Nulty & Anor v Milton Keynes Borough Council

MR JUSTICE EDWARDS-STUART: These are applications in relation to costs following a judgment that I handed down on 3 November 2011 in an action arising out of a fire at a recycling plant owned, but not operated, by the claimant in the first action, the Milton Keynes Borough Council, which occurred in April 2005.

Unfortunately, because of a power cut, the recycling plant was in a pretty untidy state on the day of the fire (the background facts are set out fully in the main judgment) and what happened was that a fire then started. It was extinguished several hours later by the fire brigade, causing significant but not enormous damage. Then, a few hours later another, much more serious, fire broke out in a nearby area in the plant. That caused very significant damage and was the cause of most of the losses in suit.

The allegation by the claimant was that the first fire was caused by an engineer called Michael Nulty who, for the reasons explained in the judgment, by the time the action came on for trial had died. The defendants, NIG (they became defendants in the course of these proceedings) were the liability insurers of Mr Nulty who did not find out about the claim until about 18 months afterwards, namely in October 2006. They immediately reserved their position and started to make investigations. Sadly, by that stage, for the reasons again explained in the judgment, Mr Nulty had gone off the rails, appeared to be living rough and was extremely difficult to contact.

There was a trial between 19 and 28 July when the two actions were heard together, that is the action relating to the claim for the damage in the fire, which had started off against Mr Nulty, and to which NIG was later joined, and a separate action started by NIG in which they sought a declaration that they were not liable to indemnify Mr Nulty or, alternatively, that they should be allowed to set off against any indemnity damages for prejudice caused by the late notification. Ultimately, I held that they were entitled to set off 15 per cent of Mr Nulty’s indemnity on the basis that that was my best assessment of the prejudice they had suffered as a result of late notification.

On 6 December 2010 the defendant made a Part 36 offer offering to accept £1.5 million, including interest, but plus costs on the standard basis, in respect of the claims in both actions; in other words, that is their claim for the damage to the building taking into account any set off to which NIG was entitled as a result of the prejudice caused by late notification. It has not been disputed by Mr Graham Eklund QC, who appears for NIG, that that was anything but a valid offer when it was made. However, it was not accepted.

The claimant then withdrew that offer on 18 July 2011, the day before the trial started. As I said in the judgment I found this an anxious case, principally because these were the three possible causes of the fire, each in themselves fairly unlikely, and I was left having to decide whether this was a case where a claimant had simply failed to prove its case, or whether it could be said, as a matter of law, that one of the causes was the probable cause of the fire. I ended up finding that Mr Nulty carelessly discarding a cigarette end or not extinguishing it properly, was the cause of the first fire, which, in turn, caused the second fire.

As I made clear during argument I do not think any criticism can be levelled at NIG for defending the claim on its merits, that is to say as to the cause of the fire. Equally, I do not consider that they can be in any way regarded as unreasonable for asserting that the late notice had caused them prejudice because indeed they won on that point, albeit only to the limited extent of 15 per cent. However, detailed criticisms have been made and can be made of their conduct in some other respects in relation to both actions. I have had detailed submissions from both parties in writing, together with oral submissions, that have now extended for two and a half hours and I am grateful for the care with which those submissions have been made.

The claimant applies for the following order in relation to costs; (1) that it is entitled to the whole of the costs of the liability dispute and the coverage dispute; (2) alternatively, that it is entitled to the whole of the costs of the liability dispute and its costs of the coverage dispute from the expiry of the offer of 6 December 2010, i.e. 31 December; (3) that it is entitled to an assessment of the costs on an indemnity basis; (4) that it is entitled to interest on such costs as may be awarded and then finally it asks for an interim payment on the account of the costs.

Those have been, effectively, the thrust of the submissions made by Mr Andrew Rigney QC on behalf of the claimants today. Mr Eklund’s position is that NIG have won one action and lost the other and therefore the appropriate order is that the winner should have the costs in each action, in the liability action for the claimant and in the coverage action for NIG. Alternatively, he submits that there should be a reduction, by perhaps of the order of 50 per cent, of the claimant’s costs overall as an alternative position.

Mr Eklund submits, quite rightly, that of course the starting point is that the claimant must be entitled to its costs in the liability action because it won, but he says NIG must be entitled to its costs in the indemnity action because it won also. It is perhaps just relevant to mention that on 29 January 2010 the claimant had made an earlier offer by which it offered to accept £1.9 million, including interest plus costs, but that offer was obviously not accepted and Mr Rigney has not pressed it as a ground for his present applications, although he points out that it was made and indicated a continuing intention of the claimants to try and settle this action if they could.

I now need to turn to the Civil Procedure Rules and I start with CPR 36.14 and that provides:

“(1)

This rule applies whereupon judgment being entered -

(b)

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

(3)

Subject to paragraph (6), where rule 36.14(1)(b) applies [that is the one I have just read] 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 per cent 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;

(c)

interest on those costs at a rate not exceeding 10 per cent above base rate.”

The rule goes on:

“(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 made or evaluated.

(6)

Paragraphs (2) and (3) of this rule do not apply to a Part 36 offer -

(a)

that has been withdrawn.”

It is clear from that that, whilst the rule sets out the general provisions to be applied where a Part 36 offer is made by a claimant who, eventually, does as well or better than his offer by reference to the judgment, it does not apply if it is withdrawn at any stage. But it is relevant then to look at 36.9(3) which says, in relation to the acceptance of a Part 36 offer:

“(3)

The court’s permission is required to accept a Part 36 offer where -

(a)

the trial has started.”

The general provisions about costs are, of course, found in CPR 44 and, in particular, Rule 3 and the relevant provisions that I should read are:

“44.3

(1)

The court has discretion as to -

(a)

whether costs are payable by one party to another;

(b)

the amount of those costs; and

(c)

when they are to be paid.

(2)

If the court decides to make an order about costs -

(a)

the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b)

the court may make a different order.”

Moving on to sub-paragraph (4):

“(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.”

Pausing there, that clearly applies to the claimant’s offer of December 2010, and then:

“(5)

The conduct of the parties includes -

(a)

conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction (Pre-Action Conduct) or any relevant pre-action protocol;

(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; and

(d)

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

As I have pointed out, this was not an offer that, if not withdrawn, the defendant could have accepted after the start of the trial on 19 July last year without the permission of the court. This then prompts consideration of the criteria that would be taken into account by the court when dealing with the permission to accept an offer after the start of a trial. It is obvious that a Part 36 offer is directed to a contingency, namely the outcome of the trial. The parties have to assess that position, both in relation to liability and quantum.

In this case there were, effectively, three principal issues or variables when considering an offer. In relation to the claimant, would it prove (1) that Mr Nulty caused the first fire and (2) that the first fire led to the second fire? Then the third, looking at NIG, is would it be able to show that it had suffered quantifiable prejudice as a result of Mr Nulty’s late notice of the claim? Suppose, having declined to accept the claimant’s offer on 18 December 2010 several months earlier, the defendant, NIG, had decided on the third day of the trial that things were not going very well and that the offer, assumed to be still open for acceptance, now seemed rather attractive. Would the court allow it to accept the offer? I think not, since the contingency to which the offer related was the outcome of the trial. Once the trial starts the contingency has, in one sense, started to happen. A case may go disastrously wrong for one party right from the outset (see, for example, Noorani v Calver [2009] EWHC 592) when the claimant’s case fell apart during his own evidence.

Alternatively, a judge may make observations during the parties’ opening submission that indicate that he or she has formed a fairly strong provisional view on the merits, or one aspect of the merits. If reasons of that sort were put forward by a defendant for wanting to accept an offer after the start of a trial, or if the court suspected that that was the reason, I would expect it to refuse permission to accept the offer. But if there had been a material change of the circumstances, unconnected with the course of the trial (perhaps the last minute disclosure of some document damaging to a party’s case, which should have been disclosed much earlier) which, if the defendant had known about it at the time of considering the offer, might have caused it to accept it, the court might give permission.

I consider that an important factor would be whether there had been a change of circumstances which is a consideration relevant to whether or not the court will allow a party to withdraw an offer within the period open to its acceptance (see the notes at 36.3.4 of the White Book). In this case there was no change of circumstances, in my judgment, would have permitted NIG to accept the claimant’s Part 36 offer after the start of this trial if it had not been withdrawn.

Indeed, I doubt very much whether the defendant had a very clear idea of the likely outcome of the trial by the end of it, although it might have been apparent that certain of its witnesses had not made a very favourable impression on the court. In these circumstances, whilst the claimant’s Part 36 offer did not attract the consequences of CPR 36.14(3), it came about as close to doing so as one could imagine and therefore, it seems to me, the withdrawal of that offer on the day before the start of the trial made no practical difference to NIG’s ability to accept it because, as I have explained, it would have needed permission and I cannot see that there were any circumstances that might have warranted permission being given. So when I turn to consider the factors that are set in CPR 44.3(4), the claimant’s offer of 6 December 2010 must be a powerful factor pointing to an exercise of discretion along the lines set out in CPR 36.14 if not necessarily to precisely the same extent.

But in this case, in my judgment, there are other factors that are relevant to the consideration of the costs. The following are of particular relevance: first, the behaviour of NIG towards its insured, Mr Nulty, which I have to say I consider fell way below that which is to be expected of an insurer. From the outset NIG’s prime concern was, I am completely satisfied, was to find a way of avoiding any liability to Mr Nulty. It was not concerned with considering the merits of the claim against him and how best it could be defended. It was quite clear from the evidence that emerged at the trial that NIG’s expert, Mr Christie, had been instructed at quite an early stage not to investigate the claim as a whole but simply to consider whether there might be any grounds on which NIG could avoid its obligations to Mr Nulty.

There were at least two occasions when NIG actually wrote to Mr Nulty declining liability in 2009 on grounds which were patently unsustainable; the first was that the failure to give notice in due time was a condition precedent to liability, a point that was subsequently, but quite a lot later, abandoned. The second, was that there was an implied term in his contract that he should co-operate with the insurers and his failing to do so but was a breach of a condition precedent; that, again, was a wholly unstable allegation.

The second aspect which I found troubling was NIG’s willingness to accuse employees of the recycling centre of smoking in the building and therefore, possibly of having caused the fire, when there was not the slightest evidence that they had done so or even that at the relevant time they had been in the area where the first fire started. One of those witnesses attended the trial and was cross-examined and vigorously denied any responsibility for the fire: it was clear that even if he had been in the relevant place he could have been there only for a very short time during the relevant window. The other witness who had been named as a likely suspect by NIG was all set to attend the trial and at the last minute was told that he would not be required to give evidence; that was not an attractive position to have taken.

The third aspect of NIG’s conduct was its thoroughly unrealistic assertion that the value of the loss of the chance of successfully resisting the claim, had it been given notice, was 100 per cent or something even approaching it. Even if NIG did not genuinely believe this to be the case it is certainly clear that it regarded the value of the loss of the chance at an unrealistically high percentage. At paragraph 273 of the judgment I said that I had no hesitation in rejecting a percentage of even 50 per cent, and I was told during submissions today that Aikenhead J made a similar observation in May 2010 at one of the interlocutory hearings. That was well before the offer of December 2010.

There were also allegations of contributory negligence made against the claimant relating to matters such as the poor housekeeping in the plant and a failure to maintain a strict no-smoking policy; by a letter dated 21 June 2010 there was a lengthy request for disclosure of documents relating to issues of that sort. Much of that request, in fact the great majority of it, was irrelevant and was never pursued. These allegations, which were never really going to have the slightest prospect of success (considering that the claimant was not the operator of the plant), were pursued, in my judgment, unrealistically and I have no doubt caused the claimant to incur unnecessary costs.

On the other side it is said by Mr Eklund, on behalf of NIG, that the claimant was guilty of unreasonable delay in pursuing the claim. For example, there was a very significant delay between about June 2007 and I think early 2009, for which the only reason put forward was that since NIG was reserving its position the claimant had to consider whether it should go ahead or not; since it decided to go ahead ultimately, Mr Eklund asked why it did not decide to press on straightway without that delay. Whilst I accept that that delay is a little difficult to explain, it certainly does not amount to conduct which one could characterise as unreasonable.

As I have said, I do not question NIG’s right to challenge or resist the claim but, in my judgment, it could have quite firmly and robustly challenged and resisted the claim without behaving in the way that I have described. In addition to its somewhat unrealistic assertion that the late notification was the extent of 100 per cent, it certainly looks as if, on its face, it was for quite some time also running a claim that the failure to give notice gave it a complete defence. Aikenhead J observed at one of the hearings that if that allegation proved to be unjustified there might be questions for indemnity costs being raised.

Since NIG accepts that it must pay the cost of the claimant’s claim in the liability action, really the only issue there is the basis of assessment and questions of interest on those costs. In relation to the coverage dispute Mr Eklund submits, as I have said, that it won in fact it established a 15 per cent loss of a chance and, indeed, that 15 per cent may have been sufficient to make the first offer in January 2010, arguably ineffective. But since the damage caused by the fires greatly exceeded the £2 million limit of indemnity, the real issue in the trial was always the percentage by which that limit of indemnity would be reduced by the allegation of the prejudice caused by delay, assuming that the claimant succeeded in proving that Mr Nulty caused the fire and that he was liable for it.

It seems to me that the claimant’s approach of making an offer, in terms of the overall position rather than dealing with the two areas of dispute separately, was entirely appropriate. In effect, it valued the combination of the loss of the chance and the risk of failure at 25 per cent: that might have been thought to be a fairly bullish estimate, but as it turned out, it was a good one because they did better.

For all these considerations and bearing in mind my overall impression of the way the action was conducted and my views of the witnesses, I consider that the following orders are appropriate. These, I make it clear, are subject to any orders to the contrary that have already been made and subject to any orders that were specifically reserved.

(1) The claimant is to have the costs of the liability action up to 31 December 2010 on the standard basis to be assessed but if not agreed; (2) the defendant, NIG, is to have 50 per cent of the costs of the coverage action to 31 December 2010, also on the standard basis, both to be subject to detailed assessment if not agreed; (3) from 1 January 2011 to 18 July 2011 the claimant is to have its costs of both actions on an indemnity basis, thereafter (that is from 19 July 2011 onwards) it is to have its costs of both actions on the standard basis; (4) in relation to interest on the claimant’s costs, it is to have interest on its costs from 1 January 2011 to date at 5 per cent (that is not 5 per cent over base, that is 5 per cent); and (5) it is agreed that interest on its costs incurred up to 31 December 2010 should be at 1 per cent over base.

I should just make it clear, so there is no misunderstanding about it, that in relation to NIG’s costs of the coverage action, I am going to order that those costs should not apply to any costs incurred before 1 November 2009. This is simply so that there are no possible arguments about odd bits of costs that might be said to be part of the coverage action. So I am imposing that cut-off point.

I have not made any more draconian order in relation to the coverage dispute, in spite of the matters that I have mentioned, because I consider those are taken into account by the indemnity costs that I have given the claimant for the period of 1 January through to 18 July 2011.

I refuse permission to appeal.