BLM successfully defends costs appeal in the Court of Appeal

13 Dec 2011

Berrymans Lace Mawer LLP (BLM) associates Catherine Hindle and Paul Wainwright report today's judgment in the case of Epsom College v Pierse Contracting Southern Limited.

BLM represented the claimant college and its insurers in a flood damage claim originally heard in the Manchester Technology & Construction Court. The claim was for the recovery of rectification costs from the defendant construction company for causing a nail to penetrate a pipe during the course of building works undertaken three years prior to the damage occurring.

The defendant appealed the order on costs in which the claimant was awarded indemnity basis costs and enhanced interest on damages and costs. The defendant argued that the trial judge was wrong to give effect to the claimant's Part 36 offers and to have awarded the claimant all of its costs and sought a reduction of 40% of the claimant's costs.

Lord Justice Rix, sitting with Lord Justice Tomlinson and Sir Mark Waller dismissed the appeal and upheld the trial judge's disposal on the question of costs save for postponement of the operation of the first of the claimant's Part 36 offers for the purposes of costs consequences from 8 May 2010 to 1st November 2010.

Background

Following the intimation of the claim, the claimant made numerous offers to settle including two Part 36 offers and costs inclusive offers. The defendant did not make any attempt to mediate or make any positive offers throughout. 

On 18 October 2010, the pipe alleged to have caused the damage, which the claimant had thought had been disposed of, was found. The claimant immediately withdrew all of its previous offers save for its first Part 36 offer at £19,200. Thereafter on 28 October 2010 the experts jointly examined the pipe. The examination supported the claimant's case that the hole had been caused by a nail or screw, rather than copper pitting corrosion advanced by the defendant.

The defendant however maintained its case that the claimant had to prove that the defendant had worked on the pipe beneath the duct covers and the claim proceeded to a three day trial in January 2011 at which the claimant was awarded the sum of £27,120.35 including interest.

Appeal

The appeal involved the consideration of a number of important issues for legal practitioners, including the construction of a Part 36 offer alleged to have been time limited (C v D [2011] EWCA Civ considered), the effect of withdrawal of a Part 36 offer (French v Groupama Insurance Co Ltd [2011] EWCA Civ 1119 applied) and whether the trial judge applied Part 36.14 consequences as opposed to Part 44 discretion when awarding indemnity costs.

The claimant's second Part 36 offer made at 50% of the claim value was the basis of the trial judge's order of indemnity costs and interest on costs. This offer had however been withdrawn in October 2010 when the pipe which had become punctured and the claimant had thought had been disposed of shortly after the incident, had in fact been found and before the expert engineers had opportunity to jointly examine it. This offer as withdrawn could therefore not be made the basis of a rule 36.14(3) order. The court of appeal did not consider that the trial judge was making a decision to award indemnity costs under his general discretion under Part 44.3, rather he was exercising a Part 36 power.

The claimant's first Part 36 offer had never been withdrawn and could be relied upon to generate Part 36 consequences. The court of appeal considered that once the pipe had been produced the defendant was in a position to accept the first offer and to argue that it should not be liable for all of the claimant's costs, let alone on an indemnity basis. The defendant however did not admit liability, make an offer or accept the claimant's first Part 36 offer. It continued to put the claimant to proof on its claim and despite realising they were in difficulties "they were prepared to go on to the bitter end in the hope that something would turn up and the school would fail to make good its case" (para 64.) The claimant was allowed indemnity costs and enhanced interest from 1 November 2010.

The defendant's appeal to reduce 40% of the claimant's costs failed as the defendant ought to have known that it was involved in replacing the pipework, it had a major contract (over £0.5 million), the corrosion defence was a speculative gamble whereas the claimant's case remained to the end as pleaded from the beginning. Although it was negligent for losing sight of the pipe there was nothing misleading about its claim and the mere fact that earlier production of the pipe would have shown that it had not corroded does not mean the defendant was entitled to be indemnified for taking a wrong point.

Comment

Lord Justice Rix, delivering the lead judgment, reminded practitioners that the Court of Appeal should as far as possible seek to put itself in the shoes of the trial judge, particularly when he was also the case management judge and build on his findings and assessment. An appeal of a costs order should not be an attempt to re-try the case.

In his postscript Lord Justice Rix expressed further judicial concern about the operation of CFAs. In his opinion this case illustrates the potential for the CFA to become an obstacle to settlement. In cases such as this, involving relatively modest sums, the effect of the success fee on the defendant's overall liability shifts the focus to costs. 

Where, as in this case, the defendant has gambled on what the court deemed a "speculative" defence at an early stage and not made any offers to settle, it is not easy for a defendant to face up to the implications in terms of its liability for costs. The likelihood is that this may serve to entrench the parties in their positions and make a trial more, not less, likely and therefore increase the overall costs.

Lord Justice Rix's strong criticism of CFAs marks further judicial intervention into the success fee debate on behalf of the Court of Appeal.  It comes in the wake of legislation to implement Lord Justice Jackson's proposals to abolish the recoverability of success fees and ATE insurance premiums in civil claims.  This gives a further indication of the senior judicial support behind Lord Justice Jackson's reforms.

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