In Global Energy Horizons Corporation v Gray  EWCA Civ 123, the Court of Appeal demonstrated the circumstances in which an appellate court will overturn costs decisions made by judges below. Disputes over who is substantially the winner at the end of litigation are not uncommon and judges regularly exercise their discretion, under CPR 44, to arrive at costs orders which reflect the true outcome of the claim.
This case illustrates the important difference between that discretion and the incorrect application of legal principle, and shows that, in the case of the latter, the appellate court will be quick to intervene.
Background to the dispute
Global Energy Horizons Corporation (GEHC) brought a claim against Mr Gray, who had owed fiduciary duties to GEHC as part of their “deal team” in relation to ongoing projects. Central to the dispute was novel ultrasound technology, which was intended to maximise the production of inaccessible oil and gas reserves. GEHC alleged that, in breach of his fiduciary duties, Mr Gray took advantage of an opportunity to obtain a personal interest in the investment vehicle which was to acquire and exploit the new technology, to the detriment of GEHC. Judgment was given in favour of GEHC and an account was ordered.
The account provided by Mr Gray claimed that he had received no profits or benefits from his investment. GEHC challenged this. The outcome of the trial before Asplin J (the “enquiry hearing”) was that Mr Gray was ordered to account to GEHC for the sums of US$3 million and £1.67 million and for certain interests arising from his investments. These were significant sums, but far short of the £227.8 million claimed by GEHC. Further, at a subsequent hearing before Arnold J, the value of Mr Gray’s interests in the technology were found to be nil (the “valuation hearing”). Arnold J made no order as to costs for the enquiry hearing on the grounds that neither party could be said to have truly succeeded and, as such, each should bear their own costs. GEHC appealed.
Costs and appellate courts
In its judgment, the Court of Appeal provided a useful exposition of the law in respect of an appellate court’s jurisdiction to interfere with costs orders made at first instance. As a starting point, the court noted the general principle set out in Day v Day  EWCA Civ 415 that an appellate court should not review the exercise of discretion by a judge below simply because it would have exercised that discretion differently.
The court also noted the principle set out in Johnsey Estates v Secretary of State for the Environment  EWCA Civ 535 that trial judges are better placed to exercise their discretion in relation to costs as they have a better feel for the case, having heard the substantive trial. Interference should only be contemplated where the judge has made a mistake of principle, failed to take the correct matters into account or arrived at a conclusion which was plainly wrong.
(Note that the hyperlink to Johnsey Estates in the judgment transcripts on BAILII and Westlaw is incorrect.)
The case of Sheffield v Sheffield and others  EWHC 2360 (Ch) was also considered. This highlights that, where accounts or inquiries are necessitated by a breach of trust, the trustee in breach will generally be ordered to pay the costs of the claim.
The Court of Appeal’s decision
The Court of Appeal noted that it was unusual that the costs order in relation to the enquiry hearing had been made by the judge who heard the valuation hearing. As such, the judge who had made the order had no better feel for the case or advantage in exercising his discretion as to costs than the Court of Appeal.
Ultimately, the Court of Appeal found that the decision that there be no order as to costs could not stand. Its reasoning in reaching this decision addressed two main areas.
At first instance, each side had claimed to be the victor. GEHC argued that they were the successful party because they had recovered over £3.6 million from Mr Gray. On the other hand, Mr Gray noted that this amounted to a recovery of just 1.6% of the claim value and argued that, on that basis, he was the true victor. Arnold J had rejected both of those submissions and characterised the result as a “score draw”.
The Court of Appeal disagreed with this assessment. It concluded that GEHC had been the true winner, as it had obtained an order for the payment of a significant sum of money (albeit much less than it had hoped for). The Court of Appeal rejected Mr Gray’s characterisation of the claim as an entirely disproportionate “juggernaut”, which he had been unable to stop. A defendant who wishes to vigorously defend an exorbitant claim, but who may be vulnerable to a finding that they are liable for a much smaller amount, can protect their position by advancing a Part 36 offer. Mr Gray had made no Part 36 offer to protect himself against an adverse costs order in the event of a minimal recovery by GEHC and this was not a case where GEHC needed to be punished for dishonest exaggeration of its claim.
Secondly, the Court of Appeal found that Arnold J had been wrong to dismiss the point that the enquiry hearing had been necessitated by the thoroughly dishonest account put forward by Mr Gray; it should have weighed much more heavily in favour of awarding GEHC their costs. This had been an error of principle, as opposed to a decision within the judge’s discretion.
On the basis of this reasoning, the order of Arnold J was set aside and a new costs order awarding GEHC their costs of the enquiry phase of the trial, (albeit with certain deductions to account for the parts of the claim on which Mr Gray had succeeded) was made.
This case provides useful guidance to litigants on how the courts will determine the “winner” of knotty claims where only a fraction of the quantum sought is awarded. It reinforces the importance of Part 36 as a mechanism by which a defendant may secure costs protection when faced with a claim that it considers to be over-valued. Had Mr Gray engaged with this process, the outcome may well have been very different.
The weight that the Court of Appeal gave to Mr Gray’s dishonest conduct also offers a cautionary tale for litigants. As with the defendant in PCP Partners and another v Barclays Bank PLC  EWHC 307 (Comm), an otherwise (at least arguably) successful but deceitful defendant was penalised in costs. This appears justifiable, given the time and money that would have been saved by the parties and the court had the defendants in these cases taken a more honest approach.