Securing interim costs can be a complicated process. Two recent decisions illustrate why.

The ECU Group plc v HSBC Bank is a complex piece of commercial litigation that was tried and determined in favour of the defendants in November 2021. No more evidence of its weight is needed than the fact that the interim costs awarded pending detailed assessment totalled $11 million.

The litigation had only been sustainable via third-party funding. The claimant had been loss-making and balance sheet insolvent since 2018 – prior to the execution of the funding agreements.

The largest but not the only funder was Therium, who had provided £9.3m during the litigation, including legal costs, ATE premiums and a deed of indemnity.

The ATE and excess providers had fulfilled most of the interim costs award, but there remained a shortfall of $1.04 million. The defendants made a successful application for a non-party costs order against Therium for the balance.

Keen followers of case law relating to commercial funding and joint and several liability among multiple funders will benefit from getting into the detail of the judgment on the application. I would like to highlight a narrower costs point that arose at the consequential hearing.

The funder wanted the decision on who should pay the costs of the application to be reserved until the end of the detailed assessment of the defendants’ costs of the main case. It had made an open offer of £700,000 which included a contribution to the interim payment and the costs of the application. Although it was not a Part 36 offer, the court has a wide discretion whether and if so how to take that into account. The funder argued that the court should consider the existence of the offer and recognise that it was not possible to know whether the offer had been beaten until the conclusion of the detailed assessment proceedings.

The defendants argued that there was no reason for the costs to be delayed. The defendants had already beaten the offer because the funder had been ordered to pay $1.04 million as an interim payment. Had the funder wanted to make a Part 36 offer it could have done so, in which case the issue of costs would have been reserved until the end of the proceedings.

Moulder J was referred to the Court of Appeal decision in McKeown v Langer which also involved an offer which was not made under the umbrella of Part 36. That court considered the policy decisions that underpin decisions on costs:

• Costs follow the issue rather than the event
• Making discrete issue-based costs orders encourages professionalism in the conduct of litigation
• There should be equality of arms between the parties.

The Court of Appeal decided that taking into account the Calderbank offer represented the antithesis of good policy. It would reward bad behaviour, encourage the taking of unmeritorious points, exacerbate problems associated with the inequality of arms and accentuate the adverse litigation consequences of informational asymmetry.

Moulder J’s decision in ECU was equally robust. The defendants were entitled to receive the costs of their application without waiting for the outcome of the detailed assessment:

• There was an issue of policy at play. The defendants’ application concerned the principle of how the costs of the litigation should be borne. It was ‘unrelated to the general litigation’.
• Although it was not completely certain that the funder’s open offer of £700,000 would be beaten, the interim payment of $1.04 million took into account the relevant considerations, allowed for a discount in the usual way and was ‘unlikely’ to be relevant.
• The funder had accepted that Part 36 is a self-contained code. If the funder wanted to have the protection of the Part 36 regime, it could have made a Part 36 offer.

A contrasting approach was adopted in the case of Credico Marketing Ltd v Lambert. A dispute had arisen between the first claimant, which had agreed to provide marketing services for clients, and the first and second defendants which were a marketing company and its owner.

The first claimant sought various remedies:

• a declaration that the defendant was in breach of a pre-termination restrictive covenant (with damages to be assessed at a later hearing).
• a declaration and injunctive relief that a post-termination restrictive covenant was enforceable.
• a declaration that undertakings given by the defendants that they would comply with the post-termination restrictive covenant were themselves enforceable.
• a ruling that the defendants had misused confidential information together with damages and injunctive relief.

At the end of a ‘speedy trial’ Mr Justice Cavanagh decided that:

• the pre-termination restrictions were binding on the defendants and had been breached.
• the post-termination restrictions were binding on the defendants.
• the undertakings were binding on the defendants.
• there was no actionable misuse of confidential information.

The claimants were awarded the whole of their costs to date including the costs of the speedy trial. The defendants appealed the decision in relation to both the pre and post termination restrictions.

The Court of Appeal dismissed the appeal against the decision on the pre-termination restriction and allowed the appeal in relation to the post-termination restriction. It made no order for the costs of the appeal itself because each party had succeeded on one issue. In relation to the costs of the action up to the speedy trial, the Court of Appeal decided that the original costs order could not stand, and the issue of costs was remitted to Cavanagh J for re-determination.

The parties took radically different views of the outcome of the speedy trial in the light of the Court of Appeal’s decision. The claimants argued that costs should follow the event. The defendants argued that the successful appeal in relation to the post-termination restrictions meant that the decision on costs should be deferred until after the quantum of damages for breaching the pre-determination restrictions had been decided.

Mr Justice Cavanagh concluded that the ruling of the Court of Appeal made a ‘very significant change’ to the outcome of the trial:

  1. The claimants were no longer the unequivocal victor. It would be difficult if not impossible to determine the overall winner or to make an issues-based allocation of costs at this stage.
  2. There was a ‘very real possibility’ that the damages for the pre-termination breach would be ‘very small indeed’. If that were the case, it was at least arguable that a major costs award to the claimants would not reflect the reality of the outcome of the speedy trial.
  3. Whilst further delay was unfortunate, the benefits of assessing damages before the costs award outweighed the disadvantages.
  4. The defendants had been criticised for ‘playing fast and loose with both the claimants and the courts’, causing the claimants to incur more and more costs in reasonably resisting the defendants’ applications. However, the claimants’ suspicion that the defendants were dragging out the consideration of the costs of the speedy trial for their own purposes did not justify determining costs at this stage.

With ‘some reluctance’ Cavanagh J decided that he should postpone the ruling on costs until after the assessment of damages for breach of the pre-termination restrictions had taken place.

Commentary by Andy Ellis

Cases such as ECU are a reminder why we recommend making Part 36 offers whenever possible over or at least alongside a costs-inclusive offer. The downside of the residual blank cheque element for tail-end costs of Part 36 is almost always outweighed by the predictability of the consequences. There is also the certainty that you will know whether it has been beaten at the end of a case or an assessment, instead of having to infer whether it has by deduction of the notional costs that were included in it.

Credico is a good example of the encouragement to the judiciary to consider issues before events in the costs context. Sometimes what looks like a standalone win will take on a different complexion once all issues have been resolved.

The contents of this article are for general information purposes only and do not constitute legal advice.  While we endeavour to ensure that the information in this document is correct, no warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission.