Defendants: Protect your Position with Part 36

The Court of Appeal has recently provided a noteworthy position statement on the proper approach of defendants, particularly in liability admitted (or established) cases, in Global Energy Horizons Corporation v Gray [2021] EWCA Civ 123:

“…Where a defendant is faced with an exorbitant claim which he wishes to defend vigorously but where he is vulnerable to a finding that he is liable for a much smaller amount, there is a clear process provided by CPR Part 36 which he can follow to protect his position…” [8]

In very brief terms (this being a lengthy and complex litigation only partially relevant to the decision on costs) Global Energy Horizon Corporation (GEHC) succeeded at a hearing on liability in establishing that Mr Gray had breached his fiduciary duty to them and must account for all profits made as a result of his breach. A further hearing was held to determine the scope of assets falling within the order made at the liability trial as well as the basis of assessment, with a final hearing then held to determine the value of those assets. The second of these three hearings was the subject of appeal, including challenging the costs order made in relation to that hearing, namely that there be no order as to costs (of that hearing/phase).

In the costs judgment, the Court set out the approach which Arnold J had taken in concluding that ‘no order’ was appropriate:

1. The starting point was CPR r44.2(2)(a): the unsuccessful party will be ordered to pay the costs of the successful party.

a) GEHC claimed that it had been ‘successful’ as Mr Gray had to account to them for over £3.6million; and

b) Mr Gray claimed that he had been ‘successful’ as, at its highest, GEHC had claimed £227.8million, and as such had only recovered 1.6%.

2. The claims made at the hearing were as follows:

a) A claim to management fees, successful for 7% of the claimed value;

b) A claim for business assets assessed at nil value;

c) A claim for settlement monies, successful for $3million out of $5.1million claimed; and

d) Two further claims which were abandoned before or during the trial.

3. None of the three offers which Mr Gray had made would affect the conclusion, nor would his allegations of misconduct on the part of GEHC and its expert witness.

4. Though ‘true as far as it goes’ that no satisfactory monetary offer had been made by Mr Gray and accordingly it had been necessary for GEHC to pursue its claims, this did not outweigh the overall position.

5. The result of the hearing being ‘a score draw’, no order was appropriate.

Counsel for GEHC accepted that the Court of Appeal does not readily interfere with first instance costs decisions, being ostensibly exercises of discretion. He then cited Day v Day [2006] EWCA Civ 415, a case in which a ‘no order’ had been overturned, on the basis that the judge had been wrong to describe the result as a draw simply because neither side got what they wanted. The Court noted further that, in contrast to Day, the costs order came at the end of the third hearing, and was therefore delivered by a judge other than the trial judge, some 3 years later. As such the usual considerations that the trial judge (in contrast to the appeal court) forms a view from a range of factors, did not apply here.

The Court then determined that the costs judgment should be overturned on the following bases:

1. The first and most important point to note is that GEHC obtained a ‘significant sum’, and that ‘Where a defendant is faced with an exorbitant claim which he wishes to defend vigorously but where he is vulnerable to a finding that he is liable for a much smaller amount, there is a clear process provided by CPR Part 36 which he can follow to protect his position’. Had Mr Gray paid into court a proportion of the two main claims on which GEHC succeeded, he would have been in a much stronger position.

2. There was no implied criticism of GEHC on the grounds of dishonesty, which had been a reason for the court to order no costs previously (Widlake v BAA Ltd [2010] 3 Costs LR 353). The significantly reduced value awarded did not imply any deliberate or reprehensible exaggeration.

3. Arnold J was wrong in principle to effectively give no weight to the GEHC’s point that they had to pursue Mr Gray as a defaulting fiduciary who put forward an account before the second hearing which was found to be dishonest. Had he acted honestly and reasonably the costs would have been much less.

4. The fact that GEHC recovered only a small fraction of their initial claim was of only limited weight, particularly given that a substantial portion of the hearing time (and presumably preparation) went to successfully establishing the ownership of assets later determined to be valueless. Had Mr Gray acknowledged that ownership and made an offer on the basis of their (lack of) value he would properly have protected his position.

Conclusion

This case is a useful reminder that the primary method for defendants to protect their position is by making sensible Part 36 offers. This is particularly pressing where liability has been admitted or established, and a defendant cannot rely solely on its view that the claim has been significantly overvalued.

Samuel Irving is a Pupil at Farrar’s Building.

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