Flawed fraud and indemnity costs – La Cotte v Sovereign Steel Stockholders

Indemnity costs are always a hard fought battle, generally following hard won litigation. It is obvious why: the indemnity basis means a receiving party is not held to their approved budget and is therefore likely to recover significantly more than on the standard basis (Burgess v Lejonvarn, paragraphs 89 – 93).

For example, an indemnity basis assessment might lead to recovery of around 85 percent of actual costs, compared to around 90 percent of budgeted costs on the standard basis. An indemnity award is meant to give the winner a fairer (or perhaps less unfair) outcome; it does not aim to penalise the loser – costs must be reasonable to be recoverable – but it disentitles the loser to the benefit of the doubt and to a proportionality assessment (Three Rivers District Council v Bank of England, paragraph 14).

But the indemnity costs battle is usually fought in a short consequentials hearing of half a day or less; this brief encounter can mean the difference between being left substantially intact or out of pocket. It pays dividends to be well prepared for and to make focussed submissions at the hearing, and to have conducted the case reasonably throughout to avoid censure. 

An indemnity costs award requires something to take the case out of the norm” (Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson, paragraph 19– a very wide discretion – which can include speculative, weak, opportunistic or thin” (Three Rivers District Council, paragraph 25(5)claims and unsuccessful claims based on dishonesty (Clutterbuck v HSBC Plc, paragraphs 16 and 17). This must be weighed against the need for caution and retrospect in long and complex cases, where answers may have become obvious by the end of trial, because of the way the case has developed and redeveloped, that were not at commencement (Digicel (St Lucia) Ltd and Ors  v Cable & Wireless Plc and Ors, paragraph 18).

These (among other) points explain the indemnity costs order made by HHJ Davis-White QC (sitting as a High Court judge) against the losing claimant in La Cotte v Sovereign Steel Stockholders; a case concerning scrap metals in which David Lewis QC and Jack Dillon of Gatehouse Chambers acted for the successful defendants. 

The claimant ran multiple causes of action based entirely or predominantly on fraud, all of which were either abandoned at various stages of the proceedings or lost at trial. The litany of accusations included fraudulently engineering a false account reconciliation in conspiracy with the claimant’s employee, fraudulently invoicing for unagreed commissions and undelivered goods, deliberately sabotaging the claimant’s tender bids, unlawfully diverting contracts from the claimant, unlawful interference and procuring breach. The allegations of dishonestly ranged more widely than the matters raised on trial, to irrelevant matters and points covered in other litigation.   

Indemnity costs were awarded; the judge held that far too much of the case was brought, persisted in and/or lost in circumstances where the claim should not have been brought or should have been dropped at an earlier stage … the most widespread allegations of fraud were made … the conduct in this case was outside the norm”. Not only was the claim an unsuccessful fraud case, but it was also a speculative unsuccessful fraud case: the weaknesses ought to have been clear to the claimant from the start.  The allegations made no commercial sense. They were not supported by proper evidence. The key witness supporting the fraud allegations was not called. In short, the claim was constructed by a process in which two and two have been added to make five”. 

Part of the claimant’s response was to seize on the judge’s finding that the witnesses for and those controlling the claimant genuinely (in part) believed in their fraud allegations. The judge rejected that submission, holding that a subjective belief in the claim was not enough to avoid indemnity costs: the conduct of a party to litigation must be viewed objectively”. It was “no answer that the paying party was a litigant in person”, especially where it had instructed (two) direct access counsel. Permission to appeal is pending. 

This was a conventional application of established principles, reminding parties asserting fraud or pursuing speculative claims that the prospect of indemnity costs is very real, whereupon they will lose the cost cap protection of the winner’s budget.  

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