can also serve as an incentive to proceed with taxation or reach agreement on costs which, as Lord Ackner also emphasised, are desirable objectives: Hunt at 415H.

Here, it has been agreed that I should order an interim payment on account of costs in the sum of £400,000. The overall costs are substantial. I think it would be unjust in all the circumstances for the judgment rate to apply immediately to the unknown balance and I shall therefore postpone the application of the judgment rate to the balance of the costs over £400,000 for four months to enable the parties to progress an assessment or reach agreement. Interest until then will run at the agreed rate of base plus 1.15%.