MacInnes v Gross

On 27 January 2017 I handed down the principal Judgment in this case ([2017] EWHC 46 (QB)). There were then a number of further issues between the parties which needed to be resolved. During the course of the hearing I indicated my decision on all but one of those issues although, for reasons of time, I said that I would provide my detailed reasons in writing. Accordingly, this Judgment gathers together my decisions on all those outstanding issues, together with the reasons for them.

As set out in the main Judgment, the claimant’s claims against the first defendant failed for a variety of reasons. There was no dispute that, in consequence, the claimant was obliged to pay the first defendant’s costs. The issue concerned the correct basis for the assessment of those costs: the first defendant sought costs on an indemnity basis, whilst the claimant maintained that the costs should be assessed on the standard basis.

The principles relating to the award of indemnity costs can be summarised as follows:

Indemnity costs are appropriate only when the conduct of a paying party is unreasonable “to a high degree. ‘Unreasonable’ in this context does not mean merely wrong or misguided in hindsight”: see Simon Browne LJ (as he then was) in Kiam v MGN Limited [2002] 1 WLR 2810.

The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it ‘out of the norm’ in a way which justifies an order for indemnity for costs: see Waller LJ in Excelsior Commercial and Industrial Holdings Limited v Salisbury Hammer Aspden and Johnson [2002] EWCA Civ. 869.

The pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, provided the claim was at least arguable. But the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may well lead to such an order: see, for example, Wates Construction Limited v HGP Greentree Allchurch Evans Limited [2006] BLR 45.

In support of the claim for indemnity costs, Mr Weisselberg QC submitted that:

In response, Mr Mansfield QC said that this was not a case that could be described as being ‘out of the norm’. He said that the claimant had had a genuine belief in the rightness of his case and had litigated his claim in a reasonable and proportionate manner. Just because the claimant had lost did not mean that it was appropriate to make an order for indemnity costs. Mr Mansfield referred to the fact that, in the substantive judgment, I expressly found that, contrary to the first defendant’s submissions, the claimant had not lied to the court.

Applying the principles set out in paragraph 3 above, I have concluded that this is not a case which can be regarded as ‘out of the norm’. The claimant’s claim failed for a variety of separate reasons. But Mr Mansfield is quite right to say that, just because a claim fails, even if it fails for a number of reasons, that is not on its own sufficient reason to order indemnity costs. The claimant must have known (and will have been advised) that his claim faced a number of difficulties, but it cannot be said that he knew or should have been advised that it was hopeless or bound to fail. I consider that it was properly arguable. For example, whilst I have found that some parts of the claimant’s emails of 24 March and 7 December 2011 significantly undermined his own case, he was entitled to argue that the failure on the part of the first defendant to respond to the first at all, or to deal with some of the details in the second, were points in his favour.

Despite being invited to do so, I found that neither the claimant nor the first defendant deliberately lied to the court. In those circumstances it is difficult for the first defendant now to sustain the argument that the claimant’s evidence was “unsatisfactory”. There were a number of issues on which I found against him, and I criticised some of his answers along the way, but I regard that as part of the court’s ordinary fact-finding process. The claimant’s evidence was not such that it should be marked with an order for indemnity costs.

In relation to conduct generally, I agree with Mr Mansfield that the claimant litigated his claim in a reasonable and proportionate manner. In my view, the fact that the claimant’s approved costs budget was around £234,000, when set against a claim for €13.5 million, demonstrates the proportionate way in which the litigation was conducted.

I accept Mr Weisselberg’s criticisms that the claimant failed to engage with the offers made by the first defendant, and that the claimant’s only offer was both late and absurdly high. However, those failures have to be set against the claimant’s genuine belief in the rightness of his own claim. More importantly, they also have to be considered against the background of the solicitors’ correspondence, which made plain that, on at least two separate occasions, the first defendant, through his solicitors, refused to engage in mediation. Again, that was doubtless because he genuinely believed in the rightness of his defence. But I consider that that failure tempers any criticism that might otherwise be made of the claimant’s rejection of the first defendant’s offers and his failure to make anything like a realistic offer in return.

In the round, I am confident that this is not a case which could fairly be described as being ‘out of the norm’. It is instead a not untypical dispute between commercial men where, on an analysis of the factual evidence and the contemporaneous material, the claim failed for a variety of separate reasons. In such circumstances the first defendant is plainly entitled to his costs, but those costs should be assessed on the standard, and not on an indemnity, basis.

The disputes about interest on costs boiled down to two different issues. First, there was a difference between the parties as to the right percentage over base to be awarded as interest on costs up to judgment. As for interest on costs after judgment, there was a dispute about whether or not the judgment date should be deferred, solely for this purpose, to reflect the fact that such interest is recoverable at a fixed rate of 8%. I deal with each issue in turn.

The rate of 4% above base was the rate ordered for pre-judgment interest by the Court of Appeal in McPhilemy v Times Newspapers Limited (No. 2) [2002] 1 WLR 934 (CA). That is the main authority cited by the editors of the White Book on this topic, at paragraph 36.17.4.3. The Court of Appeal recognised that this was a ‘generous’ allowance for the cost of money from the date upon which the work was done or liability for disbursement incurred, but explained why it was appropriate. The 4% over base was subsequently adopted by the Court of Appeal in KR v Bryn Alyn Community (Holdings) Limited [2003] EWCA Civ. 383.

On behalf of the claimant, Mr Mansfield argued that, in the light of current interest rates, 4% over base was unreasonably generous. However, it seems to me that this ignores the fact that this is the percentage above base, not the recoverable rate of interest itself. Thus the fact that interest rates are much lower than they were 15 years ago, when these cases were decided, is nothing to the point, since the successful party recovers interest at the base rate applicable at the time, with a 4% uplift.

The Court of Appeal explained in McPhilemy how and why the 4% was applicable. There is no reason for me to depart from that rate in this case. Accordingly, prior to judgment, I order that interest should be payable on costs at a rate of 4% above base.

The position as to post-judgment interest is more complicated. The Judgment Act rate is 8%, which is obviously far higher than any commercial rate currently applicable, and indeed far higher even than 4% above base. There is a risk of a windfall if such a rate is applied without consideration of the wider position. In Involnert Management Inc v Aprilgrange Limited and Others [2015] 5 Costs LR 813; [2015] EWHC 2834 (Comm), Leggatt J wrestled with this difficulty and concluded that, in his case, the fair course was to defer the date of judgment, solely for the purposes of interest calculations, for a period of three months. He said:

I address later in this short Judgment the amount of the interim payment on account of costs that I am ordering the claimant to make. It is in a significant sum. In all the circumstances, I consider that, on this issue, this case is no different to Involnert, and I accordingly adopt the same approach as Leggatt J. Thus, for the purposes of payment of interest on costs, the judgment date is deferred for three months to 27 April 2017.

The next issue was novel, and the only one on which I did not indicate my decision at the hearing. On behalf of the first defendant, Mr Weisselberg sought an order that the claimant was entitled to an order that he recover any additional sums that may be assessed “to reflect any currency loss caused by the decline in the exchange rate between the Pound and the Euro since any payments [of costs] were made”. Such an entitlement was disputed by Mr Mansfield.

The basis for this claim was said to be the recent decision of Arnold J in Elkamet Kunststofftechnik GmbH v Saint-Gobain Glass France S.A. [2016] EWHC 3421 (Pat). In that case, the judge was dealing with a summary assessment of costs. A specific amount was claimed for the consequence of currency fluctuations. The judge said:

The first point that needs to be made is that the issue in front of Arnold J arose as part of a summary assessment of costs. He had particular figures to consider, and evidence as to how those figures had arisen. I have neither: there is simply a claim that, to the extent that the first defendant has suffered such a loss, he is entitled to be compensated. I am instinctively reluctant to make such an open-ended order.

I am also uncomfortable with the idea that an award of costs should be treated as an order for compensation, as if it were a claim for damages. I consider that there are inherent differences between the two regimes, and that orders for costs have never been regarded as compensating the payee for the actual costs that he has paid out. On the contrary, unless the payee has an order in his favour for indemnity costs, he will never recover the actual costs that he has incurred.

Thirdly, I do not myself see the close analogy between ordering interest on costs, which is commonplace, and ordering exchange rate losses due to the particular time that the costs were paid, which is not. The paying party can work out in advance the additional risk created by the potential liability to pay interest on costs, but any potential liability to pay currency fluctuations is uncertain and wholly outside his control. Furthermore, it might be argued that the generous rate of interest on costs at 4% over base is designed to provide at least some protection to the payee against such events.

For these reasons, in the rather different circumstances to those in Elkamet, and in the absence of any other authority on the topic, I respectfully decline to make the order sought in respect of currency fluctuations. For the avoidance of doubt, therefore, the order to be drawn up in consequence of this Judgment must make clear that I have refused the first defendant’s application to recover any further sums by way of currency fluctuations on costs.

There was no dispute between the parties that I should make an interim order on account of costs. However, there was a significant difference between the parties as to the amount of that order. The first defendant’s approved costs budget was in the sum of £570,000. He originally sought an interim payment of £605,000, being 95% of the approved costs budget (£540,000) together with an additional £65,000 to reflect the fluctuations in exchange rate and interest. During the oral submissions, the latter figure was reduced to £30,000 to reflect interest only, so that the first defendant asked for the sum of £570,000 as an interim payment on account of costs.

The claimant proposed a payment on account of just £375,000. This was principally because the claimant argued that the first defendant would not necessarily recover the amount of his costs budget at the detailed assessment stage. At one point during his submissions, Mr Mansfield said that, when the costs are assessed by the costs judge, that assessment ‘will start from scratch’. He also said that in any event the first defendant had incurred considerably more than the figure in his approved costs budget. It appears that the first defendant’s costs are now said to be £956,279.06.

I reject Mr Mansfield’s submission on the materiality of the costs budget figure. In my view, the first defendant’s approved costs budget is the appropriate starting point for the calculation of any interim payment on account of costs. CPR 3.18 makes plain that, where there is an approved or agreed costs budget, when costs are assessed on a standard basis at the end of the case, “the court will…not depart from such approved or agreed budget unless satisfied that there is good reason to do so.” The significance of this rule cannot be understated. It means that, when costs are assessed, the costs judge will start with the figure in the approved costs budget. If there is no good reason to depart from that figure, he or she is likely to conclude the assessment at the same figure: see Silvia Henry v News Group Newspapers Ltd [2013] EWCA Civ 19.

One of the main benefits to be gained from the increased work for the parties (and the court) in undertaking the detailed costs management exercise at the outset of the case is the fact that, at its conclusion, there will be a large amount of certainty as to what the likely costs recovery will be. One consequence is that, for the purposes of calculating the interim payment on account of costs, the starting point will almost always be the payee’s approved costs budget. Another consequence is that the court assessing the interim payment can ignore the fact that, as here, there may have been significant expenditure on costs by the payee above the budget figure: any increase is a matter for the costs judge and the relatively onerous burden of recovering more than the budget figure is on the payee: see Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd (No 2) [2013] EWHC 1643 (TCC).

So when making an interim payment on account of costs in a case with an approved costs budget, the days of the educated guesswork identified by Jacob J in Mars UK Limited v TeKnowledge Limited [1999] 2 Costs LR 44 are now gone. Instead the court can be confident that there is a figure for costs which, because it has already been approved, is both reasonable and proportionate.

Accordingly I take, as my starting point for the calculation of the interim payment, the approved costs budget figure of £570,000. I make a reduction of 10% (£57,000) which I regard as the maximum deduction that is appropriate in a case where there is an approved costs budget. I add back £15,000 to reflect the interest on costs which I have awarded. That produces a figure of £528,000.

Accordingly, the interim payment on account of costs in this case will be £528,000.