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Jonathan Spencer (Partner) and Jordane Watson (Trainee Solicitor) of Simmons & Simmons consider the judgment in Lejonvarn v Burgess  EWCA Civ 114, in which the Court of Appeal held that costs should have been awarded on an indemnity basis following an unsuccessful professional negligence claim.
This case is known to many in the construction industry. The underlying dispute involved an architect who was sued by her neighbours for providing allegedly-negligent free advice, concerning a significant landscaping project.
The last chapter in this unusual story involved a victory for the architect, when the High Court rejected the claimants’ allegations of breach of duty in respect of the services the architect actually provided – describing aspects of the case as “threadbare” and offending common sense. The full background to this case and an analysis of the earlier decisions can be found here.
The latest decision involves a ruling on costs, and some very interesting commentary from Lord Justice Coulson who described the case as one that has “echoes of the bad old days” when “construction litigation was a byword for expense and delay”.
In short, the architect appealed the court’s ruling that costs should be awarded on the standard basis and argued that they should be awarded on an indemnity basis. The court found in favour of the appellant and, in doing so, addressed three distinct issues:
The central issue was whether the respondents (or their advisors) should have realised that their claims were speculative/weak claims which were most unlikely to succeed and that, in pursuing them to trial, their conduct was out of the norm, and warranted an award of indemnity costs in favour of the appellant. The court said that the answer to this question was “plain” and the respondents should have realised shortly after the Court of Appeal judgment in April 2017 that “the remaining claims were so speculative/weak that they were very likely to fail, and should not be pursued any further.”
The court also found that “[an] irrational desire for punishment unlinked to the merits of the claims themselves is precisely the sort of conduct which the court is likely to conclude is out of the norm”. Accordingly, the court allowed the appeal in relation to the respondents’ conduct and awarded indemnity costs from 7 May 2017 (i.e. one month after the handing down of the Court of Appeal judgment concerning the duty of care owed by the architect).
The second separate issue was whether the respondents’ failure to accept and then beat the appellant’s Part 36 offer, made in March 2015, meant that indemnity costs should have been awarded. The court reiterated that, although there was no automatic right for a defendant to be awarded indemnity costs in such situations, it is a matter of importance when the court exercises its discretion under CPR 44.
It was held that, whilst the appellant had acted sensibly and proportionately at the outset, the respondents had not. In the circumstances, the respondents’ failures to accept and beat the appellant’s Part 36 offer was a separate and standalone element of conduct that was out of the norm that separately justified an order for indemnity costs. However, the court maintained that indemnity costs should only date back to May 2017, rather than the date of the Part 36 offer. This was because it was only from that date, at the latest, that the respondents would have known that their “omissions case” was not open to them. Therefore, it was on that same date that it became unreasonable beyond doubt for the respondents to not accept the Part 36 offer.
The final issue was whether indemnity costs should not be awarded because of the gap between the appellant’s approved costs budget of £415,000 and her actual “eyewatering” costs of not less than £724,265.63. The court explained that the starting point is that a figure produced by an approved cost budget mechanism is a different thing to the final assessment of costs following the trial. The former is prospective; the latter is retrospective. Accordingly, it was held that the assessment of costs on an indemnity basis is not constrained by the approved costs budget and, in any event, the court was not persuaded that there was a clear costs management order with an approved budget figure.
A case that started as a cautionary tale for professional advisors offering free services (which still remains the case) has gone full circle. The court has made it clear that a desire to punish a professional for their alleged negligent mistakes through High Court litigation, unlinked to the merits of the claims, will be punishable by indemnity costs. Although this case is very fact specific, this final decision on costs will be cautiously welcomed by construction professionals and professional indemnity insurers.
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Jonathan is a Partner at Simmons & Simmons. He specialises in defending professional indemnity claims against construction professionals (including architects, engineers, and surveyors) and major contractors. He also regularly advises on complex, high value coverage disputes for London market insurers.
0330 161 1234