One of the key features of the commercial litigation landscape in England and Wales is that costs generally follow the event, creating a disincentive for claimants to commence unmeritorious claims given their exposure to the defendant’s legal costs if the claim ultimately fails. This is also true (indeed, potentially even more so) if, as is increasingly the case, a claim is backed by a litigation funder and/or the claimant has obtained cover in the after the event insurance market for that exposure. How much of the defendant’s costs can be recovered from the unsuccessful claimant is an important consideration for claimants, insurers, funders and, of course, defendants, but is largely a matter of discretion on the part of the court following its determination of the substantive issues. Where the claim is defeated comprehensively, all other things being equal, defendants can reasonably expect to receive a significant proportion of their actual costs (subject to those costs being reasonably incurred). However, particularly in more complex claims, where the claimants are able to point to certain issues on which they were successful, arguments might be run that the court should exercise its discretion to reduce the defendant’s ability to recover its costs.
A couple of recent cases have shed some light on the approach that the courts will adopt when faced with such arguments and provide useful guidance to defendants in managing their expectations of recovery in cases where costs following the event is less straightforward to apply.
The general rule
Pursuant to CPR 44.2(2)(a), the general rule in respect of orders for costs is that costs follow the event (i.e. the unsuccessful party should be ordered to pay the costs of the successful party).
However, pursuant to CPR 44.2(2)(b), the court has discretion to make a different order. Moreover, CPR 44.2(4) directs the court, in deciding what order (if any) to make about costs, to have regard to a number of matters including whether a party has succeeded on part of its case, even if that party has not been wholly successful.
Notwithstanding the discretion that the court undoubtedly has, there is a line of reasoning which suggests that it ought not to be exercised too readily for fear of undermining the rationale for the general rule. Most notably, in Fox v Foundation Piling Ltd  EWCA Civ 790, Jackson LJ criticised the “growing and unwelcome tendency” of judges to depart from the general rule because of “the uncertainty which such an approach generates”.
The Lloyds/HBOS Litigation provides a very good example of a case where it was open to the unsuccessful claimants to attempt to point to aspects of the judgment that went in their favour and say that this justified the court departing from the general rule and reducing the amount of costs which the defendants could recover. This is because, whilst the claim failed in its entirety, the court did find that, in two respects, the disclosures which Lloyds made in its shareholder circular about the acquisition of HBOS were deficient. Please see our blog post for more details on the Lloyds/HBOS Litigation.
In the consequentials hearing, the claimants’ argued that the costs award in favour of the defendants should reflect the fact that, in these two respects, the defendants had been found to have breached their disclosure duties. However, the trial judge comprehensively rejected this approach (Sharp v Blank & Ors  EWHC 1870 (Ch)). In doing so he made the following observations, which are particularly useful in providing guidance on the correct approach in such circumstances:
- It is a commonplace that a successful party will not succeed on every aspect of its case. But notwithstanding that very frequent occurrence in litigation, the general rule still applies. Costs are determined by reference to overall success. Here, the defendants had completely defeated the claims which were made.
- A degree of caution is needed against a too-ready departure from the general rule for the reasons explained by Jackson LJ in Fox.
- 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. The cause of action should be viewed as a whole – here breach was but one element of the cause of action. The claimants totally failed to prove that the breaches which were found were causative of any loss since the judge found that the acquisition would have proceeded in any event.
- Given the breadth of the attack, which extended to the recommendation given by the directors (which was found not to have been negligent) and well beyond the two disclosure breaches which were made out, the claimants’ degree of success in this case was in fact small.
- Even the measure of success achieved by the claimants was so achieved on a fine balance – the judge’s findings of breach were far from clear cut.
- It is, of course, not the law that a successful party can only be deprived of the costs of an issue if he has unreasonably resisted that issue any more than it is the law that he should be deprived of the costs of the issue simply because he lost it. In singling out an issue for separate treatment by way of costs the court 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.
Terracorp Limited v Mistry & Ors  EWHC 2623 (Ch)
A further example is found in the recent decision of Mr Justice Miles in Terracorp Limited v Mistry & Ors  EWHC 2623. This decision followed an appeal by the claimant of the first instance decision of HHJ Johns QC.
At first instance, the defendants in Terracorp were successful overall in defending the claim. However, they ran a number of unsuccessful defences and counterclaims, which the claimants estimated took up to 85% of the court and preparation time. As a result, the claimant sought an issues-based costs order, with the defendants being required to pay 90% of their own costs.
In his costs judgment, HHJ Johns QC referred to the relevant provisions of CPR 44.2 and cited a helpful summary of the applicable principles in Sycamore Bidco v Breslin  EWHC 583 (Ch):
- In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.
- In considering how to exercise its discretion the court should take as its starting point the general rule that the successful party is entitled to an order for costs.
- The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.
- Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes.
- In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.
- In considering the circumstances of the case the judge will have regard not only to any Part 36 offers made but also to each party’s approach to negotiations (insofar as admissible) and general conduct of the litigation. The conduct of the parties, both before and during the proceedings, is capable of being relevant.
- In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he/she has won but also the common costs.
- The fact that a party has not won on every issue is not, of itself, a reason for depriving that party of part of its costs.
- The reasonableness of taking a failed point can be taken into account.
- The extra costs associated with the failed points should be considered.
- One still has to stand back and look at the matter globally, and consider the extent, if any, to which it is just to deprive the successful party of costs.
Ultimately, in a decision which demonstrates the uncertainty that the discretion can introduce to the general rule, HHJ Johns QC awarded the defendants only 50% of their costs on the basis that the failed defences which the defendants ran accounted for a large part of the trial (albeit he did not accept that they took as much time as was contended by the claimants). The judge reached this conclusion even though he did not consider that the defendants were unreasonable in running those defences.
The claimant was granted permission to appeal on the question of whether a proportionate order of 50% of the respondents’ costs was unjustifiably high and therefore wrong, given that the appellants were not awarded any of their costs for the issues on which they succeeded at trial. Mr Justice Miles dismissed the appeal, finding that an appellate court will only interfere if satisfied that the judge’s decision was plainly wrong, emphasising the fact-dependent nature of the assessment which the trial judge will be conducting.