LPI (Hotels) Ltd v Technical & General Guarantee Company SA

In exercising its discretion whether to disallow elements of costs, the Court will need to have regard to the general principles on which its discretion on costs is exercised. In Home Office v Lownds [2002] EWCA Civ 365, the Court of Appeal considered the impact of proportionality in the assessment of costs at the costs assessment stage. When the managing or trial judge is considering whether to allow or disallow elements of the potential cost bill, he or she is not actually assessing costs as such. However the Court of Appeal made some observations which need to be borne in mind at the earliest stage prior to assessment:

“31.

In other words what is required is a two-stage approach. There has to be a global approach and an item by item approach. The global approach will indicate whether the total sum claimed is or appears to be disproportionate having particular regard to the considerations which Part 44.5(3) states are relevant. If the costs as a whole are not disproportionate according to that test then all that is normally required is that each item should have been reasonably incurred and the cost for that item should be reasonable. If on the other hand the costs as a whole appear disproportionate then the court will want to be satisfied that the work in relation to each item was necessary and, if necessary, that the cost of the item is reasonable. If, because of lack of planning or due to other causes, the global costs are disproportionately high, then the requirement that the costs should be proportionate means that no more should be payable than would have been payable if the litigation had been conducted in a proportionate manner. This is turn means that reasonable costs will only be recovered for the items which were necessary if the litigation had been conducted in a proportionate manner.

37.

Although we emphasise the need, when costs are disproportionate, to determine what was necessary, we also emphasise that a sensible standard of necessity has to be adopted. This is a standard which takes fully into account the need to make allowances for the different judgments which those responsible for litigation can sensibly come to as to what is required. The danger of setting too high a standard with the benefit of hindsight has to be avoided. While the threshold required to meet necessity is higher than that of reasonableness, it is still a standard that a competent practitioner should be able to achieve without undue difficulty. When a practitioner incurs expenses which are reasonable but not necessary, he may be able to recover his fees and disbursements from his client, but extra expense which results from conducting litigation in a disproportionate manner cannot be recovered from the other party.

38.

In deciding what is necessary the conduct of the other party is highly relevant. The other party by co-operation can reduce costs, by being uncooperative he can increase costs. If he is uncooperative that may render necessary costs which would otherwise be unnecessary and that he should pay the costs for the expense which he has made necessary is perfectly acceptable. Access to justice would be impeded if lawyers felt they could not afford to do what is necessary to conduct the litigation. Giving appropriate weight to the requirements of proportionality and reasonableness will not make the conduct of litigation uneconomic if on the assessment there is allowed a reasonable sum for the work carried out which was necessary.”

As proportionality is part of the overriding objective, it seems clear that the case managing or trial judge can and should take into account the proportionality of elements of costs being incurred. Thus, one might form the view that it was wholly disproportionate to call three witnesses all to say the same thing on a topic which was not controversial and therefore the Court could disallow the costs of proofing and calling, say, two of them. Similarly, if it was disproportionate to call an expert to deal with issues which did not need expert evidence, the case managing or trial judge could legitimately disallow the related costs. I do not think that it is essential at this stage to become involved in any pedantic detail about the two stage approach referred to by the Lord Chief Justice in the Home Office case but it will be legitimate to consider the necessity, desirability and reasonableness of calling an expert.

This case

In August 2007, LPI (Hotels) Ltd (“LPI”) employed a contractor, Meadmanor Contracts Ltd (“the Contractor”), to build a hotel complex in Wigan. The Defendant, Technical & General Guarantee Company SA, provided a bond in effect guaranteeing the performance of the Contractor for just under £800,000. By June 2008, the Contractor was facing a winding up order petition due to be heard on 28 July 2008; this petition related to another project altogether. By this stage, LPI was, with the concurrence of the Contractor, paying directly various subcontractors and suppliers of the Contractor.

Matters came to a head on 21 July 2008 when there was a meeting attended by two directors of the Contractor (Messrs Ilott and D’Ippolito), an accountant (Mr Chesterton, who was to become the liquidator of the Contractor), a Mr Goodwin (a director of an associated company of LPI which was eventually to take over the works from the Contractor) and two directors of LPI (Messrs Drew and Slatter). There was some issue between the parties as to what was said at that meeting but there seems little doubt that Mr Chesterton delivered a relatively pessimistic outlook for the Contractor. LPI’s evidence was and was going to be that Messrs Ilott and D’Ippolito said that the Contractor was ceasing trading forthwith; LPI’s primary case was that the Contractor thus repudiated the building contract which was accepted in a variety of ways. Messrs Ilott and D’Ippolito were due to give evidence to the effect that they did not say that they were ceasing to trade. On 22 July 2008, the Contractor notified LPI that it had ceased to trade, albeit that this was said to be a reaction to LPI’s conduct of the previous day.

In any event, by one means or another, the building contract came to an end and not later than 28 July 2008 when the winding up order was actually made against the Contractor. It seemed and seems unlikely that the Contractor would or will ever be able to honour any valid claims from LPI.

In August 2009, LPI issued proceedings against the Defendant seeking declarations in effect that in principle it was entitled to damages for repudiation of the building contract, alternatively to additional costs calculated in accordance with Clause 27 of the building contract. The proceedings contained no monetary claim. The Particulars of Claim were predicated on there being repudiation at the meeting of 21 July 2008, alternatively on 22 July 2008 when there was further notification of cessation of trading or alternatively automatic termination of the Contractor’s in employment pursuant to Clause 27.3.3 of the Building Contract. Paragraph 12 states:

“At [the meeting of the 21 July 2008] it became clear that, even on a best case scenario, the Contractor was in considerable difficulties, was technically insolvent and not in a position to trade. The Claimant’s representative David Drew formed the view that the Contractor had not hitherto fully appreciated its financial position. However, the Claimant now has reason to believe that Mr Drew was mistaken in this regard and in fact the Contractor had for some time been aware of the extent of its financial difficulties. It was apparent to all at that meeting that the works would not be completed by the Contractor as it was not able to perform its obligations under the Building Contract despite the assistance provided by the Claimant. As the minutes of that meeting (Attached…) record, the Contractor indicated that it had no option but to cease all works on site and the Claimant confirmed that, if it did so, security would be brought to the site to secure the site and minimise the Contractor’s losses.”

The Defence and Counterclaim served in October 2009 specifically took issue on what was said at the meeting of 21 July 2008. There was a denial that the Contractor’s position was financially precarious as at 7 July 2008 (Paragraph 19(5) (a)). As to Paragraph 12 of the Particulars of Claim, Paragraph 24 materially pleaded:

In Paragraph 32, the Defendant denied an allegation that the winding up order was made "as anticipated" and it went on to plead that:

This Negative Valuation was produced on behalf of LPI on 21 July 2008 and purported to show a substantial six-figure sum due from the Contractor to LPI.

Paragraph 36(4) pleaded:

“It is reiterated that the cessation of trading and/or decision not to defend a winding up petition was brought about by the Claimant’s unconscionable conduct and/or breaches of the implied terms of the Building Contract, as more fully particularised above. In the premises, if, which is denied, a cessation of trading amounts to and/or evidences a breach and/or repudiatory breach of contract, the Defendant avers that the Claimant is prevented from claiming relief as a result of such breach as to do so would enable the [Claimant] to rely upon and or benefit from its own breach of contract.”

Through their Case management information sheets, the parties informed the Court in November 2009 that experts were not required for the case. At the first Case Management Conference, directions were largely agreed and they did not provide for expert evidence to be called.

Notwithstanding this, each party had retained an accounting expert by about January 2010. It was the Defendant’s solicitor however who first raised with LPI’s solicitors on 5 March 2010 the proposal that there should be an agreed order from the court that experts could be called. LPI’s solicitors replied on 18 March 2010 "it would be appropriate for the parties to be permitted to adduce expert evidence relating to the solvency of" the Contractor. A consent order was agreed and lodged with the court with explanatory letters to the Court from each party’s solicitors, with the Defendant’s solicitors saying that such expert evidence may assist the court in its understanding of events before and after the repudiation; they recognise that it might not be relevant but would prefer that the evidence was before the court if the court needed it. LPI’s solicitors told the Court that it would be greatly assisted by the evidence of forensic accounting experts. I endorsed the order albeit given that, as it was by consent, I had not analysed the detail of the case at that stage.

Witness statements were exchanged in May 2010 including a long witness statement from Mr D’Ippolito which contained extensive evidence about the Contractor’s solvency or insolvency and ability to trade in the period leading up to its winding up. Expert reports were exchanged by late May 2010 and the two accountants met on 27 May 2010 and produced their Joint Statement dated 10 June 2010.

There were issues between the parties about security of costs and there was a hearing in front of Mr Justice Edwards-Stuart on 25 May 2010 in which he ordered that security should be provided by LPI but in doing so he expressly excluded from the amount of security anything for the Defendant’s forensic accounting expert costs on the basis that in his view such accounting evidence was irrelevant. In consequence, the Defendant’s wrote to LPI’s solicitors on 1 June 2010 to the effect that the parties should give serious consideration to what to the judge had said. On 9 June 2010, LPI’s solicitors responded somewhat obliquely and asking for proposals about narrowing the issues. The Defendant’s solicitors responded on 10 June 2000, in effect making it clear that they now considered the expert reports were irrelevant.

By the time of the trial it had at least been agreed between the parties that the experts would not be called as witnesses but, subject to arguments about relevance, their reports and Joint Statement could be considered by the court.

That trial started on 22 July 2010 and, after short openings, I heard the evidence of Messrs Chesterton and Goodwin although the latter was incomplete at the end of the first day. In the opening submissions of Counsel for the Defendant, they specifically made it clear that they considered that the expert reports and Joint Statement were inadmissible and irrelevant.

The parties resolved the case on or about 23 July 2010, when the Court was not sitting on the trial. Effectively, the Defendant accepted the Claimant’s primary case that it was liable on the basis that the Contractor had repudiated the building contract and that the repudiation had been accepted; it withdrew its defence and agreed to accede to a declaration in the terms sought. It was agreed by both parties that the Defendant should pay the Claimant’s costs on a standard, as opposed to an indemnity, basis, subject to argument as to whether it should pay the Claimant’s costs related to the accounting expert.

Discussion

Both parties initially proceeded upon the basis that accounting expert evidence was irrelevant and was not needed following close of pleadings. In the light of that, the engagement by LPI of an accounting expert in about January 2010 must have been on a speculative basis, because the pleadings had not changed and witness evidence had not been exchanged.

However, by about late March 2010, both parties and their solicitors, perhaps with differing degrees of enthusiasm, were mutually of the view at the very least that expert evidence of this sort might be of assistance to the Court. It was therefore agreed that each party that could produce the evidence of an accounting expert and a timetable was agreed. The accounting experts were to and did meet pursuant to this agreement.

It was however clear, and, so to speak, the writing was on the wall, by late May 2010 that the Court at the very least had serious reservations about the relevance of the expert evidence. That was not surprising because the primary issue revolved around a meeting on 21 July 2008 and in simple terms whether the Contractor’s directors had effectively said that it was ceasing trading and would not be continuing with the work. The reality was that on the following day the Contractor said that it was ceasing to trade and it was wound up a week later at the behest of a petitioning creditor supported by others.

I have formed a clear view that the expert evidence was tangential in terms of relevance and not strictly necessary in practice. It was tangential because the primary issue related simply to what was said at a meeting and it was not strictly necessary because almost everything that the expert dealt with could simply have been dealt with by way of cross-examination of the Contractor’s witnesses. The fact that LPI agreed that the experts were not to give oral evidence perhaps highlights the tangential nature of their evidence.

However, I do not consider that it was unreasonable in all the circumstances for LPI to have utilised the services of its accounting expert from the time when it was clear that both parties believed that accounting evidence would or could be of assistance to the resolution of the dispute between the parties by the Court. Although, of course, it was for each party to decide whether it actually wanted or needed to put in such expert evidence, the parties were in practice proceeding upon the basis that they would each put in such evidence. It was not unreasonable in those circumstances for a party such as LPI to seek to protect itself by having accounting expert evidence at least by way of response to whatever the Defendant might put forward by way of such evidence. The fact that both parties encouraged and invited their accounting experts to meet and produce a Joint Statement is supportive of the view that both parties were mutually proceeding on the basis that such evidence was likely to be material.

However, by the end of May 2010 and in the light of what Mr Justice Edwards-Stuart had said, it is clear that the parties should have revisited the need or desirability of having such expert evidence. The Defendant formed a view by early June 2010 that it was not necessary and by then LPI and its advisers had had more than enough time to decide on the utility of the further use of such expert evidence.

I have formed the view therefore that it was reasonable for the Claimant, LPI, to retain and use its accounting expert between the date when solicitors expressed agreement with each other that accounting expert evidence would be helpful, 18 March 2010 and 1 June 2010, when there should have been a realisation that the further use of the accounting experts was not going to take the case significantly further.

It is argued that the conduct of the Defendant in "capitulating” after Day 1 of the trial was conduct which is material in determining whether LPI should have all its accounting costs. Although no explanation has been provided as to why the Defendant conceded defeat after the first day and none was apparent to the Court from Day 1, the parties have agreed, for better or for worse that costs should be on a standard basis. If there was material before the Court that enabled it to say that costs should be on an indemnity basis, there might be something more in this argument.

Decision

It follows from the above that the Claimant should only have its costs of and related to its forensic accounting expert and her report in respect of the period 18 March to 1 June 2010 inclusive and that it should not be paid as part of its costs entitlement for such costs as relate to work done outside that period.