Mr Justice Norris has now handed down judgment following the consequentials hearing in the landmark Lloyds/HBOS Litigation: Sharp & Ors v Blank & Ors [2020] EWHC 1870 (Ch). Norris J resoundingly refused permission to appeal the judgment on liability and made a number of interesting findings on the adverse costs position of the claimants, and the litigation funders who backed the claim, following their failure.

The findings are split into two main parts:

  1. Costs
  2. Permission to Appeal

Costs

Should the costs award be determined by reference to overall success?

The court considered whether, in light of the outcome of the case, there was any reason for departing from the general rule that costs are to be determined by reference to overall success.

The claimants argued that they should only be required to pay 60% of the defendants’ costs on the basis that they “succeeded” on two issues; namely that the defendant Directors were in breach of a duty of care in respect of two issues which the judge had held ought to have been disclosed. The claimants submitted that the defendants should have conceded the case on the disclosure duty and that, had they done so, costs would have been saved.

The court firmly rejected these arguments however. Norris J said that “there is no reason in principle why a party who succeeds in establishing one element of his cause of action but fails to establish the others should be regarded as partially successful”. Given the breadth of the attack made by the claimants against Lloyds and its Directors (which included both allegations of a number of disclosure defects and also an allegation that the recommendation given to shareholders to vote in favour of the acquisition was made negligently), their degree of success was in fact small. Moreover, the claimants failed to establish that the breaches were causative of any loss, or indeed that any loss was suffered. Even the points on which they were successful were finely balanced.

In singling out an issue for separate treatment by way of costs the court held that it must look for “some objective ground (other than failure itself) which alongside failure distinguishes it from other issues and causes the general rule to be disapplied”. Such a distinctive ground may include:

  1. the comparative weakness of an argument (even if not unreasonably maintained);
  2. the necessity for particular evidence relevant only to that issue; or
  3. extensive and intensive legal argument directed to that issue which gives it an especial significance in the costs context.

The court held that such a factor is missing in this case. As such, the general rule was found to apply, and costs will follow the event.

The liability of litigation funders to cover costs

Therium, the claimants’ litigation funder, accepted in principle that it was liable to pay costs awarded against the claimants. However, it submitted that it should be liable only

  1. to the extent that the Claimants did not satisfy the adverse order; and
  2. to the extent of the funding that Therium actually provided (i.e. subject to “the Arkin cap”: see Arkin v Borchard Lines Ltd [2005] 1 WLR 3055).

In an order which reflects the realities of the litigation funder’s role in group litigation such as this, the court found that Therium’s liability ought to be joint and several with the claimants’ own.

The court considered the recent Court of Appeal decision in Davey v Money [2020] 1 WLR 1751 on the application of the Arkin cap, noting that it “is not a binding rule, but simply guidance given to individual judges, who retain a complete discretion in relation to third party costs orders”, but ultimately withheld from making a decision regarding the application of the Arkin cap to this case at this stage given that the interim payment which he ordered was below what would have been the Arkin cap in this case.

“Risk-free” shareholder litigation

The judgment acknowledges that this may have been a case in which many of the claimant shareholders thought that they were “litigating risk-free”. However the judgment makes clear that this was “most unfortunately” not the case:

  1. the ATE insurance cover which was meant to protect the claimants from cost risk fell short of the defendants’ costs;
  2. the level of ATE insurance cover which had been put in place was affected by the insolvency of some of the insurers;
  3. the claimants had failed to cover the risk that interest would be awarded on the defendants’ costs (see further below); and
  4. pursuant to the Group Litigation Order, the court held the claimants severally liable for any costs awarded to the defendants.

Interim costs

The court awarded interim costs comprising of (a) 50% of the incurred costs identified in the cost budget; 90% of the budgeted costs; and (c) VAT thereon. In making this finding the court followed MacInnes v Gross [2017] 4 WLR 49 which held that:

  1. the approved costs budget almost always provided the starting point for assessing a payment on account, because the costs management process had established it to be a reasonable and proportionate sum; and
  2. a discount of 10% was the maximum deduction appropriate in a case where there is was an approved costs budget.

Interest on costs

The court considered whether it should award interest on pre-judgment costs. The claimants argued that it should not because the Defendants did not signal an intention to claim pre-judgment interest on costs at any time when costs budgets were under consideration, and a possible claim for interest was not factored in to the level of ATE cover obtained.

However, the court found in favour of the defendants noting that “it was ultimately for the Claimants to decide against what risks to insure and what risks to bear themselves. A claim for pre-judgment interest on costs is commonplace, and it was for the Claimants to decide whether any protective measures were required, not for the Defendants to call for them”.

Permission to Appeal

The court resoundingly rejected the claimants’ application for permission to appeal the judgment. In doing so, the court clarified findings made in the judgment handed down on 15 November 2019. Given that the court had found there to be two breaches of disclosure duties, but that those breaches were not causative of any loss, in order to successfully appeal the judgment, the claimants would need to overturn the court’s findings on both causation and loss, findings which the defendants alleged were factual, as opposed to legal.

In its November 2019 judgment the court held that the existence of both the repo facility entered into between Lloyds and HBOS (the Repo), and the Emergency Liquidity Assistance (ELA) facility being drawn upon by HBOS ought to have been disclosed. The judge also formulated hypothetical disclosures which in his view would have met the disclosure requirements. Those hypothetical disclosures did not contain details of the features of the Repo and ELA. The claimants contended that the court’s conclusions in that respect were wrong as a matter of law, and that the details ought to have been disclosed. The claimants then argued that the court’s findings in relation to causation were dependent upon its conclusions regarding the limited nature of the disclosures, and were therefore flawed.

The court accepted that the actual disclosures which could have been made in relation to the Repo and ELA may have been different to the hypothetical disclosures it had formulated in its judgment in November 2019, but did not accept that the conclusions it had reached were “plainly wrong” (which is the test that the defendants submitted to be the correct threshold for re-assessments by the Court of Appeal of intensely complex mixtures of fact and law).

However, more importantly, the court made clear that the findings it had reached regarding the causative effects of disclosure of each of the repo facility and ELA were not dependent upon the precise nature of the disclosure which was made: “The evidence assembled by the Claimants and the case put to the Defendants related to “detailed disclosure”: and my conclusion rests on an analysis of that evidence”.

The claimants also argued that the judgment did not consider whether the Repo or ELA constituted material contracts pursuant to the Listing Rules. The court clarified that it did not consider that a breach of the Listing Rules can found any claim for damages by an individual against a listed company or the directors of a listed company.

The claimants also sought permission to appeal on the basis that the court erred in law in holding that they had failed to make out a case on loss. However, the court explained in this judgment that the claimants’ loss case was built around their “recommendation case”, which was a part of the case in which the claimants had failed to establish there had been a breach (a conclusion which the claimants were not seeking to appeal). The court did not consider that the claimants had provided it with evidence establishing losses arising solely from disclosure breaches.

Finally, the court addressed the claimants’ argument that there was a “compelling reason” to grant permission to appeal because the decision sets a standard for disclosure which is too low. However, the court reiterated in its judgment that the test it had set in the November 2019 judgment was “that directors, when considering the materiality of items for disclosure, must not focus only on material supportive of the recommended outcome but ought, when laying out the proposal and in enumerating the risks attendant upon it, to set out in a balanced way material which shareholders might see as indicating disadvantages”, which, it contended, could not be controversial. The court refuted any suggestion that the application of that standard to the extraordinary facts of this case could be seen as setting any standard of wider significance.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Sarah Penfold

Sarah Penfold
Senior Associate
+44 20 7466 2619