Costs Litigation Blog

12KBW’s Charles Robertshaw looks at the Court of Appeal judgment in Thakkar & Ors v Mican & Anor [2024] EWCA Civ 552 which considers whether a claimant has a default entitlement to indemnity costs where a defendant has unsuccessfully alleged that the claim is fundamentally dishonest (“FD”).

Background facts

The claim arose out of an RTA in 2017. The Claimants were the driver and passengers of a car. They alleged that the First Defendant drove his van into their vehicle. The First Defendant denied liability, alleging that the Claimant pulled out of a parked position into the side of his van. The Second Defendant was the First Defendant’s insurer.

The Claimants relied on the evidence of a witness to the accident, Mr Patel. The Defendants appear to have had doubts as to the legitimacy of Mr Patel’s evidence and instructed an investigator to visit his home to obtain a statement. Mr Patel was not at home when the investigator called, but the investigator did speak to Mr Patel’s uncle, telling him that Mr Patel may be accused of fraud.

Later the same day, the investigator contacted Mr Patel by phone and Mr Patel agreed to provide mandates for the Defendants to obtain his telephone records. The investigator did not tell Mr Patel about the possibility of fraud.

When the investigator telephoned again the next day, Mr Patel had been told about the potential fraud allegation by his uncle and withdrew his cooperation. This appears to have strengthened the Defendants’ suspicions that Mr Patel was not a bona fides witness to the index accident.

A claim was eventually served and the defence denied liability and pleaded that the Claimant’s credibility and honesty would be challenged at trial. At the subsequent CCMC, the Defendants applied for permission to plead FD. However, the judge (HHJ Backhouse) was unimpressed by the application and dismissed it. In her view the matters put forward by the Defendants as evidence of FD at that stage were “nowhere near what is required to be able to plead fraud and/or fundamental dishonesty”. However, the Judge made clear that the Defendants could make any submissions as to FD at trial if there are grounds to do so after cross-examination of the witnesses.

The matter eventually came before HHJ Backhouse for trial. The judge found liability in favour of the Claimants, largely on the basis of Mr Patel’s evidence which demonstrated that the First Defendant’s negligent driving caused the accident. The judge made no finding that any party lied, she simply found that the recollections of the Claimants and Mr Patel were more reliable than that of the First Defendant.

The Claimants sought indemnity costs for the period starting from the date when the allegations of FD were first raised by the Defendants. The Judge refused and awarded costs on the standard basis for this period.

The Claimants appealed.

The Court of Appeal decision

The lead judgement in the Court of Appeal was given by Coulson LJ who started his analysis with a summary of the legal principles as follows:

• The discretion to award indemnity costs is a wide one and must be exercised taking into account all the circumstances of the case, including but not limited to the conduct of the paying party.

• In order to obtain an order for indemnity costs, the receiving party must surmount a high hurdle; to be able to demonstrate “some conduct or some circumstance which takes the case out of the norm. That is the critical requirement”.

• To the extent that the application is based on the paying party’s conduct, it is necessary to show such conduct was “unreasonable to a high degree” in order to recover indemnity costs.

• But it is not necessary to go so far as to demonstrate “a moral lack of probity or conduct deserving of moral condemnation” on the part of the paying party.

• Merely because the conduct in question may happen regularly in litigation does not mean that such conduct cannot also be ‘out of the norm’. The word ‘norm’ was not intended to reflect whether what occurred was something that happened often, so that in one sense it might be seen as ‘normal’ but was intended to reflect something “outside the ordinary and reasonable conduct of proceedings”.

• Since the judge has such a wide discretion when it comes to costs, the courts have repeatedly made it clear that the court should avoid going beyond the CPR to identify rules, default positions, presumptions, starting points and the like, when addressing costs disputes.

Coulson LJ then stated the key question posed by the appeal: where allegations of dishonesty are pursued and fail, is there a default position, or a presumption, that the party who relied on those allegations is liable to pay the entirety of the others side’s costs on an indemnity basis?

Having considered the relevant case law, he concluded:

• There is no such presumption or reversal of the ordinary burden of proof. It will always depend on the circumstances of the particular case, and the judge retains a complete and unfettered discretion.

• The default position is always that standard costs will be assessed and paid, unless the party seeking indemnity costs can demonstrate why they are appropriate in all the circumstances.

• Any other conclusion would fetter the court’s broad discretion in respect of costs in any given case and would give rise to the very danger which the case law has warned against: the court must avoid the temptation to create rules which cannot be found in the CPR.

However, and importantly, Coulson LJ also stated (at paragraph 28 of the judgment):

“But nothing that I say there is intended to detract in any way from this statement of the obvious: that, because the making of a dishonest claim will very often attract an indemnity costs order against a claimant, a failed allegation of dishonesty will very often lead to the making of an indemnity costs order against the defendant, on the simple basis that “what is sauce for the goose is sauce for the gander”…A defendant who makes allegations of this kind therefore runs a very significant risk that, if the allegations fail, indemnity costs will be awarded against them.”

Accordingly, the appeal failed.

Comment

At the risk of stating the obvious, it is almost inevitable that allegations of FD will cause increased litigation costs. For example, such allegations are likely to increase:

• The risk of a case being re-allocated to the multi-track or a higher complexity band in the fast/intermediate track;
• The amount of disclosure required;
• The length and number of witness statements served; and
• The length of trial.

As a consequence, the increased costs caused by alleging dishonesty should always be considered before committing to making such allegations.

Whilst the Court of Appeal has confirmed that there is no presumption of indemnity costs awarded against defendants who have failed to prove allegations of dishonesty, this case is still a clear warning to such defendants: “what is sauce for the goose is sauce for the gander”.

Consequently, successful claimants will surely feel emboldened to seek (and first instances judges will be more likely to make) indemnity costs orders in such circumstances following this Court of Appeal judgment.

What can parties wishing to allege dishonesty do to minimise the risk of being ordered to pay indemnity costs if they don’t make it home on those allegations at trial?

Firstly, an obvious starting point is provided by the defendant’s legal representatives’ professional duties. For example, counsel are bound to follow the Code of Conduct set out in the BSB Handbook, rC9.2(c) of which states:

• you must not draft any statement of case, witness statement, affidavit or other document containing any allegation of fraud, unless you have clear instructions to allege fraud and you have reasonably credible material which establishes an arguable case of fraud.

Accordingly, a defendant must be satisfied that there is reasonably credible material on which a finding of fraud/dishonesty can be based before any express allegation of dishonesty is made.

Secondly, it must be borne in mind that, although the standard of proof for allegations of FD is the usual ‘balance of probabilities’ test, judges usually will consider FD to be a serious allegation and require clear and cogent evidence before finding that the balance of probabilities threshold has been met.

Thirdly, does FD need to be pleaded at all? If the evidence raises suspicion but is not sufficiently clear to make a reasonably arguable case of FD against a claimant, the guidance of Newey LJ in Howlett v Davies [2017] EWCA Civ 1696 (which was seemingly endorsed by Coulson LJ) should be remembered:

• The mere fact that the opposing party has not alleged dishonesty in his pleadings will not necessarily bar a judge from finding a witness to have been lying: in fact, judges must regularly characterise witnesses as having been deliberately untruthful even where there has been no plea of fraud.

• The key question in such a case would be whether the claimant had been given adequate warning of, and a proper opportunity to deal with, the possibility of such a conclusion and the matters leading the judge to it rather than whether the insurer had positively alleged fraud in its defence.

Accordingly, a defendant can plead a positive case as to the facts which might give rise to a finding of FD without then expressly pleading FD. So, for example, in the case of a suspicious ‘independent’ witness, the defendant might expressly plead that:

• It understands that the claimant will rely on the witness evidence of Mr X as to the circumstances of the accident.
• The defendant denies that Mr X was present at the scene of the accident at any material time.

The issue can then be investigated further and if no supportive further evidence comes to light prior to trial:

• The allegation can be dropped entirely (and the same notified to the claimant in correspondence); or
• The allegation can be explored in cross-examination and expressly made once the appropriate evidence has been elicited from the witnesses.

Of course, if further supportive evidence comes to light (e.g. social media evidence, surveillance etc. etc.) an application to amend to expressly plead fraud based on that evidence can be made.

The final takeaway from this case is that it serves as a warning to any litigants who have slipped into a habit of aggressively raising allegations of dishonesty where the evidence is too weak to reasonably do so. This is made clear in the coda to the judgment, where the Lady Chief Justice states:

“This litigation has been characterised by parties on both sides far too ready to throw unnecessary and serious allegations against each other…

… As the courts have made clear repeatedly, an unnecessarily aggressive approach to litigation is unacceptable… … The unfortunate effect of the parties’ conduct was to increase not only aggravation to an independent witness but also costs on both sides”