J Murphy & Sons Ltd v Johnston Precast Ltd (Formerly Johnston Pipes Ltd) [No 2 Costs]

On 10^th December 2008, I handed down the principal Judgment in this case, with a neutral citation number of [2008] EWHC 3024 (TCC). In summary, I concluded that:

There was a contract between the parties, but it did not contain the fitness for purpose term for which Murphy contended;

There was no breach of contract and/or no breach of duty on the part of JP;

The cause of the burst water main was not the result of any default on the part of JP; it was instead due to the existence of a large void in the foam concrete within the tunnel, for which Murphy themselves were responsible.

Following the handing down of that Judgment, a variety of issues were canvassed at the hearing on 10^th December 2008. In keeping with the conduct of the trial itself, those issues (all of which related, in one way or another, to costs) were concisely argued. However, time did not permit me to give an ex tempore judgment in relation to those matters. Accordingly, this reserved Judgment addresses the following issues:

Pursuant to CPR 44.3(2)(a), the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party but, pursuant to sub-paragraph (b), the court may make a different order. CPR 44.3(4) identifies the circumstances to which the court must have regard in considering the appropriate order as to costs, and these include “whether a party has succeeded on part of his case, even if he has not been wholly successful”. In addition, CPR 44.3(6) allows the court to make an order by which one party pays a proportion of the other party’s costs.

There is no dispute between the parties that JP were the successful party in this action. This was an ‘all-or-nothing’ case: either Murphy were going to recover the £4.17 million agreed as the appropriate figure for damages, or they were going to recover nothing. As a result of my Judgment, Murphy recovered nothing. In such circumstances, JP were plainly the successful party.

The first question for me therefore, is whether there is any reason to depart from the general rule that the unsuccessful party (Murphy) pay the costs of the successful party (JP). My strong instinct is that I should not depart from the normal rule and that this is a case in which one party, having successfully defeated the case against it on both liability and causation, is entitled to its costs. The question is therefore whether there is any principle of law, or any particular element of the trial process in this case, which should lead me to a different conclusion.

One of the advantages of the CPR, in the words of Lord Woolf MR in A.E.I. Rediiffusion Music Limited v Phonographic Performance Limited [1999] 1 WLR 1507:

“….is to require courts to be more ready to make separate orders to reflect the outcome of different issues. In doing this, the new Rules are reflecting a change of practice which has already started. It is now clear that too robust an application of the ‘follow the event’ principle encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take. If you recover all your costs as long as you win, you were encouraged to leave no stone overturned in your effort to do so”

There have been a number of subsequent cases in which the court have affirmed the principle that the court should always consider the applicability of an issue- based costs order: see for example, Summit Property Limited v Pitmans (a firm) [2001] EWCA Civ 2020; Fulham Leisure Limited v Nicholson Graham and Jones [2006] EWHC 2428 (Ch); and National Westminster Bank Plc v Angeli Kotonou [2006] EWHC 1785 (Ch). In each of those cases the identification of one side as the successful party was not entirely straightforward. In Summit, the defendant lost on the major liability issues, but defeated the claim on the grounds of causation and loss. In Fulham Leisure, the claimant recovered a sum by way of damages, but it was just £6,750, as against a claim of £7.75 million. And in National Westminster Bank, the claimant lost four of the five isues raised but was successful on the fifth.

By contrast, in the present case, there is no difficulty in identifying JP as the successful party. The claimant recovered nothing and lost each of the significant issues (as to contract terms, breach, and causation in fact and law) along the way. I therefore conclude by analogy with the cases noted above, that this is not an appropriate case for an issue-based costs order.

During the course of his helpful submissions, Mr Lewis took me to the decision of the Court of Appeal in Fleming v Chief Constable of Sussex Police Force [2004] EWCA Civ 643 in which the Court of Appeal tested the costs order made at first instance by asking themselves whether they felt “able to say that there was any discrete issue or matter pleaded which added sufficiently to the length of the trial to necessitate displacing the prima facie rule that costs should follow the event”. He noted that this approach was followed by Beatson J in Shore v Sedgewick Financial Services Limited [2007] EWHC 3054 (QB). Mr Lewis submitted that, as a matter of principle, this was the question which the court had to ask itself in every case in which an issue-based costs order was sought.

I do not accept that submission. It seems to me that, in a case like this, where a defendant has defeated the claimant on contract terms, breach and causation, an issue-based costs order is inappropriate, so that the question posed in Fleming and Shore simply does not arise. In civil litigation it is almost inevitable that there will have been some point or argument, raised by the otherwise successful party but rejected by the judge, which will have added to the length of the trial. In my view, the mere fact that the successful party was not successful on every last issue cannot, of itself, justify an issue-based costs order.

However, for present purposes, let us assume I am wrong about that and that I should ask myself the question posed by the Court of Appeal in Fleming. In those circumstances, it seems to me that the critical word is “sufficiently”. If a defendant took 10 points, and was successful on 7 of them, such that the claim against him failed, it seems to me that the claimant should only be entitled to an issue-based costs order if the three points on which the defendant was unsuccessful made a material difference to the length of the trial, and therefore the costs incurred on both sides.

Mr Lewis identified two arguments on which JP were unsuccessful and which, he says, should lead to an order that Murphy pay 80% of JP’s costs (i.e. a reduction of 20%). The first concerned the argument as to the existence of a contract; it was JP’s primary position that there was no contract between the parties. Mr Lewis submits that because Murphy won on that issue, they should be entitled to a reduction in the amount of costs that they pay JP. Secondly, Mr Lewis contends that it was JP’s case that the alkaline attack was not an efficacious cause of the delay in legal terms and that, since I have found that it was, that was a further reason to justify the 20% reduction.

As to the first point concerning the contract, I am in no doubt that it would be wrong to characterise the contract/no contract issue as an issue in its own right which had a significant effect on costs. True it is that I found that there was a contract, when JP had argued that there was not. But JP’s argument that there was no contract was part of a much wider series of contentions designed to demonstrate that JP owed no fitness for purpose obligation to Murphy, who needed the fitness for purpose obligation in order to have any prospect of fixing JP with liability in law for the burst water main. On that issue, whichever version of the contract I accepted, I found that it did not contain the alleged or any fitness for purpose obligation. Accordingly, I do not accept that it is fair to single out the contract/no contract issue as an issue on which JP ‘lost’, given their success on the underlying dispute as to fitness for purpose.

Furthermore I should add that, because the arguments relating to the formation of the contract involved a series of different alternatives, each of them introduced by Murphy in order to get over difficulties in the evidence, it would be impossible to say that the contract/no contract point added significantly to the length of the trial at all. It was simply another alternative conclusion available on the (somewhat uncertain) facts. It therefore fails the Fleming test in any event.

As to the second point, the parties were agreed that the pipe suffered from alkaline attack. Whether or not that attack was an effective cause of the burst water main was a mixed matter of fact and law. The issue took some time at the trial, although I am doubtful as to whether it could be said to have added significantly to the length of that trial. But more important was my conclusion that the alkaline attack was not the responsibility of JP. That was in many ways the critical issue in the case, and JP won that argument. It seems to me that it would be an odd result if the level of JP’s costs recovery was be reduced as a result of their failure on one part of an overall argument on which they were ultimately successful.

Accordingly, I am satisfied that, even if it is appropriate in this case to ask the question posed in Fleming, I would still arrive at the same conclusion, namely that there should be no percentage reduction in JP’s costs recovery.

There is an entirely separate reason why I have concluded that there should be no reduction in the percentage of costs which JP recover from Murphy. During the course of the dispute between the parties, JP made two separate offers to Murphy to settle the claim, and there can be no doubt that Murphy would have been in a much better position than they are now if they had accepted either one of these offers.

The first offer was made during the pre-action protocol process (although, because of concerns about limitation, Murphy had in fact already issued proceedings). It was dated 20^th February 2007. The offer was a “drop hands” offer, namely that the claim be discontinued with each party bearing their own costs.

The second offer was expressed to be an offer in accordance with CPR Part 36. It was dated 9^th September 2008, about 6 weeks or so before the start of the trial. It offered Murphy £350,000 together with costs.

There was some debate about whether this offer fell within the rubric of Part 36 in any event. This is because the offer was in respect of claims “whether pleaded or not”. It was suggested that this took the offer outside Part 36 (which might be said to be concerned only with the pleaded claims made). Mr Lewis said frankly that this point had only occurred to him when he was preparing his submissions on costs.

There are two reasons why I consider that I should treat this second offer as being in accordance with CPR Part 36. The first is that, in the circumstances of this case, it was reasonable for the offer to include claims “whether pleaded or not”. At the time that the offer was made in early September, it was plain that Murphy would have to make amendments to its particulars of claim in order to incorporate some of the criticisms made of JP in the report of Mr Greatorex, and which had not hitherto been pleaded. Such amendments were subsequently formulated and permitted at the PTR in early October. In those circumstances it was plainly reasonable for the offer to include all claims, whether pleaded or not, that might be the subject of this litigation.

Secondly, I consider that there is considerable force in Ms Jefford’s submission that, as a matter of principle, the fact that the Part 36 offer was expressly said to be an offer under Part 36, and was treated by both parties as such, means that that is how it should now be treated by the court. In this regard I was referred to the decision of Lightman J in Hertsmere Primary Care Trust v Rabindra-Anandh [2005] EWHC 320 in which the learned judge held that, in circumstances where a point is taken as to the adequacy of an offer long after it was made, the court must seek to give effect to the overriding objective, and strive to conclude that the failure to take the point at the time meant that it could not now be argued that the offer did not accord with Part 36.

Accordingly, there were two offers made by JP to Murphy which, had either of them been accepted, would have meant that Murphy would have been in a much better position than they are now. The latter offer, the acceptance of which by Murphy would have avoided all the trial costs, was in accordance with CPR Part 36. It seems to me that this is another, and entirely separate, reason why, in all the circumstances, I should order that Murphy pay the entirety of JP’s costs, to be assessed on the standard basis if they cannot be agreed.

Pursuant to CPR 44.3(8), JP seek an interim payment of those costs. The general rule is that, unless there is a good reason why not, the court will order such an interim payment. Murphy do not say that there is any reason why the usual order for an interim payment should not be made in this case.

The leading case is the decision of Jacob J (as he then was) in Mars Uk Ltd v Teknowledge Ltd [1999] 2 Costs L.R. 44. The learned judge said:

“Where a party has won and has got an order for costs the only reason that he does not get the money straight away is because of the need for a detailed assessment. Nobody knows how much it should be. If the detailed assessment were carried out instantly he would get the order instantly. So the successful party is entitled to the money. In principle he ought to get it as soon as possible. It does not seem to me to be a good reason for keeping him out of some of his costs that you need time to work out the total amount. A payment for some lesser amount which you will almost certainly collect is a closer approximation to justice. So I hold that where a party is successful the court should on a rough and ready basis also normally order an amount to be paid on account, the amount being a lesser sum than the likely full amount”.

In Mars, the judge took the view that the claimant’s costs were extremely high. Thus he concluded that the claimant was likely to recover only 40% of its costs on assessment, and that figure was further reduced to arrive at the appropriate interim payment figure.

In the present case, there are two figures before me, both exclusive of VAT. Prior to the trial, JP’s solicitors estimated that the costs up to the end of the trial would be £542,000. There is a relatively detailed estimate for that figure. I am told that, for a variety of reasons, the actual costs were higher than that and that the likely bill (for which I do not have a breakdown) is £650,000.

In the light of the two figures noted above, I consider that, for present purposes, I should take as my starting point the figure of £600,000. The increase between the pre-trial estimate and the actual trial cost does seem high and, at least for the purposes of calculating the interim payment, I would not want to base my calculations on a figure higher than £600,000.

I do not consider that such a figure is, of itself, excessive so, unlike Jacob J in Mars, I would not want to make as great a reduction as he did for the purposes of the interim payment. I consider that a deduction of 50% is sufficient to allow for the likely reduction on assessment, together with any further reduction required to reflect the necessary caution in the making of any interim payment. That would produce a figure of £300,000.

Accordingly, for the reasons that I have noted, I consider that Murphy should make an interim payment to JP on account of costs of £300,000. As indicated to the parties at the hearing, this sum must be paid by 4pm on Friday 16^th January 2009.

CPR Part 44(6)(g) gives the court the power to order interest on costs “from or until a certain date, including a date before judgment.” The court also has power to order interest on costs pursuant to the provisions of Part 36 (i.e. if an offer is not beaten). The relevant provisions of Part 36 are as follows:

“36.14-(1) This rule applies where upon judgment being entered-

The general provision as to awarding interest on costs pursuant to CPR 44.3 has been dealt with in a number of cases. Perhaps the most significant is Bim Kemi AB v Blackburn Chemicals Limited [2003] EWCA Civ 889, where Waller LJ said that “in principle there seems no reason why the court should not [order interest on costs] where a party has had to put up money paying its solicitors and been out of the use of that money in the meanwhile.” That approach was subsequently followed by Kitchin J in Nova Productions Limited v Mazooma Games Ltd [2006] EWHC 189 (Ch) where he said:

“In the light of all these authorities, it seems to me that the court has a broad discretion when deciding whether to award interest on costs from a date before judgment. That discretion must be exercised in accordance with the principles set out in CPR 44.3 and the court must take into account all the circumstances of the case, including such matters as the conduct of the parties and the degree to which a party has succeeded. Further, the discretion must be exercised in accordance with the overriding objective of dealing with a case justly. I am unable to accept the submission that interest on costs should only be awarded in a case which is in some way out of the norm. I find no basis for that in the CPR and I believe it would provide an unwarranted fetter on the court’s discretion. This conclusion is in my judgment supported by the decisions of the Court of Appeal in Powell and in Bim Kemi.”

As I see it, there are three separate issues arising in relation to interest on costs in this case. They are:

On the first point, Mr Lewis does not dispute that, on the basis of the authorities, there is no reason why interest should not be payable on JP’s costs. I find that this concession is properly made in the light of the judgments of Waller LJ and Kitchen J noted above. It seems to me that this is an entirely typical case; in circumstances where the defendant, JP, has had a resounding victory, interest on such costs should be ordered.

The next issue is the appropriate rate of interest. Absent the offers, and therefore concentrating solely on CPR 44.3(6)(g), I consider that the appropriate rate is the base rate plus 1%. That was the rate at which interest of costs was awarded in ABCI v BFT [2003] Lloyds LR 146. In that case, the Court of Appeal noted that there was nothing in the wording of the rule which limited the court’s discretion as to rate, and awarded base rate plus 1%. The same rate was also awarded by Gloster J in Kidsons v Lloyds Underwriters [2007] EWHC 2699 (Comm), and by Kitchin J in Nova, referred to above.

All of the cases under CPR 44.3(6)(g) refer to the need to ensure that the party incurring the costs has been properly compensated for losing the use of the money that it was obliged to pay to its solicitors. It is plain that the award of base rate plus 1% represents a properly compensatory rate of interest. Accordingly, absent questions of offers and the operation of CPR Part 36, that is the rate I would award to JP.

Accordingly, the remaining issue is whether I should enhance that rate of interest on costs because the defendant, JP, made two separate offers which the claimant would have been well advised to accept. Ms Jefford acknowledged that there was no authority for this proposition, but she argued, by analogy to r.36.14 (3)(c) that, if the claimant was entitled to an enhanced rate of interest if it beat the offer made, there was no reason in principle why a defendant should not also recover interest at an enhanced rate.

Attractively though this argument was presented, I do not accept it. There are a number of reasons for this. First, the wording of r.36.14(2)(b), dealing with interest on costs to be paid to a defendant who beats an offer, is different to the wording of r.36.14(3)(c), which sets out the consequences when a claimant beats an offer. There is no doubt that the latter talks expressly about interest on costs “at a rate not exceeding 10% above base rate” whereas the former does not. The notes at paragraph 36.14.1 of the White Book make plain that the provisions are deliberately drafted in different terms.

Further, those difference were reiterated, albeit by reference to an earlier form of Part 36, by Lord Woolf in Excelsior Commercial Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnston [ 2002] EWCA Civ 879: see paragraphs 18-19 of his judgment. In other words, I conclude that the express power to award interest on the defendant’s costs at an enhanced rate is not available under the CPR, whereas it is available in relation to the claimant’s costs.

Ms Jefford contended that this would give rise to an unfair result, and she pointed out that the defendant in the position of JP (who was either going to be liable for the whole amount or defeat the claim completely) would have no incentive in making an offer at all since, even without an offer, if the claim failed, it would get its costs, and interest on those costs in any event, pursuant to CPR 44.3. There is some force in that submission, although I have to say that I doubt very much whether the possibility of recovering interest at enhanced rates would alone galvanise a defendant in such a position into making an offer, where otherwise it would not do so. The making of an offer by a defendant is always an attractive thing to do, regardless of enhanced interest, because it can affect the basis of the assessment of costs and it may influence (as it has done here) whether or not an issue-based costs order should be made.

Accordingly I do not accept that, in some way, to find that the defendant is not entitled to an enhanced rate of interest on its costs in these circumstances would somehow act as a disincentive to a defendant facing an ‘all-or-nothing’ claim from making an offer at all.

In addition, it seems to me that the enhanced interest point could only apply from 30^th September 2008 onwards in any event. That is because, on any view, an order for interest at an enhanced rate under CPR 36.14 requires the making of a Part 36 offer by JP which was not beaten by Murphy. For the reasons noted above, whilst the offer of 9^th September 2008 was a Part 36 offer, it was not suggested that the offer of the 20^th February 2007 was such an offer. I certainly decline to find that the offer of 20^th February 2007 can have the effect of carrying with it interest on costs at an enhanced rate.

Thus, even if I considered that interest at an enhanced rate was payable in principle, the only relevant period here would be from 30^th September 2008 onwards. Essentially, that means the preparation for and the duration of the trial. As a matter of discretion, I would not want to order interest at an enhanced rate over that period. The principal reasons for that concern Murphy’s conduct of the trial (which was exemplary) and the fact that, as noted above, they won at least two of the skirmishes along the way, although they lost the major battles. Whilst the loss of those skirmishes should not deprive JP of their costs, and I have so found, I consider that Mr Lewis is right to say that those are matters which I should take into account in my discretion in considering whether or not to award enhanced interest on costs.

Accordingly, for the reasons that I have set out, I consider that JP are entitled to interest on their costs at a rate of 1% over base rate from the commencement of the action until 10 December 2008. I decline to award JP any interest on costs at an enhanced or higher rate.

For the reasons set out above I consider that Murphy must pay 100% of JP’s costs to be taxed on the standard basis if not agreed. I conclude that Murphy must make an interim payment on account of those costs in the sum of £300,000 by 4pm on 16^th January 2009. I also conclude that JP are entitled to interest on those costs at 1% over base rate, but they are not entitled to interest at an enhanced or higher rate.