LMS International Ltd & Ors v Styrene Packaging and Insulation Ltd & Ors

Today I handed down Judgment on the liability issues in this case. It will be apparent to anyone reading that Judgment that the First Defendants’ case failed on almost every point. The Claimants now make an application that the First Defendants should pay the costs of those liability issues, and that such costs should be assessed on an indemnity basis in accordance with CPR 44.4 (1) (b). Mr McGee properly accepts that the First Defendants must pay the Claimants’ costs, but resists the application that those costs should be assessed on an indemnity basis.

Of course, the fact of the Claimants’ success in this case, however resounding, is not sufficient of itself to justify an award of costs to be assessed on an indemnity basis. Costs are ordinarily awarded on the standard basis, and the court must exercise its discretion, in accordance with the relevant principles, if a different order is sought. Although the authorities indicate that it is not helpful to seek to define the circumstances in which indemnity costs may be appropriate, it seems clear that there are a number of important principles which I should have in mind when considering this application and exercising my discretion.

It was a widely-held view that “indemnity costs should only be awarded on an indemnity basis if there has been some sort of moral lack of probity or conduct deserving of moral condemnation on the part of the paying party.” That was the view of the trial judge in Reid Minty - v- Taylor [2002] 1 WLR 2800. The Court of Appeal concluded that that was a misdirection which overstated the criteria necessary for an order for costs on an indemnity basis. May LJ, at paragraph 28, said:

“If costs are awarded on an indemnity basis, in many cases there will be some implicit expression of disapproval of the way in which the litigation has been conducted, but I do not think that this will necessarily be so in every case. What is, however, relevant at the present appeal is that litigation can readily be conducted in a way which is unreasonable and which justifies an award of costs on an indemnity basis, where the conduct could not properly be regarded as lacking moral probity or deserving moral condemnation.”

May L J went on to say, at paragraph 32:

“There will be many cases in which, although the defendant asserts a strong case throughout and eventually wins, the court will not regard the claimant’s conduct of the litigation as unreasonable and will not be persuaded to award the defendant indemnity costs. There may be others where the conduct of a losing claimant will be regarded in all the circumstances as meriting an order in favour of the defendant of indemnity costs. Offers to settle and their terms will be relevant and, if they come within Part 36 may, subject to the Court’s discretion, be determinative.”

The effect of the judgment of May L J in Reid Minty was further explained by Simon Brown LJ in Kiam- v - MGN Limited (2) [2002] 1 WLR 2810. He said:

“I for my part understand the Court there [in Reid Minty] to have been deciding no more than that conduct, albeit falling short of misconduct deserving a moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order made under Part 44 (unlike one made under Part 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory.”

There are a number of recent examples where it was decided that the conduct of one or other of the parties was sufficiently unreasonable to justify an order for indemnity costs. In Amoco (UK) Exploration Company - v – British American Offshore Limited [2002] BLR 135, Langley J awarded indemnity costs against Amoco because they “determined to come up with the most persuasive case they could to put commercial pressure on BAO to re-negotiate a freely-negotiated commercial contract and to do so against the risk of termination of the contract and of the litigation to which that would inevitably give rise.” He concluded that an order for indemnity costs was justified on the ground that:

“… Amoco conducted itself throughout the relevant events on the basis that its commercial interests took precedence over the rights and wrongs of the situation and that it was prepared to risk the outcome of litigation should BAO resist the pressures upon it and take on the challenge.”

In a number of the recent cases, particular conduct has been found to justify making an order that part, but by no means all, of the costs should be assessed on an indemnity basis. Thus in The British Coal Respiratory Disease Litigation (23.1.1998, unreported) Turner J ordered that the defendants should pay the costs of the medical issues on an indemnity basis, whereas the remainder of the costs were assessed on a standard basis. The medical issues were singled out because the defendants mounted an attack on field research programmes which they themselves had helped to set up; as a result, the judge found that they had lost intellectual and professional credibility. Similarly, in Clark – v – Associated Newspapers Ltd (21.9.1998, unreported) Lightman J ordered that the claimant’s costs of that part of the trial which comprised a personal and unjustified attack upon him should be assessed on an indemnity basis.

The most recent example of a case in which the Court of Appeal concluded that the conduct did not justify an award of indemnity costs, and overturned the conclusions of the trial judge, was P Simms and others – v – The Law Society [2005] EWCA Civ 849. In that case Evans-Lombe J had held that the claimant should pay indemnity costs because of an earlier tribunal’s finding of dishonesty. However, Carnwath LJ held that, since the claimant had an explanation for his conduct, “however implausible it now seems”, he did not regard the case as one which justified an order for indemnity costs.

With those principles in mind, I turn to the present case. The Claimants advance four reasons why, they say, costs should be ordered on an indemnity basis. Those are:

In Halsey – v – Milton Keynes General NHS Trust [2004] 4 ALL ER 920, the Court of Appeal held that if one party unreasonably refused mediation, that was a factor which could be taken into account when considering the question of costs. However, in that case, the issue concerned the possible deprivation of an otherwise successful party of some or all of his costs. It was not concerned with the differences between standard and indemnity costs. I am aware of no authority in which a losing party’s refusal to mediate has, on its own, justified an order for indemnity costs. For my own part, I could see that, in exceptional circumstances, a refusal to mediate might justify an order for indemnity costs, such as where the refusal was, on any view, wholly unjustified, or where it was motivated by completely commercial considerations, of the kind referred to by Langley J in Amoco. However, I consider that the lack of a mediation in the present case was not the result of such conduct, and this would not therefore be an appropriate ground for ordering the Claimants’ costs to be paid on an indemnity basis.

By complaining that the Defendants failed to mediate, the Claimants are really saying no more than that, had there been such a mediation, the case would have settled at that stage, and there would have been no trial. But, when taken to its logical conclusion, that argument could be advanced in almost all cases where the parties failed to settle their differences (by whatever means) and those differences had to be resolved by a judge following a trial. As I have said, there is no particular conduct which was so unreasonable that it takes this case out of the ordinary. I cannot therefore conclude that the alleged failure on the part of the Defendants to mediate could fairly be described as the sort of unreasonable conduct “to a high degree” referred to by Simon Brown LJ in Kiam.

Furthermore, on the facts as they have been explained to me, I do not think that it would be fair to say that the Defendants wholly refused the possibility of mediation. Indeed, when the offer was first made, the Defendants actually agreed to mediation, but the parties were unable to agree the form of mediation that would be appropriate. When mediation was suggested again, the parties were by then preparing for trail in accordance with my directions, and the offer was never taken up. In all those circumstances, I do not consider that this is a factor which I should take into account in the exercise of my discretion in any event.

It is certainly right to say that, as I pointed out in my Judgment, the Defendants did not discharge their disclosure obligations in a satisfactory way. As Mr Bickford- Smith put it, this added considerably to the aggravation, and therefore cost, incurred by the Claimants’ solicitors. However, Mr Bickford-Smith fairly conceded that, by the start of the trial, there was no suggestion that there were any relevant documents that were not included in the court bundles. It is therefore difficult to say that the Defendants’ reluctant compliance with their disclosure obligations had any lasting significance at all. I agree with Mr McGee that it would be disproportionate, now, for me to make any order for indemnity costs simply because the Defendants were slow to make proper disclosure.

Mr Bickford-Smith complained about what he described as the “root and branch” attack on his two liability experts, Dr Beeley and Mr Howe. He said that this was precisely the sort of conduct that the court should take into account when considering whether or not to order costs on an indemnity basis. It was similar to the successful ground of the application in Clark.

As Mr McGee pointed out, the reported cases demonstrate that, even if this ground were made out, it would only be one element of the costs, namely that relevant to the cross- examination of the experts, which could be ordered on an indemnity basis. It would certainly not be right to use this ground to make an order that all costs should be on an indemnity basis.

However, Mr McGee’s principal submission was that there was no unfair or unreasonable attack on the experts and that, whilst there were differences of opinion and analysis, those were legitimate and were reasonably explored in the evidence. I accept that submission. Indeed, I ought to say that I consider that Mr McGee’s cross-examination of the experts, although necessarily hampered by the limited nature of the case advanced by the First Defendants, was a model of courtesy and logic. It was a far cry from the sort of conduct complained of by Lightman J in Clark. I have no doubt at all that it would quite wrong for me to find that the cross-examination of the Claimants’ experts in the present case was conducted in anything other than an exemplary fashion.

Mr Bickford-Smith’s final point was to submit that, at the outset of the litigation, the Defendants’ solicitors appeared to suggest that liability would not be in issue and that, although the Defendants did in fact maintain a challenge to the case on liability thereafter, they can have had very little doubt that their defence was a sham and not bona fide. He relies on early exchanges between the solicitors which certainly suggest that the Defendants would not dispute the claim on liability.

I do not believe that it is fair to criticise the bona fides of the Defendants’ position. Again, to use the words of Simon Brown LJ in Kiam, I consider that this point amounts to no more than a suggestion that the decision to defend the claims was wrong or misguided in hindsight, rather than anything worse. Indeed, given the legal principles involved in the Claimants’ claim, including the applicability of the rule in Rylands – v – Fletcher, and the Defendants’ case that they had carried out all the fire protection work required by the statutory authorities, it is my conclusion that the Defendants’ defence, although ultimately incorrect, was, at the very least, arguable. As a result, it cannot be said that the Defendants’ defence lacked bona fides.

For these reasons I have concluded that it would not be appropriate to order costs to be assessed on an indemnity basis in this case. The First Defendants will therefore pay the Claimants’ costs of the liability issues to be assessed on the standard basis if they cannot be agreed.