Reasonable and Proportionate Costs does not mean the lowest possible amount

Discovery Land Company, LLC & Ors v Axis Specialty Europe SE [2021] EWHC 2146 (Comm) (30 July 2021)

Before Peter MacDonald Eggers QC

Background

The Defendant is an insurer which provided professional indemnity insurance to Jirehouse, Jirehouse Trustees Ltd ("JTL") and Jirehouse Partners LLP (collectively "the Jirehouse Entities").

Mr Jones was a director or member of the Jirehouse Entities. It was agreed between the parties to this action that the three claims which are the subject of this action arose out of the dishonesty of Mr Jones. Mr Jones is not a party to this action.

The policy issued by the Defendant contained an exclusion (clause 2.8) which provided that the Defendant would have no liability under the policy for any claims directly or indirectly arising out of or in any way involving dishonest or fraudulent acts, errors or omissions committed or condoned by the insured, subject to certain provisos, namely that (a) the policy shall nonetheless cover the civil liability of any innocent insured, and (b) no dishonest or fraudulent act shall be imputed to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company or, in the case of a Limited Liability Partnership, all members of that Limited Liability Partnership. There is also an aggregation provision (clause 5.2) identifying what amounted to "one claim".

The Claimants claim declarations that they are entitled to indemnities under the policy pursuant to their rights under the Third Parties (Rights against Insurers) Act 2010. The principal issue between the parties in this action under the professional indemnity policy is whether the Defendant has any liability to the Jirehouse Entities and/or the Claimants as a consequence of Mr Jones's dishonesty. The Defendant contends that it is not obliged to indemnify the Jirehouse Entities in respect of all three matters which are the subject of this action and that the Claimants are not entitled to the declarations they seek.

Reasonableness and Proportionality in Costs Management

The Claimants referred the Judge to the decision of Leggatt, J in Kazakhstan Kagazy plc v Zhunus [2015] EWHC 404 (Comm), where the learned judge said at para. 13:

"In a case where very large amounts of money are at stake, it may be entirely reasonable from the point of view of a party incurring costs to spare no expense that might possibly help to influence the result of the proceedings. It does not follow, however, that such expense should be regarded as reasonably or proportionately incurred or reasonable and proportionate in amount when it comes to determining what costs are recoverable from the other party. What is reasonable and proportionate in that context must be judged objectively. The touchstone is not the amount of costs which it was in a party's best interests to incur but the lowest amount which it could reasonably have been expected to spend in order to have its case conducted and presented proficiently, having regard to all the relevant circumstances. Expenditure over and above this level should be for a party's own account and not recoverable from the other party. This approach is first of all fair. It is fair to distinguish between, on the one hand, costs which are reasonably attributable to the other party's conduct in bringing or contesting the proceeding or otherwise causing costs to be incurred and, on the other hand, costs which are attributable to a party's own choice about how best to advance its interests. There are also good policy reasons for drawing this distinction, which include discouraging waste and seeking to deter the escalation of costs for the overall benefit for litigants."

The Judge was not certain why the "touchstone" of reasonable or proportionate costs must be the lowest amount which a party could reasonably have been expected to spend.

In the context of costs management, the Court should allow some flexibility to the parties to ensure that their conduct of the action is not unnecessarily and potentially unfairly hampered by an unrealistically low assessment or by only the lowest assessment of what would constitute reasonable and proportionate expenditure.

Expenditure which is within a reasonable and proportionate range is still reasonable and proportionate even if it is not at the lower end.

Incurred Costs

The Judge found that the Defendant's incurred costs in respect of disclosure were high, perhaps very high. However, the explanation provided by Defendant was one he found credible and reasonable.

There was an issue about whether the "work done but not yet billed" should be treated as "incurred costs" rather than "budgeted costs". The judge concluded that, "incurred costs" should be treated as including the "work done but not yet billed", because the purpose of the costs budget is to allow the Court to set a budget by which the parties, going forward, can prepare the case for trial and take decisions in this respect with the Court-approved budget in mind.

The Judge highlighted that the emphasis of costs budgeting rests on the future costs which the parties are to incur. This is for good reason in that it allows the parties to make their decisions in respect of the conduct of the action in light of the costs budget approved by the Court. The Judge said that it would be unhelpful for the Court to comment on incurred costs where it was not undertaking a formal assessment of costs, with the benefit of the information and evidence which would be available for that exercise.

Costs overall

The value of the claim was just under £6,000,000.

There was a vast difference between the Claimants' incurred and estimated costs (£520,961) and those of the Defendant, after the reductions in the costs to be incurred (£1,221,683.71).

The Claimants relied on that difference as a self-evident indication that the Defendant's overall costs incurred and to be incurred were disproportionately high.

The Defendant contended that its costs were much higher than the Claimants' costs, largely because it had to engage an independent IT consultant to process and search the SRA's image of Jirehouse's server and to engage a team of independent counsel to deal review documents for privilege/confidentiality (at the SRA's insistence).

The Judge did not consider that the Defendant’s incurred costs were unreasonable. However, after subtracting the total disclosure costs (£624,781.99), the Defendant's total costs were still substantially in excess of the Claimants' costs.

The Judge had regard to the possibility that the Claimants may well have under-estimated the costs of the action and the fact the value of the claim is such that the Defendant's costs could not be said to be self-evidently disproportionate.

In the circumstances, The Judge was not in a position to judge whether the Defendant's costs were unreasonable based on the information available.

Conclusion

The Court made no criticism of the Defendant's incurred costs in respect of disclosure and declined to make any comment in respect of the Defendant's incurred costs under CPR rule 3.17(3)(b).