U.K. - Costs - The "Winner" Will Not Always Recover

(Sea Venture Volume 21)

A recent High Court decision has demonstrated acutely the "issue by issue" approach now taken by the courts when assessing claims for costs. It is now clear that a claimant who succeeds in recovering 100% of his claim may still find himself liable for the majority of the defendant's costs.

In Kastor Navigation v. AGF M.A.T.¹, Mr. Justice Tomlinson had to assess:

(a) the recoverable proportion of the costs incurred by a successful claimant and 

(b) whether a successful claimant would have to pay anything towards the defendant's costs.

The vessel, "Kastor Too", had sunk shortly after a fire had broken out on board. The claimants had pleaded that the vessel was an actual total loss as a result of the fire and, in the alternative, that the vessel was a constructive total loss before she sank. Tomlinson J. held that while it could not be shown that the vessel was an actual total loss as a result of the fire, the claimants would succeed on the grounds that she was a constructive total loss before she sank. As a result, the claimants could recover the vessel's full insured value from the defendant insurers.

The principal amount at stake had been $3 Million. Each side had incurred approximately £850,000 costs in litigation. Understandably, therefore, the issue of costs and costs recovery was almost as important to the parties as the actual claim itself.

Traditionally under English law a successful claimant would usually recover his costs under the "costs follow the event" principle. Following the introduction of the Civil Procedure Rules in 1999, the courts were encouraged to exercise their discretion and take a more reasoned approach. This was best summarised by Lord Woolf MR, the author of the CPR reforms, in Phonographic Performance Ltd., v. AEI Rediffusion Music Ltd.²:

"The most significant change in emphasis of the new rules is to require courts to be more ready to make separate orders which 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 are encouraged to leave no stone unturned in your effort to do so."

Bearing this mind, Tomlinson J. looked closely at the alternative cases that the claimants had pleaded and the amount of time and costs that ensued from each. He concluded that the claim in respect of actual total loss represented 85% of the costs and time taken, as the issues raised were far more complex and the evidence required far greater. Conversely, the issues raised in relation to the constructive total loss case were far more straightforward and the matter would have been resolved very quickly had it been the only case pleaded. As a result the claimants were entitled to recover their costs in respect of the constructive total loss claim, but were held liable to pay the defendants' costs in respect of the actual total loss case.

The result was that the claimants could recover 15% of their costs but had to pay 85% of the defendants' costs. Tomlinson J. stated that he had "reached that conclusion simply on the basis that the claimants raised and pursued an issue which significantly increased the length and cost of the action and of the trial upon which they lost. That does not involve a finding that the claimants acted unreasonably or improperly in that regard."

A further issue that the Judge had to address related to Part 36 offers. Under Rule 36 of the CPR, either party can make an offer to settle a claim; a claimant can use the procedure to say he will accept a sum which is less than the full claim pleaded, and equally the defendant can offer a lower amount. There are costs implications which follow the making of such offers designed to act as incentives to settle.

Where a defendant makes a Part 36 offer, that is an offer to settle the dispute at an amount of less than the full amount claimed, and the claimant does not manage to better the amount of the offer through proceedings, the defendant would then be entitled to recover "any costs incurred"³ by him after expiry of the offer period (unless the Court feels such an award to be unjust given the particular circumstances of the case).

Where a claimant has made a Part 36 offer which the defendant does not accept and the claimant is subsequently awarded an amount of the same value or more than his offer, the CPR allow the court discretion to award the claimant costs an "indemnity" basis, rather than on a "standard"⁴ basis (The Court can also award a claimant interest on damages at a rate of upto 10% over base rate as an additional penalty).

In this case the claimant had made a Part 36 offer to accept approximately ninety percent of the full amount claimed. In seeking recovery of their costs, the claimants sought to argue that as a result of the defendant failing to accept this offer, which was less than the final amount they recovered, they (the claimants) should be entitled to recover all their costs from the point the offer elapsed onwards. However, Tomlinson J. highlighted that the wording of Rule 36 of the CPR in relation to costs where a claimant does better than he proposed in his Part 36 offer differs significantly to the wording in relation to what happens when a claimant fails to beat an offer made by a defendant⁵ . Where a claimant does better than he proposed in his Part 36 offer he is only entitled to recover such costs as are or would otherwise be awarded to him (albeit on an "indemnity" basis). The reasons for this, as pointed out by Tomlinson J., are as follows:

Were a claimant able to recover all his costs in the event that he did better than he proposed in a Part 36 offer, that claimant would be encouraged to make a Part 36 offer and then plead every single possible point.

"A Claimant with only a 50/50 case could by careful use of a Part 36 offer produce a situation in which he had a potentially free run on any number of wholly unmeritorious bases of claim which had no prospect of success whatever. A Defendant in such circumstances might be deterred from defending a 50/50 case, perhaps involving an important point of principle, by fear of the prospect of having to pay the Claimant's costs (and on an indemnity basis) on a whole raft of wholly unmeritorious makeweight points …".⁶

This case underlines the fact that in London litigation (and this includes arbitration, as arbitrators are likely to be guided by this decision when making their discretionary awards in respect of costs) it is incumbent on a claimant to "pick his battles". In the words of Tomlinson J., "the claimants must live with the consequences of pursuing and losing a claim which significantly increased the length and cost of the trial."

In light of the increasing legal costs associated with both litigation and arbitration, this decision may have a great impact on the future conduct of cases. A claimant should think twice about fighting marginal points. Every single point pleaded will now be individually scrutinised by the courts when assessing the allocation of costs. A victory, such as that of the claimants in the "Kastor Too", may be rendered Pyrrhic by a massive costs award in the defendant's favour.

Costs awards are no longer a matter of right for a successful litigant. What matters now is not whether you win or lose, but how you play the game

1.[2003] EWHC 472 (Comm.). Unreported. 

2.[1999] 1 WLR 1507. 

3.CPR 36.20(2). 

4.Where costs are awarded on a standard basis the receiving party must show that the costs were reasonably incurred and any doubts are normally resolved against him. On an indemnity basis, it is for the paying party to show that any of the costs claimed were unreasonably incurred and doubts are normally resolved against him. On an indemnity basis, the successful party invariably recovers more than on a standard basis. (In both cases, however, the successful party is only allowed to recover a reasonable amount in respect of costs reasonably incurred.)

5.CPR 36.21(3)(a). 

6.Op. Cit. Footnote 1, Point 28 of the Judgment.