The High Costs of Failure: Pursue the Claim at Your Peril!

Articles
08 Jan 2020

Suez Fortune Investments Ltd & Anor v Talbot Underwriting Ltd & Ors [2019] EWHC 3300 (Comm)

The First Claimant (“the Owner”) owned a marine vessel damaged by fire at sea. It brought an insurance claim against the Defendants (“the Underwriters”). The Second Claimant, the mortgagee of the vessel (“the Bank”), claimed an indemnity against the Underwriters pursuant to an insurance policy for the constructive total loss of the vessel by piracy.

On 5 May 2016, the Owner’s claim was struck out after failure to comply with an order to deliver an archive of documents and a finding that its sole owner/beneficiary had lied to the court in an attempt to prevent the claim from being struck out. The Bank thereafter continued its own claim.

Following a 52-day trial, Teare J dismissed the Bank’s claim on the ground that the vessel had been lost by reason of the wilful misconduct of her Owner in ‘scuttling’ the vessel, and not by reason of an insured peril. The Bank accordingly agreed to pay the Underwriters’ costs of the action and, because it had funded the Owner’s claim, accepted that costs should be assessed on the indemnity basis until May 2016 when the Owner’s claim was struck out.

The Bank, however, objected to costs on the indemnity basis thereafter. It argued that its claim was independent of the Owner’s; that it was objectively arguable; that it would not have been apparent at the start of the trial that it was weak; that the Underwriters’ case had to be tested and won at trial; and that the outcome of the trial was not a foregone conclusion.

The Underwriters’ claim for indemnity costs was based upon the character of the claim, looked at objectively; its weakness; and the manner in which the Bank had pursued it and its effect on the Underwriters’ defence.

The Law

Teare J referred to Excelsior Commercial and Industrial Holdings v Salisbury Hammer Aspden and Johnson (a firm) [2002] EWCA Civ 879, where Lord Woolf MR considered the court’s power to order costs on the indemnity basis. Lord Woolf MR emphasised that the court had “a wide and generous discretion in making orders as to costs” but that there must be “some conduct or … some circumstance which takes the case out of the norm.”  Such justification may be the conduct of the parties, but also other particular circumstances of the litigation.

Although such requirements for circumstances out of the norm and, where unreasonable conduct is relied upon, that it be unreasonable to a high degree, are not expressly identified in the CPR, Teare J considered these necessary corollaries of the scheme of the CPR for two main reasons.

First, under the CPR, costs are normally awarded on the standard basis, so there must be something out of the norm to justify departure from the general rule.

Second, an award of costs on the indemnity basis under CPR r 44.2(4) and (5) removes the need for the costs to be proportionate pursuant to CPR r 44.3(3). Given the importance ascribed to the principle of proportionality under the CPR, where unreasonable conduct is relied upon in circumstances where costs incurred need not be proportionate, it follows that the conduct must be unreasonable to a high degree. This proposition was also found to be supported by a long line of authority established in Kiam v MGN Ltd. (No.2) [2002] 1 WLR 2810 by Simon Brown LJ and restated many times subsequently.

Teare J also accepted that, in light of the wide discretion to order costs on the indemnity basis, the court may consider an ‘aggregation of factors’, one of which may be unreasonable conduct but not to a high degree, if, looking at the circumstances as a whole, the case is out of the norm.

The Decision

Teare J focused on the matters which he considered the most significant in the circumstances of the case:

  1. The Nature of the Claim: although Teare J accepted that the Bank had no knowledge of the Owner’s misconduct, was not party to the Owner’s plan, and brought its claim honestly, the Bank’s purpose nevertheless was to seek recovery in respect of what had been determined to be the Owner’s fraudulent destruction of his vessel. Such claims are undeniably out of the norm and, from the point of view of the Underwriters, the Bank’s claim was as much out of the norm as the Owner’s had been.
  2. The Risks to the Bank in Continuing the Claim: on an objective basis, in May 2016 there were several matters which must have indicated to the Bank that its claim faced considerable difficulty. These included the reasons why the Owner’s claim had been struck out, and some supporting evidence for the allegations being made by the Underwriter.
  3. Subsequent Developments and Trial: further evidence had transpired which, on an objective basis, made the Bank’s case even more vulnerable to failure. Although the Bank’s case at trial was supported by factual and expert evidence, and could not therefore be considered speculative, the prospects of a successful outcome were objectively ‘bleak with “very real weaknesses.” Nevertheless, the Bank argued every point fully, thereby requiring each point to be defended fully. This increased costs.

In these circumstances, Teare J was persuaded that the character of the claim and the manner in which it was pursued since May 2016 were beyond the norm, and justified an order that costs be paid on the indemnity basis. Teare J drew particular attention to the fact that the Bank had chosen to argue the case at length on every point and subsequently lost on each point of substance for reasons which “could have been predicted at the commencement at the trial in February 2019 by an objective observer familiar with the case.”

Comment

This case serves as a stark warning: although the fact that a claim may appear vulnerable or weak in hindsight is not sufficient to justify costs on the indemnity basis, where a claim is arguable but objectively weak, a claimant who chooses to pursue it is taking a high risk and can expect to pay costs on that basis if it fails. As with any decision on costs, however, everything continues to depend upon all the circumstances of the case.

 

 

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