Suez Fortune Investments Ltd Piraeus Bank AE v Talbot Underwriting Ltd and Others

Hearing dates: 21 November 2019

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

THE HONOURABLE Mr Justice Teare

On 7 October 2019, following a trial spanning 52 days between February and July 2019, I gave judgment in this action. The Bank (the Second Claimant) had claimed against Underwriters (the Defendants) an indemnity pursuant to a war risks insurance policy for the constructive total loss of the vessel BRILLANTE VIRTUOSO by piracy. In that judgment, [2019] EWHC 2599 (Comm), I dismissed the claim of the Bank on the grounds that the vessel BRILLANTE VIRTUOSO had been lost by reason of the wilful misconduct of her Owner and not by reason of an insured peril. There has been no application for permission to appeal from that judgment. In the light of that judgment the Bank agreed to pay the Underwriters' costs of the action on the standard basis and to make a payment of £8.7 million by way of an interim payment on account of costs. The Underwriters reserved their right to seek costs on an indemnity basis and a further payment on account of costs. The Bank has accepted that costs should be assessed on the indemnity basis up until May 2016 when the Owner's claim for an indemnity under the policy was struck out. The Bank made that concession because the Bank had funded the Owner's claim. The Bank objected to the costs thereafter being assessed on the indemnity basis. It is agreed that if costs should be assessed on the indemnity basis there should be a further payment on account of costs in the sum of approximately £3.8 million.

The court's power to order costs on the indemnity basis stems from CPR Part 44.3 which provides that costs may be assessed on the standard basis or on the indemnity basis. Whereas costs on the standard basis must be proportionate and any doubt as to whether the costs were reasonably and proportionately incurred must be resolved in favour of the paying party, costs on the indemnity basis are not subject to the requirement of proportionality and any doubt as to whether costs were reasonably incurred must be resolved in favour of the receiving party. In deciding what order to make about costs the court will have regard to all the circumstances of the case including the conduct of the parties; see CPR Part 44.2(4) and (5) which provide as follows:

“(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including—

(a) the conduct of all the parties………….

(5) The conduct of the parties includes—

(a) conduct before, as well as during, the proceedings …………..

(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue:

(c) the manner in which a party has pursued or defended its case or a particular allegation or issue………”

In Excelsior Commercial and Industrial Holdings v Salisbury Hammer Aspden and Johnson (a firm)[2002] EWCA Civ 879 the court's power to order costs on the indemnity basis was considered. Lord Woolf MR emphasised that the court had “a wide and generous discretion in making orders as to costs” (paragraph 12) but that there must be “some conduct or (I add) some circumstance which takes the case out of the norm” (paragraph 19). Lord Woolf said that “an indemnity order may be justified not only because of the conduct of the parties, but also because of other particular circumstances of the litigation” (see paragraph 31). Finally he said that “there is an infinite variety of situations which can come before the courts” and that it would be “dangerous for the court to try and add to the requirements of the CPR which are not spelt out in the relevant parts of the CPR” (see paragraph 32).

Although the requirement that there be some conduct or some circumstance which takes the case out of the norm is not stated in the CPR, that requirement is a necessary consequence of the scheme of the CPR. Costs on the standard basis are the norm and so, in order to justify costs on the indemnity basis there must be something which takes the case out of the norm.

Very recently, on 3 October 2019, Excelsior was described by Sir Bernard Rix as “the leading modern authority” and that litigants were discouraged from citation of authority on what is “a well-travelled road”; see Ford v Bennett [2019] Costs LR 1473 at paragraphs 26–29.

Notwithstanding that discouragement the court was presented with 16 pages of submissions on the law relating to indemnity costs and with no less than 31 authorities. There appeared to be a dispute as to the manner in which the court's discretion should be exercised. The oral submissions of counsel for the Underwriters suggested that the dispute concerned a number of matters but, in reality, the dispute concerned one question, namely, whether, when conduct is relied upon to justify an order for indemnity costs, the conduct had to be unreasonable to a high degree.

There is a long line of authority that where it is said that a party's conduct was unreasonable it must be unreasonable to a high degree to justify an order for indemnity costs. That requirement was first stated in Kiam v MGN Ltd. (No.2) [2002] 1 WLR 2810 by Simon Brown LJ and has been repeatedly stated since; see Euroption Strategic Fund Ltd. v Skandinaviska Enskilda Banken AB[2012] EWHC 749 (Comm) at paragraph 14 per Gloster J., Elvanite Full Circle Ltd. v AMEC Earth Environmental (UK) Ltd. [2013] 4 Costs LR 612 at paragraph 16(a) per Coulson J., ICI v Merit Merrell [2017] 5 Costs LR 631 at paragraph 12 per Fraser J. and Hislop v Perde[2019] 1 WLR 201 at paragraphs 35–36 per Coulson LJ.

It was suggested that the requirement that conduct must be unreasonable to a high degree was not stated in the CPR and that this gloss on the CPR was therefore wrong in principle. However, the requirement is, I think, a necessary corollary of the scheme of the CPR. Having regard to the importance ascribed to the principle of proportionality in the CPR, where unreasonable conduct is relied upon as justifying costs on the indemnity basis, and hence removing the need for the costs to be proportionate, the conduct must be unreasonable to a high degree. Otherwise due regard would not be had to the importance of proportionality in the scheme of the CPR. This was explained by Morgan J. in Digicel (St. Lucia) Ltd. and others v Cable and Wireless plc and others [2010] 5 Costs LR 709 at paragraph 19:

“Finally, I have found it useful, when asking myself whether the conduct of the paying party was at a sufficiently high level of unreasonableness or inappropriateness to make it appropriate to order indemnity costs, to remind myself of why precisely I am asking that question. The purpose behind the question is whether the relevant conduct makes it just as between the parties to remove from the paying party the two-fold benefit of an order on the standard basis, as compared with an order on the indemnity basis, that is to say, to enable the receiving party to recover its costs, reasonably incurred and reasonable in amount, with the benefit of the doubt being given to the receiving party and without the receiving party having to address (and persuade the court upon) the subject of proportionality. In this regard, I need to give proper weight to the significance which the CPR attach to this question of proportionality. The policy considerations behind the requirement of proportionality and the weight to be attached to the requirement are emphasised in Lownds v Home Office [2012] 1 WLR 2450, in particular, at [8]–[10]. The matters which will be relevant to any dispute about proportionality include those set out at CPR rule 44.5(3), which I have set out above, and also the similar provisions in rule 1.1(2)(c).”

Counsel for the Bank referred to the summary of the relevant principles by Coulson LJ in Hislop v Perde[2019] 1 WLR 201 at paras. 35–36 which is in these terms:

“(a) Indemnity costs are appropriate only where the conduct of a paying party is unreasonable “to a high degree”. “Unreasonable” in this context does not mean merely wrong or misguided in hindsight.

(b) The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it out of the norm in a way which justifies an order for indemnity costs.”

The issue in Hislop v Perde did not in fact concern indemnity costs pursuant to CPR Part 44 but the fixed costs regime in CPR Part 45 for low value road traffic accident cases and employers' liability/public liability claims where there was a late acceptance of a claimant's Part 36 offer. It does not appear that there was any debate as to the circumstances in which it was appropriate to order indemnity costs pursuant to CPR Part 44. Although the summary could be taken as supporting the proposition that indemnity costs are only appropriate where there is unreasonable conduct to a high degree, such a proposition would not only be contrary to CPR Part 44 which enjoins the court to have regard to “all the circumstances” of the case but would also be contrary to Excelsior, the effect of which is stated in ...