Allege and Fail to Prove Fundamental Dishonesty?  A ‘Significant Risk’ You’ll Pay Indemnity Costs

Thakkar & Ors v Mican & Anor [2024] EWCA Civ 552

Decision of the Court of Appeal

Leading Judgment of Coulson LJ, with the Lady Chief Justice & Asplin LJ agreeing

20 May 2024

https://urldefense.proofpoint.com/v2/url?u=https-3A__caselaw.nationalarchives.gov.uk_ewca_civ_2024_552-3Fquery-3Dthakkar&d=DwICAg&c=euGZstcaTDllvimEN8b7jXrwqOf-v5A_CdpgnVfiiMM&r=_Tqnn7PeGD0E3Ikr9KycpBghkm9HL1oCiW3uNBXhD2G3XOBqYt1-tjwHxkBMIkKz&m=223Tr5-ZrNcFAfZED5y2YidSwij50jJR1ssNaWke1r0PXp8vEWjh1MuRjSfsEXxd&s=3TW6kFTJLAMs8RJJL2vXDG9j8e0GRwEnoofiGtek9yI&e=

Background

• In this case, the claimants brought a claim arising from a RTA in May 2017.

• Liability was in issue. The claimants alleged the defendant driver had driven his van into their car; whereas the defendant driver alleged that the claimant driver drove from a parked position into the side of his van.  The defence pleaded that the claimants’ credibility and honesty would be challenged at trial.

• At the CCMC the Circuit Judge considered an application by the defendants to amend the defence and allege fundamental dishonesty.  The Judge was unimpressed and refused the application. The relevant matters came ‘nowhere near what is required to be able to plead fraud and/or fundamental dishonesty’.  It was accepted that following the trial, if there were grounds to do so, the defendants could still advance the allegation of fundamental dishonesty (in accordance with Howlett & Howlett v Davies & Ageas Insurance Ltd [2017] EWCA Civ 1696).

• At the trial in April 2022, the court gave judgment for the claimants.   The Judge resolved the factual issues according to the reliability of the witnesses’ recollection.  There was no allegation at trial that the claimants had been fundamentally dishonest.

• The claimants sought their costs following the CCMC (when the defendant had sought to amend the defence and allege fundamental dishonesty) up to the date of the trial on an indemnity basis. (The claimants had beaten a CPR 36 offer so recovered the costs of the trial on an indemnity basis).  The application was refused by the Judge.

• The claimants’ appeal to Mr Justice Richard Smith was refused in July 2023.

• The claimants were given permission to appeal to the Court of Appeal.

Grounds of Appeal

• The claimants’ grounds of appeal were pared down to three issues.  These were identified by Coulson LJ at paras 11 & 12 as follows:
  
  ‘The first is that the trial judge misdirected herself as to the test to be applied when considering indemnity costs and/or that the absence of proper reasons in her decision was sufficient to throw real doubt on the test that she applied.’
  
  ‘The second is that, in all the circumstances, the trial judge reached a conclusion which no reasonable judge could have reached; that the refusal to award indemnity costs to the appellants was perverse.’
  
  ‘The third ground is identified at paragraph 18f of the appellants’ skeleton: it is said that, in Commercial and Chancery cases, the failure of allegations of fundamental dishonesty attract “a presumption” that indemnity costs will be awarded, and that the same approach should apply in personal injury cases. An element of this same submission is that such a presumption would reverse the burden of proof…It was this point of principle which led to the granting of permission to bring this second appeal.’

Legal Principles

• Coulson LJ identified the applicable legal principles at paras 18 to 21 of the judgment:
  
  18. On any appeal concerned with costs, a good starting point are the words of Wilson J (as he then was) in SCT Finance Ltd v Bolton [2003] 3 All E.R. 434 at [222], where he noted “the heavy burden faced by any appellant in establishing that the judge’s decision falls outside the discretion in relation to costs conferred upon him…For reasons of general policy, namely that it is undesirable for further costs to be incurred in arguing about costs, this court discourages such appeals by interpreting such discretion very widely”. The same point was made by this court in Hislop v Perde [2018] EWCA Civ 1726; [2019] 1 W.L.R. 201 at [68].
  
  19. It is convenient to summarise, without going to the authorities in laborious detail, the general principles applicable to the award of indemnity costs. They are:
  
  (a) The discretion to award indemnity costs is a wide one and must be exercised taking into account all the circumstances of the case, including but not limited to the conduct of the paying party: see Three Rivers DC v The Governor of the Bank of England [2006] EWHC 816 (Comm)); Digicel (St. Lucia) Limited v Cable and Wireless PLC [2010] EWHC 888 (Ch); and Excalibur Ventures v Texas Keystone & Others (No 2) [2016] EWCA Civ 1144, [2017] 1 W.L.R. 2221 at [21].
  
  (b) In order to obtain an order for indemnity costs, the receiving party must surmount a high hurdle; to be able to demonstrate “some conduct or some circumstance which takes the case out of the norm. That is the critical requirement”: see Lord Woolf in Excelsior Commercial & Industrial Holdings Limited v Salisbury [2022] EWCA Civ 879, [2022] C.P. Rep. 67 at [32]). Whilst it is preferable for the judge expressly to apply the test of “out of the norm”, the use of the word “exceptional” may be consistent with the judge having applied the principles in Excelsior: see Whaleys (Bradford) Ltd v Bennett [2017] EWCA Civ 2143; [2017] 6 Costs L.R. 1241 at [21] (Newey LJ).
  
  (c) To the extent that the application is based on the paying party’s conduct, it is necessary to show such conduct was “unreasonable to a high degree” in order to recover indemnity costs (see Kiam v MGN Limited [2002] EWCA Civ 66; [2002] 1 W.L.R. 2810), but it is not necessary to go so far as to demonstrate “a moral lack of probity or conduct deserving of moral condemnation” on the part of the paying party (see Reid Minty v Taylor [2002] 2 All E.R. 150).
  
  (d) Merely because the conduct in question may happen regularly in litigation does not mean that such conduct cannot also be ‘out of the norm’: “in my view the word ‘norm’ was not intended to reflect whether what occurred was something that happened often, so that in one sense it might be seen as ‘normal’, but was intended to reflect something outside the ordinary and reasonable conduct of proceedings”: see Esure Services Ltd v Quarcoo [2009] EWCA Civ 595 at [25], in the judgment of Waller LJ.
  
  20. Since the judge has such a wide discretion when it comes to costs, the courts have repeatedly made it clear that the court should avoid going beyond the CPR to identify rules, default positions, presumptions, starting points and the like, when addressing costs disputes. Lord Woolf made that point in Excelsior at [32]:
  
  “In my judgment it is dangerous for the court to try and add to the requirements of CPR which are not spelt out in the relevant parts of the CPR. This court can do no more than draw attention to the width of the discretion of the trial judge…”
  
  21. As to allegations of dishonesty, there are many cases which demonstrate that, if a claim is found to be dishonest, the judge will very often award indemnity costs against the claimant: see Three Rivers DC at [25(5), (6) and (8)], and Esure v Quarcoo at [25] – [27].

Outcome

• Coulson LJ addressed the third issue first.  After reviewing the authorities, he roundly rejected the claimants’ submission that there was a ‘presumption’ in favour of an order for indemnity costs in these circumstances; or that an order for indemnity costs was the ‘starting point’.    There was no reversal of the burden of proof.

• At paras 29 & 30 Coulson LJ stated:
  
  29. As to the existence of a presumption or a starting point which tilts the balance in favour of an order for indemnity costs before any consideration of the circumstances, I respectfully agree with the views expressed by the first instance judges in Clutterbuck, Natixis, Bishopsgate, and Libyan Investment, all cited above. Their analysis makes plain that there is no such presumption or reversal of the ordinary burden of proof. It will always depend on the circumstances of the particular case, and the judge retains a complete and unfettered discretion. It may be that, in an appropriate case (like Natixis), the failure might be the starting point for any consideration of those circumstances but, as Miles J noted in Libyan Investment, that does not, in some way, reverse the burden of proof, or put the burden on the paying party to explain why indemnity costs are not appropriate. Bryan J did not suggest anything of the sort in Natixis, and he applied no presumption or reversal of the usual burden. The default position is always that standard costs will be assessed and paid, unless the party seeking indemnity costs can demonstrate why they are appropriate in all the circumstances.
  
  30. I consider that any other conclusion would fetter the court’s broad discretion in respect of costs in any given case, and would give rise to the very danger which Lord Woolf warned against at [32] of Excelsior, cited at paragraph 20 above: the court must avoid the temptation to create rules which cannot be found in the CPR.
  
  
• Thereafter, Coulson LJ considered the two other issues in the case.  He was satisfied that the Judge had not misdirected herself as to the test to be applied and had given adequate reasons for her decision.  Further, the Judge reached a conclusion which was open to her; the decision was not perverse.

• Although the appeal was dismissed, Coulson LJ gave this warning to defendants at para 28:
  
  ‘But nothing that I say there is intended to detract in any way from this statement of the obvious: that, because the making of a dishonest claim will very often attract an indemnity costs order against a claimant, a failed allegation of dishonesty will very often lead to the making of an indemnity costs order against the defendant, on the simple basis that “what is sauce for the goose is sauce for the gander”: see Tomlinson LJ in Manna v Central Manchester University Hospitals NHS Foundation Trust [2017] EWCA Civ 12; [2017] 1 Costs L.R. 89 at [42]. A defendant who makes allegations of this kind therefore runs a very significant risk that, if the allegations fail, indemnity costs will be awarded against them [My emphasis].
  
  
• Manna v Central Manchester University Hospitals NHS Foundation Trust was a catastrophic clinical negligence action in which the claimant had recovered substantial damages. In respect of an appeal against an order for indemnity costs, Tomlinson LJ stated at para 42:
  
  42. I have no doubt that had the judge acceded to the defendant’s suggestion that the claimant’s case was deliberately exaggerated the defendant would have sought an award of indemnity costs. What is sauce for the goose should be sauce for the gander. I bear in mind that litigation in this field is often hard-fought. Given that litigation is necessarily adversarial, and that litigation unfortunately cannot be avoided in this field, I guard against a feeling that sometimes it is conducted in a manner inappropriate to the subject matter. I appreciate that there were here serious issues which the defendant felt needed to be explored in the manner in which they were, although as the judge records at [9] the contemporaneous records, of which there were here a large number, including in particular medical, social services and educational records, were likely to be the most reliable source of information. Looked at in the round, the judge who heard the trial, and who I might add had heard many like it, plainly concluded that what had occurred fell outside the norm, although she did not express her conclusion in precisely that manner. That conclusion will I hope rarely be reached in litigation of this kind, but I do not consider that we would be justified in interfering with the judge’s conclusion that here it properly should be. I would therefore dismiss the appellant’s appeal on this aspect also.
  
  
• Returning to Thakkar & Ors v Mican & Anor,at paras 55 & 56 The Lady Chief Justice added:
  
  55. I also agree and would add only this. This litigation has been characterised by parties on both sides far too ready to throw unnecessary and serious allegations against each other. In the appellants’ case, this occurred from the very outset. The appellants’ solicitors first email response to the second respondent spoke of the first respondent’s “reckless” driving; within weeks they were referring to what they described as the first respondent’s “fabrication of the truth” and “perversion of justice”, and indicating that they would be seeking to recover their costs from the respondents on an indemnity basis.
  
  56. As the trial judge recognised, this was a relatively straightforward road traffic accident case involving conflicting witness evidence. It should have been approached by the parties as such, all in accordance with the overriding objective. The trial judge is to be commended for her attempts throughout to lower the temperature, particularly at the CCMC on 16 July 2021. As the courts have made clear repeatedly, an unnecessarily aggressive approach to litigation is unacceptable (see Excalibur Ventures LLC v Texas Keystone Inc (Costs) [2013] EWHC 4278 (Comm) at [48]; Collier v Bennett [2020] EWHC 1884 (QB); [2020] 4 WLR 116 at [13]; Bates and others v Post Office Limited [2018] EWHC 2698 (QB) at [58]). Potential costs incentives are not a good reason for making unwarranted allegations of misconduct, let alone dishonesty. The unfortunate effect of the parties’ conduct was to increase not only aggravation to an independent witness but also costs on both sides.

Takeaway

• In my experience, there is an attitude amongst some of the judiciary that defendants allege dishonesty (and fundamental dishonesty) too regularly; and that more care is required to target those cases where the allegation is merited.   Indeed, I know of one Judge who rejected a claimant’s application for indemnity costs where the defendant had failed to prove fundamental dishonesty because the allegation was made so frequently and claimants should necessarily expect it.   I should add, that I do not consider this a good reason to refuse the application (see para 19 (d) of Thakkar & Ors v Mican & Anor above).

• Where a court finds a claimant (or their claim) fundamentally dishonest, in my experience, an indemnity costs order almost always follows.   By this stage, the Judge is usually critical of the claimant and a quick reference to the authorities cited at para 44.3.8 of the White Book Vol 1 is all that’s required if the claimant seeks to resist the order.   The judgment of Coulson LJ is a clear warning to both parties that defendants are at a very significant risk of a similar order in the event the allegation fails.  If an unproven allegation of fundamental dishonesty is pursued vigorously throughout the litigation and at trial, the prospects of a claimant securing an indemnity costs order will necessarily be improved.    The judgment of Thakkar & Ors v Mican & Anor has underlined the risks for the unsuccessful defendant in these circumstances.

• The defendant must tread a careful course: a failure to give the claimant adequate warning and proper opportunity to meet an allegation of fundamental dishonesty may prevent the defence being deployed at trial (per para 31 Howlett & Howlett  v Davies & Ageas Insurance Ltd  [2017] EWCA Civ 1696); though ‘vigorous’ pursuit  of the allegation in an unmeritorious case brings with it the increased risk of costs sanction.  Each case is of course ‘fact specific’ and as illustrated in Thakkar & Ors v Mican & Anor, an appellate court will be reluctant to interfere with the trial judge’s decision.    As ever, defendants must be vigilant to identify the right cases which justify the defence of fundamental dishonesty being pursued to trial.