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Discontinuance and indemnity costs: when using litigation as an anvil for settlement can backfire

In judgments on consecutive days in October 2018, two High Court judges have made it clear that they will not, without sanction, see their courtroom used for purposes other than the proper adjudication of genuine disputes.

Two of this year’s cases to watch, Hellas (in Liquidation) v Apax Partners and Robert Tchenguiz v Grant Thornton and others (unreported) (in relation to the latter, where the author acted for various of the defendants), have both, coincidentally, been discontinued by the claimants on day four of what were set to be lengthy trials (six weeks and 12 weeks respectively). These were not straightforward cases nor quick to reach trial; both were well-publicised in the media and made allegations of the most serious kind against the defendants. Upon discontinuance, Hildyard J in the Chancery Division and Knowles J in the Commercial Court both saw fit to order indemnity costs against the claimants, and in doing so to pass comment on the substance and merits of the cases before them (although Hildyard J accepted that this would not ordinarily be the function of the court following discontinuance).

The message is clear: claimants who use the litigation process to bring complex cases, without genuinely good prospects against the defendants and with the primary aim of securing some kind of settlement or commercial advantage (either because of the nuisance value of lengthy litigation, publication of damaging allegations or the inevitable uncertainty of the trial process) will not be allowed to slip away quietly by way of discontinuance before the close of trial, leaving the defendants’ reputations potentially tainted and without the prospect of vindication through judgment.

Discontinuance generally

A claimant can discontinue its claim by giving notice at any time. Permission will only be required where there is an injunction in place, an undertaking to the court or where one of several claimants does not consent to the discontinuance.

Under CPR 38.6 and CPR 44.9, the claimant will, upon discontinuance, be liable for costs up until the date of the notice on the standard basis and unless otherwise ordered by the court. The burden is on any party seeking to persuade the court to make a different order.

Standard vs. indemnity costs

In order for a court to award costs on the indemnity basis, the guiding principle from case law (in particular the Excalibur Ventures and Euroption cases) is whether the behaviour of the paying party or the circumstances of the case take it “out of the norm”.

Hildyard J summarised the position in Hellas as follows:

“The cases cited show that amongst the factors which might lead to an indemnity basis of costs are (1) the making of serious allegations which are unwarranted and calculated to tarnish the commercial reputation of the defendant; (2) the making of grossly exaggerated claims; (3) the speculative pursuit of large-scale and expensive litigation with a high risk of failure, particularly without documentary support, in circumstances calculated to exert commercial pressure on a defendant; (4) the courting of publicity designed to drive a party to settlement notwithstanding perceived or unaddressed weaknesses in the claims.”

Hildyard J then noted the difficulty of applying these criteria in the context of a discontinuance where the court has not assessed all of the evidence and reached a determination and may therefore find the reasonableness of the way that the case has been conducted more difficult to assess; for example, whether the claim was “unwarranted”.

Commentary on the merits following discontinuance

What then is it open to a judge to say about the case following discontinuance and when determining the issue of indemnity costs?

Tomlinson J’s (as he then was) highly critical judgment of the liquidators following the discontinuance of their claims in the BCCI litigation is well known. There, the liquidators had agreed to pay costs on the indemnity basis, and Tomlinson J considered whether there was sufficient issue remaining to comment on the substance of the abandoned case (which he found that there was, it not having been agreed that the defendants were entitled to indemnity costs and by way of guidance to the costs judge on assessment).

In the Tchenguiz case, again, like BCCI, it was agreed by the claimants that indemnity costs would be paid. But Knowles J considered it appropriate to note, in the context of his order as to indemnity costs and the appropriate level of interim payment, certain factors about the way in which the claim had been progressed and abandoned at trial. He noted that the court considered the evidence of the defendant witnesses, ultimately not challenged by way of cross-examination, to represent the truth. He said that the defendants could leave the courtroom with their reputations intact and that the claimants owed the defendants an apology for the litigation.

In Hellas, the claimant liquidators did not accept that costs were payable on the indemnity basis. In ordering costs against them on that basis, Hildyard J noted the following factors:

  • The court is not precluded, following discontinuance, from considering whether sudden discontinuance confirms that the claim, though perhaps not susceptible to summary determination at an earlier stage, lacks or has come to lack any real vitality. Nor is the court precluded from assessing the documentary record, to assess whether it appears that the claim was continued, not with a view to adjudication on its merits, but with a view to extracting a settlement.
  • The court is entitled to assess whether the fact of discontinuance, where no other explanation is offered, raises an inference that the discontinuing party has not only recognised weaknesses such that the continued pursuit of the claim cannot be justified, but that such weaknesses were always present. He said, “the sudden, unexplained discontinuance of a large claim, carried on for days at trial after enormous expense, invites the question whether it was reasonable to pursue it at all, or at least, so far.”
  • The factors which took this case out of the norm and which Hildyard J commented on in some detail were:
    • the allegations of serious impropriety, some of which were abandoned before trial but which continued to taint the way that the case was put at trial;
    • the way that the factual allegations were shoehorned and manipulated in order to fit within the specified cause of action;
    • the way that the pleaded case shifted as new facts came to light which also needed to be explained within the cause of action;
    • the way that publicity of the allegations was courted;
    • that there was no proper support for the case in the documents, the claimants relying instead on the hope of proof by way of cross-examination;
    • the use of improbable and unwarranted expert evidence; and
    • the failure of settlement talks and the abandonment of the case, without explanation and without a withdrawal of the allegations made.

Concluding remarks

These judgments ought to cause any claimant who plans to threaten or use litigation as a commercial tool and with a view to extracting a settlement, to consider the prospects and viability of the claim at a much earlier stage than the commencement of trial and to realise when the settlement that they might desire is not going to come good. On the basis of these judgments, it is difficult to see that a claimant who discontinues suddenly during trial, without very good excuse, will ever escape indemnity costs as a consequence.

It may be that this also creeps into cases that discontinue before trial where huge expense has been incurred on a case known not to be fit for trial. But in such cases the judge, even if he has had conduct of the general case management of the claim throughout, will have not had the benefit of trial pre-reading and opening submissions and may therefore feel more restrained in what can be said about the merits of the claim.

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