Linklaters Business Services v Sir Robert McAlpine Ltd & Ors

I handed down judgment in this case on 23 November 2010. The outcome was that Linklaters secured judgement in the principal sum of £2,845,435.60 against the McAlpine companies and the How companies. The McAlpine companies were entitled to a full indemnity in respect of their liability from the How companies. The claim of How Engineering Services Ltd against the insulation sub-sub-contractor, Southern, was dismissed. This further hearing has dealt with questions of costs and interest and, whilst I indicated what my decision was on the matters which remained in issue, I told the parties I would give my reasons in writing later.

This was in many ways old-fashioned litigation in the sense that a main contractor, McAlpine, was initially sued; it brought in the relevant sub-contractor, How, which in turn brought in a sub-sub-contractor, Southern. The Claimant then issued separate proceedings against How albeit in contract. How, for reasons which were not wholly obvious, issued separate proceedings against Southern for a different type of contribution. There is no doubt that one set of proceedings would have sufficed to encompass all three claims. It is obviously important that defendants, particularly, think long and hard as to whether it is necessary or desirable to bring in third or fourth parties. It may well be that the "good" or possibly "bad" old days of the 1970s and 1980s are long over but it is rarely a good idea to bring in a new party just in the hope that the new party might "chip in" to any settlement pot which might be passed around, unless there is a reasonably good case against the new party.

Although, of course, unknown to the judge before considering costs, there appears only in the final months of the case to have been any concerted effort to try to settle this litigation. How appears to have taken the view that an offer of a few hundred thousand pounds would or could protect it against a costs liability. How also unaccountably took the view that for some reason it was sensible to keep McAlpine in the proceedings notwithstanding the clearest indemnity provided by it to McAlpine such that, if How’s substantive defence succeeded, it and McAlpine would succeed whilst, if it failed, it would be 100% liable to indemnify McAlpine. It was only at the final speech stage that How acknowledged unconditionally that it was fully liable to indemnify McAlpine if McAlpine had a judgement against it. Counsel for How at the costs hearing was unable to offer any or any convincing explanation as to why How did not accept and acknowledge its liability to indemnify McAlpine very much earlier than the final day of the trial.

The basic calendar of relevant events was as follows:

McAlpine’s solicitors’ letter of 28 May 2009 to How’s solicitors was written during the Pre-Action Protocol process and made the obvious observation that How was liable through its indemnity to McAlpine if McAlpine was found liable for the subcontract work for which How had assumed responsibility. They asked How to provide a "complete indemnity" in effect to "relieve our clients from the ongoing burden of legal costs of defending the claim (in duplication of your own client’s costs) in their own right for your clients to take over the entire defence of the claim". This very sensible offer was simply turned down a few days later.

Southern’s solicitors offered to How’s solicitors on 23 June 2010 a "walk away" deal in which each party would bear its own costs to date including the costs relating to the impending appeal against my judgement of 21 May 2010. The offer was open for 21 days.

On 9 August 2010 Linklaters wrote separate letters to How’s and McAlpine’s solicitors, albeit not copied to the other, materially saying:

On 11 August 2010, McAlpine’s solicitors wrote to How’s solicitors in effect repeating the Offer made by Linklaters on 9 August 2010 (and enclosing a copy of it), again repeating that, if McAlpine was liable to Linklaters, How would be 100% liable to McAlpine. On the same day, they also wrote to Linklaters asking for clarification, materially asking:

On 1 September 2010, Linklaters replied to these two letters explaining that it had sought simply to make offers which were compliant with Part 36 but, under a heading "Proposal for Compromise of LBS’s claims in both Actions”, it wrote:

There was no response from the Defendants to the effect that they found this difficult to comprehend. The only response of any sort was from How’s solicitors who, on 21 September 2010, offered to settle for a total sum of £1,092,000, comprising £592,000 in damages and £500,000 towards Linklaters’ costs and subject to Linklaters paying McAlpine’s costs. Meanwhile, Southern’s second offer on 13 September 2010 to pay How £250,000 all received short shrift from How.

CPR Part 36 deals with offers to settle and the impact on costs and interest following a judgement. Part 36.2 states:

Part 36.14 addresses the costs and other consequences where, amongst other things, judgement against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant’s Part 36 offer:

CPR Part 44.3 deals with the Court’s discretion on costs:

As far as indemnity costs are concerned, apart from what Part 36.14 (3) says, Mr Justice Tomlinson in Three Rivers DC v Governors and Company of the Bank England [2006] EWHC 816 (Comm) , unexceptionably stated:

I would add that CPR Part 36.14(3) gives the Court the discretion to take into account any injustice there would be in applying the indemnity costs and additional interest provisions where a Claimant’s Part 36 offer is exceeded by a judgement obtained in its favour. It can have regard to the Part 36 offers and to any difficulties created by the terms or impact of such an offer or offers.

Southern’s offer of a “walk-away” agreement of 23 June 2010 was obviously with hindsight (at least) a sensible one. One needs to bear in mind that, when it was sent, the final witness statements had not been submitted or the expert reports exchanged. That had however occurred by 9 July 2010. It should have been obvious to How by that stage at the latest that its case against Southern was at best weak and at worst speculative. The problem for How was that its evidence was that it and others had supervised Southern and consequently there was little chance of what was perceived as bad workmanship going unnoticed and not remedied at the time. Against that, there undoubtedly was extensive corrosion which primarily had to be attributable to dampness penetrating the insulation and that could only be due to some inherent problems with the insulation which were not all pervading bad workmanship. There were left only two realistic alternatives: poor detailing (How’s fault) or post-How damage caused by maintenance or fitting out works (not How’s risk). The real problem with this latter alternative as it turned out at trial was that there was no coherent probability that this could have caused the all pervading corrosion. The overwhelming probability then must have been that the corrosion problems, mostly and almost invariably appearing at the wooden supports and the Victaulic joints, were attributable to poor detailing by How.

It it is all the more surprising that How did not accept the offer made by Southern on 13 September 2010 to pay to How £250,000 inclusive of course and in effect to pay its own costs. I take this into account also.

I assume in How’s favour that it simply did not do any real analysis at the earlier or later times; if it did, that analysis must and certainly should have pointed to there being a real risk that its case against Southern was weak. Be that as it may, an offer was made and it was rejected by How. How has done much worse than what Southern’s first offer represented in that it has lost and has on any count to pay the costs of Southern. The only question is whether it should pay indemnity costs. I have decided that it should do so but as from 16 July 2010. Although the offer was for 21 days and expired on 9 July 2010, I have allowed for another 7 days for How to have looked at the expert reports and seen that there was little on analysis to justify keeping Southern in the proceedings; I have no doubt that Southern would have extended the offer for another 7 days.

There remains the question, left over to this Court by the Court of Appeal, as to what order should be made with regard to the costs of and occasioned by the appeal. These appeals were from my judgements in favour of How in May and July 2010, in which I decided that (a) I could not definitively decide whether Southern did not owe a duty of care to Linklaters for contribution purposes and (b) that Southern did owe a duty of care to How, collateral to the contractual duty owed by Southern. I gave permission to appeal. The Court of Appeal adjourned the latter appeal and dismissed the former as the point was arid given that the trial was impending ([2010] EWCA Civ 999). My judgement on the merits has been that Southern owed no relevant duty of care but that in any event there was no causative breach of duty by Southern. On the one hand, therefore Southern can point to its eventual success, but on the other, How can point to the fact that Southern “jumped the gun” by prematurely seeking an early departure from the proceedings. It would not be fair for this Court to double guess what the Court of Appeal would have done.

I have decided that How should pay half of the costs of and occasioned by the appeals. My reasons are, firstly, that the acceptance of the offer made by Southern dated 23 June 2010 would have avoided the need to further the first appeal or even pursue the second application which led to the July judgement giving rise to the second appeal. Secondly, ultimately Southern won on the point which went to appeal on the duty of care to Linklaters. Thirdly, How had established the duty of care owed to it. Fourthly, Southern’s timing of the appeals was such that it was foreseeable that the Court of Appeal would have found it difficult to produce any considered judgement before the trial in any event (as turned out to be the case).

This is relatively simple. How agrees that it must pay McAlpine’s costs on an indemnity basis. That was inevitable given the contractual indemnity arrangements and the offer made by McAlpine even before the Claims were issued to drop out on How confirming its obligation to indemnify. There remained two issues.

The first issue was whether McAlpine should be ordered to pay the same amount by way of interim payment on costs as How has agreed to pay Linklaters, £1.4m. This issue only could become important if How do not pay it on time. Linklaters’ summary costs bill was for nearly £3.5m. Upon my indicating that the Court could not accept the figure of £1.4m as the basis for deciding what the interim costs order should be (given the (at least superficially) disproportionate size of the Linklaters’ bill and for instance the case law about the assessment of solicitors’ costs when they have acted (as here) for themselves), the parties left it to me to decide between £1.3m suggested by Linklaters and £1.1m suggested by McAlpine. I decided that the sum of £1.2m would suffice.

The second issue was how much by way of interim costs should be paid for by How for McAlpine’s costs. McAlpine put forward a summary costs bill of about £1.1m and argued that it should have £1m by of an interim payment on account. The principles applicable are set out in the costs judgement of Mr Justice Jacob (as he then was) in Mars UK Ltd v Teknowledge Ltd [2008] EWHC 226 (Pat) to the effect that generally “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". It seems to me that the fixing of the amount will necessarily vary from case to case but the following should provide some sensible guideline:

I have formed the view that it would be legitimate to take a figure of about £1m for McAlpine's costs as a reasonable one and deduct about 15% to reflect what may be substantial arguments even on an indemnity taxation. I round the resulting total to £850,000.

There were 17 bundles of maintenance documents copied and included in the trial bundles. The maintenance issue arose because How argued that some or all of the damage to the insulation (which arguably caused a path for dampness to penetrate to the pipes) was or may have been caused by maintenance and by contributory negligence by Linklaters. This latter allegation was dropped early in the trial. It emerged that Linklaters simply collated most and possibly all documents relating to maintenance over a 10 year period, copied them and offered them to the other parties as part of the bundles. There seems to have been no great thought process as to what documents should go in, and all went in lest they be relevant. Without wishing to be censorious, this was the wrong approach. How was making the maintenance point and it should have been asked what documents it wanted in; then, in the light of that, Linklaters could have added documents to those selected by How to put them into context and to counter specific points made by How. In my view, How should not have to pay for the whole of this exercise. I order therefore that Linklaters should have only half of its costs of and occasioned by copying the I (maintenance) bundles.

I am satisfied that the offers made by Linklaters on 9 August 2010 complied with the requirements described in CPR 36.2 set out above. They necessarily related to the two Claims, one against McAlpine and one against How, which, on an earlier contested application to consolidate the two Claims, I merely ordered should be tried together; unsurprisingly, I was not told at that stage that one of the reasons to consolidate might have been to facilitate a valid overall Part 36 Claimant’s offer to be drafted.

The difficulty however that these letters created was that it would be in practical and commercial terms impossible for McAlpine to accept the offer made to it by Linklaters without it securing How’s agreement because, technically, if it accepted the offer and How accepted the offer made to it, Linklaters would end up with £4.56m which was effectively more than the maximum which it could recover on its best case, including interest. It was sensible and proper for McAlpine to raise the query which it did in its letter to Linklaters on 11 August 2010, adopted belatedly by How. It would have been very easy for Linklaters to respond to this letter rather more promptly than it actually did. The Court has not been informed why Linklaters until its letter of 1 September 2010 delayed its response; it could have been deliberate (awaiting the expiry on 30 August 2010 of its 9 August 2010 offer) or accidental (in that Linklaters like the other parties was obviously working flat out to get ready for the October trial).

Be that as it may, it was and must have been obvious to both Defendants, once they had the letter of 1 September 2010, that Linklaters was willing to settle at the net figure of £2.28m plus costs to be assessed. There is no good reason why that offer could not have been accepted; it was How which in effect would have to accept it given the fact that it was obliged to indemnify McAlpine. It follows that by applying CPR Part 36.14(3) the general rules should follow but from a reasonable time in the circumstances after the letter of 1 September 2010 was received by the Defendants. How (and McAlpine) should pay Linklaters’ costs on an indemnity basis from and including 7 September 2010 and on a standard basis prior to that date.

Linklaters also argued that costs should be ordered on an indemnity basis from 1 July 2010 on the basis that How’s conduct from that time was unreasonable. I have formed the view that How’s conduct at least before 7 September 2010 in relation to the case against it was not so unreasonable as to justify indemnity costs. My reasons are:

Interest should be allowed on damages and, indeed, costs at the rate of 5% above base rate from and including 7 September 2010. Various cases relied upon by the parties demonstrate that interest under CPR Part 36.14(3) should not be imposed at a penal rate to punish the Defendants (in this case) but that an enhanced rate should provide some compensation towards the general impact of proceedings. I formed the view that a rate of 5% above base rate by way of interest should be ordered in respect of the period from and including 7 September 2010. Interest is agreed between the parties in respect of the period beforehand.

There were issues as to the date of payment by How and what interest rate shall apply after the judgement. I formed the view that judgement rate interest should apply as from the judgement date, it being not significantly different from base rate + 5% as I have ordered in any event for the period after 7 September 2010 but that the time for payment should be 14 December 2010 to enable How’s insurers to secure the requisite monies from the co-insurers or other layers. The interest rate imposed should act as an incentive to secure earlier payment.