Costs News

13 February 2020
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Assessment of indemnity costs not constrained by budget, Court of Appeal says

The Court of Appeal has rejected the argument that a party should not be awarded indemnity costs because that would allow her to get away with substantially exceeding her costs budget.

In Lejonvarn v Burgess and Burgess [2020] EWCA Civ 114, the court also found that the trial judge had applied the wrong test when refusing to order indemnity costs.

The appellant was awarded indemnity costs and claimed costs of £725,000 – with not all costs yet included – against a budgeted sum of £415,000.

Lord Justice Coulson, the lead judge on costs in the appeal court, said he agreed with the analysis of HHJ Keyser QC, sitting as a High Court judge, when he explained the absence of an overlap between the cost budgeting regime and an order for indemnity costs, in Kellie v Wheatley and Lloyd Architects Limited [2014] EWHC 2886 (TCC). In doing so, Coulson LJ overruled obiter comments he himself had made while sitting in the High Court.

HHJ Keyser said that while proportionality was central to costs budgeting, it was not in issue with indemnity costs. He said: “The costs management regime is not intended to give litigants an expectation that they will not incur a liability for disproportionate costs pursuant to an order for costs on the indemnity basis; any such expectation must rest on a party's own reasonable and proper conduct of litigation.

“It is no objection to an order for costs on the indemnity basis that it is likely to permit the recovery of significantly larger costs than would be recoverable on an assessment on the standard basis having regard to the approved costs budget; that possibility is inherent in the different bases of assessment, and costs on the indemnity basis are intended to provide more nearly complete compensation for the costs of litigation.”

A party seeking to recover disproportionate costs on an assessment on the indemnity basis was still required to show that those costs were reasonably incurred, he added.

Coulson LJ said: “I respectfully agree with that analysis. In principle, the assessment of costs on an indemnity basis is not constrained by the approved cost budget, and to the extent that my obiter comments in Elvanite or Bank of Ireland v Watts suggested the contrary, they should be disregarded…

“There is, as a matter of principle, no overlap between a costs budget, which will have been approved on the basis of a projected series of figures for costs that were assessed as reasonable and proportionate, and the actual costs to be assessed by reference to the indemnity basis (where reasonableness might still be an issue, but proportionality is not). Thus, even if there had been an approved budget figure, it could not affect whether or not the court should make an order for indemnity costs.”

Further, in this case, there was “no clear or settled starting point as envisaged by the costs management regime”, meaning it was not appropriate to compare the two figures.

Coulson LJ added that, on detailed assessment, the appellant's costs were likely to be found to be unreasonable. “I find it difficult to comprehend how such costs were incurred in a dispute about a garden in Highgate when the appellant's original involvement lasted no more than a few weeks and was not the subject of charge.”

In the case, the appellant architect was a “friend and former neighbour” of the respondents, who helped them for free when they wanted to carry out major landscaping works at their home in North London.

Coulson LJ recorded: “There was a falling-out which led the respondents to commence proceedings against the appellant in the TCC [Technology and Construction Court] for breach of contract and/or negligence.

“The appellant made a part 36 offer in the sum of £25,000 three weeks after the start of proceedings, which was not accepted.”

Although the High Court found that Ms Lejonvarn owed Mr and Mrs Burgess a duty of care, a finding upheld by the Court of Appeal, Mr Recorder Bowdery QC, sitting as a deputy High Court judge, ruled that the architect had “provided very few services and not been negligent in any of them”.

The judge ordered that her costs, described by Coulson LJ as “eye-watering”, should be assessed on the standard basis.

Ms Lejonvarn appealed on the grounds that the claims were “out of norm” such as to warrant indemnity costs.

Coulson LJ said that, after the earlier Court of Appeal ruling, the couple knew their claims were weak and “all that really mattered now” was costs.

“From then on, the respondents found themselves in an absurd position, where they were incurring hundreds of thousands of pounds in costs, solely in order to try and recover some of those costs from the appellant.

“The respondents should have called a halt, because their underlying claims were speculative/weak, but they failed to do so.”

He found that the trial judge had applied the wrong test by considering that the claims were not hopeless; rather, he should have looked at whether the couple “knew or ought to have known that their claims were speculative/weak and, therefore, likely to fail”.

Coulson LJ went on to reconsider the decision. He said the answer to why the claims were pursued may lie in the judge’s comment that it was borne out of the couple’s desire to punish the architect.

“An irrational desire for punishment unlinked to the merits of the claims themselves is precisely the sort of conduct which the court is likely to conclude is out of the norm.”

Coulson LJ said he was confident that the respondents were aware their claim faced “significant difficulties”, which could be seen from their part 36 offers.

Having sought £220,000 before the first Court of Appeal ruling, they were prepared to accept only £45,000 after it.

The judge said their failure to accept the architect’s original offer was an “important matter” which the trial judge was wrong to ignore and which was “a separate and stand-alone element of their conduct which was out of the norm”.

Coulson LJ ruled that, taking into account all the circumstances of the case, it was appropriate to limit indemnity costs to the period after the couple had time to digest the Court of Appeal judgment – from 7 May 2017.

He allowed Ms Lejonvarn’s appeal. Lady Justice Rose and Sir Jack Beatson agreed.

Coulson LJ commented that the case had “echoes of the bad old days” of construction litigation, where “costs were often out of all proportion to the sums at stake”.

Louis Flannery QC and Rupert Cohen (respectively of and instructed by Stephenson Harwood) for the appellant and Seb Oram (instructed by Mayo Wynne Baxter) for the respondents.


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