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||Neutral Citation Number:  EWHC 3318 (Pat)
||Case No: HC 08 C01575
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
Rolls Building London EC4A1NL
B e f o r e :
THE HON MR JUSTICE FLOYD
|| VIRGIN ATLANTIC AIRWAYS LIMITED
||- and -
||(1) JET AIRWAYS (INDIA) LIMITED
(1) DELTA AIR LINES, INC
(1) AIR CANADA
(2) ZODIAC SEATS UK LIMITED (formerly CONTOUR AEROSPACE LIMITED, formerly PREMIUM AIRCRAFT INTERIORS UK LIMITED)
||ZODIAC SEATS UK LIMITED
||- and -
||VIRGIN ATLANTIC AIRWAYS LIMITED
||PREMIUM AIRCRAFT INTERIORS UK LIMITED
||- and -
||(1) COMPTROLLER GENERAL OF PATENTS
(2) VIRGIN ATLANTIC AIRWAYS LIMITED
Richard Meade QC (instructed by DLA Piper UK LLP) for Virgin Atlantic Airways Limited
Adrian Speck QC (instructed by Taylor Wessing LLP) for Jet Airways (India) Limited
Pushpinder Saini QC and Christopher Hall instructed by Wragge & Co LLP for Delta Air Lines, Inc
Adrian Speck QC (instructed by Bird & Bird LLP) for Air Canada
Iain Purvis QC and Brian Nicholson (instructed by Wragge & Co. LLP) for Zodiac Seats UK Limited and Premium Aircraft Interiors Limited
Fiona Clark (instructed by The Treasury Solicitor) for The Comptroller-General of Patents
Hearing date: 8th November 2012
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Floyd :
- I gave judgment in this action on 27th July 2012:  EWHC 2153 (Pat) ("the main judgment"). On 8th November 2012 I heard argument from a number of parties on the form of the order to be made, and in particular on the issues about costs. These arguments raised a question about an offer which Virgin had made to Contour (now called Zodiac Seats UK Limited, "Zodiac"), purportedly under CPR Part 36, and whether it was appropriate for the court to be shown the offer at this stage. I decided it was appropriate to be shown the offer, but that I would put my reasons in writing. That will be the first issue I deal with in this judgment. I also heard argument on whether the existence of the offer meant that I should not deal with costs as between Virgin and Zodiac at this stage, but should wait for the outcome of other proceedings. That is the second issue with which I deal in this judgment. Next, I heard argument about who was the overall winner as between Virgin and Zodiac for the purposes of CPR Part 44.3, or whether there was an overall winner. That is the third issue I must determine in this judgment, if it arises.
- Finally I heard argument between Air Canada and Jet on the one hand and Virgin on the other as to the correct costs order as between those parties. Those are the final issues I deal with in this judgment.
- It was not possible to hear argument on all the disputed issues in the time available on 8th November. Accordingly I adjourned all other issues to be decided at a further hearing, if they cannot be agreed.
- These proceedings were complex, even by the standards of patent proceedings. In the main judgment, I summarised the result at  as follows:
"(a) 908 is not infringed by the Solar Eclipse seating system either in its original form or with the variant form of headrest;
(b) 711 would not be infringed by Solar Eclipse seat units, either in their original form or with the variant form of headrest;
(c) 734 would be infringed by the Solar Eclipse seating system and Solar Eclipse seat units both in their original form and with the variant form of headrest;
(d) the modified Solar Eclipse does not infringe any of the patents;
(d) subject to deletion of the words "at least some" in claim 1 of 908 and 734, and on the construction of the claims of 908 which I have held to be correct, none of the patents is invalid for added matter;
(e) none of the three patents is invalid for obviousness;
(f) the Delta undertaking continues to apply;
(g) the non-designation point fails;
(h) the Rule 50 appeal will be dismissed."
- Although Virgin succeeded overall against Zodiac in relation to one of the patents (734), and will be entitled to an injunction to restrain any future infringement, this finding does not provide an alternative route for Virgin to recover back damages from Zodiac. This alternative route to back damages could only arise under 908, as the other patents were only granted later. The alternative route to back damages was one of the purposes for which the action was commenced. It would have been an "alternative" route because Virgin had already obtained an enquiry as to damages in an earlier action against Zodiac for those damages ("the first action"). However, the patent has subsequently been amended in proceedings before the EPO. On the current state of the law ("the Unilin principle": see Unilin Beheer BV v Berry Floor NV  EWCA Civ 364) Virgin would be entitled to continue with the enquiry as to damages notwithstanding the amendment of 908. Zodiac has, however, been given permission to appeal to the Supreme Court on the question of whether the Unilin principle is correct. That appeal would have been rendered moot if Virgin had succeeded in recovering damages by this alternative route. The hearing in the Supreme Court has been allowed to come on at a date after the present action is decided for that reason. In this action, on the issue of the alternative route to back damages, Zodiac has prevailed. However, as the amendment of the patent led to the original injunction being discharged, Virgin has succeeded in restoring its position on injunctive relief.
Virgin's Part 36 offer
- CPR Part 36.13 deals with the restrictions on disclosure of Part 36 offers:
"(1) A Part 36 offer will be treated as 'without prejudice except as to costs'.
(2) The fact that a Part 36 offer has been made must not be communicated to the trial judge or to the judge (if any) allocated in advance to conduct the trial until the case has been decided.
(3) Paragraph (2) does not apply –
(a) where the defence of tender before claim has been raised;
(b) where the proceedings have been stayed under rule 36.11 following acceptance of a Part 36 offer; or
(c) where the offeror and the offeree agree in writing that it should not apply."
- Virgin's skeleton argument for the application on 8th November said this at paragraph 10:
"[Zodiac] does not have to pay damages based on the amended form of 908, but as matters stand, subject to the Supreme Court, it does have to pay damages following its defeat in the first action. [Zodiac] is therefore not a winner in any sense; to say it has won anything would be premature in advance of the outcome of the Supreme Court appeal and a subsequent damages enquiry (there is a sub-issue in this respect arising from a part 36 offer made by Virgin)."
- Virgin has therefore disclosed the fact that they had made a Part 36 offer. Moreover even this early reference went further by hinting that the offer might relate to the other proceedings as well. Virgin went on to make submissions at paragraphs 44 to 48 of their skeleton about the ability of the court to defer any determination about costs, and cited cases where this had been done within the context of a single action. At paragraph 47 they said:
"By analogy, the same approach should be taken in the present case where the outcome of the damages phase of the first action is unknown but Virgin has made a Part 36 offer covering that action and the present proceedings." (emphasis added)
- At paragraph 48, Virgin said:
"As a practical matter, Virgin does not object to the Court knowing that there is a Part 36 offer in existence, however. However, that does not mean that the Court should consider its terms, let alone some of its terms selected by the offeree, [Zodiac]."
- Thus Virgin were explicitly agreeing to the court being told of the fact that they had made a Part 36 offer. In addition they had disclosed that it related both to the present proceedings and the first action. Finally they relied on the well known principle that it is wrong for only part of an otherwise privileged document to be referred to.
- In HSS Hire Services Group plc v BMB Builders Merchants Ltd  1 WLR 3158;  EWCA Civ 626, the trial judge had given judgment on liability with damages to be assessed. The defendants had made a payment into court under CPR Part 36 prior to the order for a split trial. Pursuant to the former CPR 36.19(3), which expressly allowed disclosure to the court of the fact of an offer where there was a split trial and liability had been determined, the judge was informed of the payment but not of its amount. The judge ruled that the offer was not of any relevance and ordered the defendant to pay the costs of the liability trial. On appeal, Waller LJ quoted and subsequently approved the submission at  that:
"The proper approach … should … normally be to adjourn the question of costs pending the resolution of all the issues including damages, at which stage the quantum of the Part 36 offer can be revealed and the discretion in relation to costs exercised in the knowledge of it."
- The main reason why the court should take this approach was to be found in CPR 44.3(4)(c) which places the court under an obligation to have regard to offers:
"(4) In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including –"
(c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply."
- The obligation to have regard to offers must obviously apply at the time the discretion in relation to the relevant costs is exercised. Accordingly Waller LJ said at paragraph 35:
"If the court is told that there has been no payment in, then the court is free to exercise its discretion to award costs in relation to the preliminary issue and there is no difficulty with Part 44.3(4)(c). If however it is told that there has been a payment in, then, in any but perhaps the most exceptional case, I find it very difficult to think that there could be circumstances where if the issue of damages remains to be decided, the judge can do otherwise than to reserve the question of costs until after the determination of that issue."
- Waller LJ also considered and rejected at paragraphs 34-35 an argument that the terms of the old CPR 36.19(3)(c) allowed disclosure of not only the fact of the payment in but also its amount. He said:
"On its language it allows simply the disclosure of the fact that there has been one or the fact that there has not"
- In AB v CD  EWHC 602 (Ch), Henderson J considered the impact of the recast CPR 36.13 in a split trial case, and the fact that it no longer expressly authorised telling the trial judge of the existence of the offer at the end of the liability phase. At paragraph 18 he said this:
"It seems to me that there is a real problem here. If the existence of a Part 36 offer cannot be disclosed, except where the parties agree, until the conclusion of the second stage of a split trial, such agreement is unlikely to be forthcoming in any case where the disclosure might prejudice the position on costs of either the offeror or the offeree at the conclusion of the liability stage. It would seem to follow that in nearly all split trial cases where a Part 36 offer has been made all questions of costs would have to be reserved to the conclusion of the second stage, because it will be in the interests of at least one party to refuse consent to its disclosure at the liability stage. But it will often be desirable in principle, and in the wider interests of justice, for the costs of the liability hearing to be dealt with at its conclusion. Very substantial costs may well have been incurred, it will probably be clear that one party has succeeded, and the general philosophy of the CPR is to encourage the determination and payment of costs on a "pay as you go" basis. Furthermore, the Part 36 offer may relate only to the costs of the liability stage; and even if it does not, it is relatively uncommon for trials on quantum to proceed to a hearing. Why, then, should the court be compelled to deal with the costs of the liability hearing in ignorance of the fact that a Part 36 offer has been made, and in ignorance of the terms of the offer, unless the relevant parties all agree? Further, if the court is asked to reserve the costs, it will almost inevitably conclude that the reason for the request is the existence of a relevant Part 36 offer, thereby undermining the apparent policy of rule 36.13(2)."
- At paragraph 20 he made this suggestion:
"Since it is unnecessary for me to resolve the problems to which I have drawn attention, and since I have not heard full argument on them, I think it would be unwise for me to say much more about them. I will merely hazard the suggestion (perhaps foreshadowed in the notes in the White Book) that a possible solution might be to focus on the words "until the case has been decided" in rule 36.13(2), which are much less specific than the wording of the old rule 36.19(2) ("until all questions of liability and the amount of money to be awarded have been decided"). It may be that in appropriate circumstances the new wording should be construed as referring to the conclusion of the first part of a split trial. But even then the difficulty would remain that the court may only be told about the existence of the Part 36 offer, so the question of costs would in practice still have to be reserved for the reasons given by the Court of Appeal in the HSS Group case."
- In Ted Baker plc and others v AXA Insurance (UK) PLC and others  EWHC 1779 (Comm), Eder J was considering the order to make on costs following trial of certain preliminary issues. Having considered the wording of the new rule and the cases which I have referred to above, he decided to proceed on the basis that he was not entitled to be told of the existence of an offer, but that the existence of an offer remained a possibility. He declined on this basis alone to make any immediate order for costs.
- Mr Meade QC for Virgin submitted that, using the words of 36.13(2), the case had not yet been decided. He submitted that in practical terms, the "case" encompassed the first action and its associated enquiry as to damages and appeal to the Supreme Court, all of which were part of the global dispute between the parties. Just as it might be possible, as Henderson J suggested, to take a narrow view of the "case" where there was a split trial, it was and is possible to take an expanded view of the term where there were related actions or disputes.
- In the present case I fortunately do not have to decide whether CPR 36.13(2) prevents the court from being told about the existence of the offer because both parties are agreed that I may be told about the existence of the offer. Whether one regards this as a waiver of the parties' strict procedural rights, or agreement in writing within the exception in CPR 36.13(3)(c) does not seem to me to matter. What remains to prevent the court being told about the offer is that it is still to be treated as "without prejudice save as to costs" by virtue of CPR 36.13(1).
- Mr Purvis QC for Zodiac submits that (a) as the court is now dealing with an issue of costs, the "without prejudice save as to costs" designation does not prevent the terms of the offer being looked at now; (b) as Virgin has already referred to one of the terms of the offer, namely that the offer extends to the first action as well, it has waived its without prejudice privilege and cannot prevent the remaining terms from being referred to. More generally he submits that if a party is able to prevent the court from looking at an offer, and therefore from dealing with costs of an action merely because he has made an offer in relation to a different action, it will become too easy for a party to prevent the court from dealing with costs at the conclusion of an action, thus greatly exacerbating the problems to which Henderson J referred in AB v CD in the context of split trials.
- I would prefer not to base my decision on Mr Purvis' first point. It seems to me that, if correct, it could have been deployed in HSS. The judge there was dealing with an issue of costs, albeit at an interim stage. It was not suggested there that the "without prejudice save as to costs" restriction ceased to be applicable in a situation where the events dealt with in the offer had not yet occurred, and merely because the court was considering the issue of costs. If I may venture a reason, it is perhaps because the true meaning of the "without prejudice save as to costs" designation is that the contents of the offer should not be referred to until the offeror consents to it being referred to on the question of costs. In that case, it would not automatically cease to attract without prejudice privilege as soon as any question of costs is reached.
- However, I do find Mr Purvis' second point to be persuasive. Virgin have disclosed the existence of the offer as well as, from its point of view, one of its key provisions. It is not in dispute that parties cannot pick and choose the terms of an otherwise privileged offer which they wish to bring to the court's attention. Virgin have waived the privilege in their offer by referring to one of its terms.
- I appreciate that this conclusion makes it difficult for a party to prevent the court looking at the terms of an offer in circumstances such as those presented by the present case. The difficulty arises from the fact that the party wishes to make the point that there is a relevant offer which involves another set of proceedings as well, but it cannot make that point without referring at least in part to the terms of the offer, and thereby waiving privilege. However, for the following reasons, I do not think that this dilemma justifies taking a different course.
- Firstly, there must be a very strong presumption that the court should be able to deal with all outstanding issues including costs at the end of a trial. The modern tendency to make costs orders as a case progresses, does not do away with the need for all remaining costs (which may be very substantial) to be dealt with at the end of the trial. The court must be satisfied that a strong reason exists if it is to take a different course.
- Secondly, the court cannot be satisfied that it should not deal with costs at the end of the trial merely because of the mere possibility of the existence of a relevant offer. Unlike the position with a split trial, where it is inherently plausible that, if an offer exists, that it will be inclusive of quantum and therefore relevant to costs, there is no such inherent plausibility in the case of an offer about a separate action.
- Thirdly, a rigid rule that the court should not be told about the terms of the offer would be open to the kind of abuse which Mr Purvis referred to.
- Fourthly, it is right that one should be careful before reaching a situation in which a party is obliged to waive its privilege. But the true position here is that Virgin could continue to rely on its privilege, and deploy its offer at some later stage. If it wishes to deploy its offer now in order to ask the court to deal with costs at a later date, then I see no injustice in requiring Virgin to disclose the terms of the offer, so that the court can see whether the course suggested is justified.
- I would add that, in the present case, the parties are very sensibly agreed that it is not necessary for the purposes of the arguments which they wish to present for me to see details of any financial provision in the offer, and this provision has been appropriately redacted from any copy I have been provided with. There are obvious reasons for this when an enquiry as to damages, albeit in the first action, may in due course proceed before a nominated patents judge.
The offer and whether costs should be decided now
- Virgin's offer was contained in a letter from their solicitors dated 7th July 2011. It was made in the three "airline actions" as well as in the enquiry as to damages in the first action. The terms, in summary were:
i) The court to declare or Zodiac otherwise to acknowledge that the 908 patent was valid and had been infringed by Zodiac's past activities;
ii) A corresponding injunction expressed in terms of not infringing 908;
iii) An order for delivery up or destruction;
iv) The redacted financial term;
v) Subject to existing costs orders, Zodiac to pay Virgin's costs up to the date of acceptance on the standard basis.
- 734 was not granted at the date of this offer. It was granted later in October 2011. But Zodiac were aware of the application for 734, as they had submitted third party observations in the EPO.
- It is not in dispute that the court has a wide discretion, in appropriate circumstances to defer making a costs order. Virgin submit that at the end of the proceedings in the first action, they may reach a position where they can say they have achieved the following (using corresponding numbering):
i) A finding, from the main judgment, that a patent (albeit not 908 but 734) was valid and would be infringed by the Zodiac seats;
ii) A corresponding injunction (albeit based on 734), and subject to a countervailing declaration of non-infringement in respect of the modified Solar Eclipse;
iii) An order for delivery up (albeit based on 734);
iv) The damages recovered from the enquiry in the first action in respect of past infringement.
- Virgin submit that, in substantive terms, this is what they set out to achieve. In commercial terms it does not matter whether the injunction or the damages flow from 908 or 734. Critically, Virgin submit that they will be in a position to say to the court that they are the overall winners of the combined litigation. By contrast, if costs of this action are dealt with now, the question of who is the overall winner of this action is far less clear. In short, the court should decide who is the overall winner of the war at the appropriate time, namely when the war is over, when the court will be able to see what overall result is achieved in the litigation.
- There are plainly difficulties with applying the costs consequences of CPR Part 36.14 to Virgin's offer. An application of those provisions requires the court to decide whether "judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer". Mr Meade accepts that, applying the blinkers of the present proceedings, the judgment obtained in the main judgment is not "at least as advantageous" as the offer. There would be similar difficulties, I think, in applying this language to any subsequent judgment, for example a judgment on a restored enquiry as to damages in the first action. So Mr Meade puts his case most firmly on the effect the offer would have outside of Part 36, as an offer which the court would be obliged in due course to take into account in deciding costs under CPR 44.3. He submits that he should at least have the opportunity of seeking to persuade the court at that stage that Zodiac, on receipt of the July offer, or at the latest at the date of grant of 734, ought to have "given up", submitted to an injunction and abandoned their attempt to avoid payment of damages.
- Mr Purvis submits that the only basis on which a court could properly take account of the July offer is if it could be said that Zodiac should have accepted it. However, given the findings in the main judgment that the Zodiac seat did not infringe the amended 908 patent, Zodiac can never be criticised for failing to accept that offer. 734 was a different patent with different scope, and was and is vulnerable to attack in the EPO. The offer did not mention 734. The offer was, he submitted, irrelevant. Virgin's submissions would, in the events which are contemplated, amount to no more than saying it had won, and that the defendants should have given up as soon as the relevant patent was brought into the proceedings. Mr Purvis pointed out that if I do not decide costs now, it may be many months before the costs are decided.
- I think I should approach the dispute on this point by asking whether there is a realistic prospect that the court would look at the issue of costs differently as between Virgin and Zodiac if it was being decided at a time when Virgin had succeeded in upholding the Unilin principle, and had recovered a sum in damages on the enquiry which exceeded the amount offered (whatever that is). Applying that approach, I do consider that Virgin would have a realistic prospect of persuading the court to take a different approach. Firstly, it would be open to Virgin at that stage to say they had won the war, and that they should have all their costs subject only to a deduction for issues on which they have lost, and a losing party's costs order in relation to any exceptional issues. That approach would differ from the position in this action, where both parties have extracted significant gains from the litigation viewed in isolation, and the issue of who is the true winner is, as the parties recognise, less clear. Secondly, in the exercise of the duty imposed on the court under CPR 44.3(c), the court deciding costs at that stage may (I express no view on whether it will) look at the offer in a different light. The court might take the view that in July 2011 Virgin were offering a solution to the litigation as a whole which would have been more advantageous to Zodiac than the ultimate result.
- It follows that I do not accept Mr Purvis' submission that the offer is and will remain unarguably irrelevant. Likewise, I do not accept the proposition that the only basis on which a court could take account of an offer is if the party can be criticised for not accepting it. If, in commercial terms, what is on offer is a solution to the litigation which is ultimately beaten by the claimant, it is arguable that the offer should have a bearing on the order for costs ultimately made. I do not have to decide that question now: I only have to decide that it is an argument which has a realistic prospect of success, which in my judgment it does. I do not regard this argument as equivalent to an argument that Zodiac should have capitulated solely because it turned out that Virgin were right. The argument is merely, analogously with CPR 36.14 that the overall result of the litigation is more advantageous to Virgin than the commercial terms on offer in 2011.
- I have taken account of the fact that taking this course may have the effect that it will delay Zodiac's recovery of costs. Zodiac's position can be protected by an award of interest, however.
- It follows that this third issue does not arise at this stage.
Air Canada's costs against Virgin
- The issues to be considered under this head are (i) the deduction to be made from Air Canada's costs to take account of the issue on which it lost; (ii) whether any part of those costs should be ordered on the indemnity basis; and (iii) interim payment.
- It is common ground that, as between Air Canada and Virgin, Air Canada is the overall winner. Air Canada lost on the issue of the validity of the designation of the UK for 908. There is no dispute that this is a severable issue on which it should not recover its costs. By agreement between the parties any costs order in favour of Virgin on this issue will be made against Zodiac, with liberty to apply in case of non-payment.
- Of Air Canada's total costs of £2.6 million, they estimate £228,000 or 8.8% to be attributable to the designation issue.
- Virgin's total costs are £2.2 million. It is instructive to compare this with the total costs of the defendants. Air Canada's costs are £2.6 million. Jet's costs are said to be "over £400,000". Delta's costs are £410,000. Zodiac's total costs are £3.3 million. So the total costs of the defendants in defending the claim are £6.7 million. This is over three times Virgin's costs of bringing it.
- These figures suggest that Air Canada's costs are disproportionately high and indicate to me that it will be necessary for the costs judge in assessing costs in this claim to ensure that there has not been unreasonable duplication of effort. It is also noticeable that both Zodiac and Air Canada seem to have spent comparable sums in defending the action, even though Air Canada's participation was much smaller than Zodiac's.
- The court is encouraged where possible to make a percentage award of costs where a party has lost on one or more issues, even in cases where a losing party's costs order is to be made on some issues. This is not always possible. In Research In Motion UK Ltd v Visto Corporation  EWHC 819 (Pat) at -, a case involving a losing party's costs order, I said that it may not be possible when it appears that one side's costs may be assessed down more severely than the other side's.
- This case provides another illustration of one where caution is needed in relation to a percentage approach, even though a losing party costs order is not being sought against Air Canada and Jet. I have no reason to suppose that the sum spent by Air Canada on the designation issue is disproportionate. Indeed Virgin appear to have spent considerably more than Air Canada on this issue. Yet Air Canada's remaining costs do seem to me to be out of proportion and will require the closest possible scrutiny on assessment. The position may then emerge that the amount spent on designation in fact represents a much greater proportion of Air Canada's recoverable costs than 8.8%. It would therefore not be fair at this stage to award Air Canada 91.2% of their costs.
- All this can be avoided by making an order that Air Canada recover their costs subject to deduction of the sum of £228,000 incurred in respect of the designation issue. This simply ensures that there is no recovery in respect of designation, and leaves the remaining sums claimed to be scrutinised by the costs judge.
- Virgin say that there should be an adjustment made at this stage because the Product Description did not fully describe the behaviour of the seat as I have found it to be. Virgin say that the experiments were unnecessary and that Air Canada should have stated clearly at an early stage what their contention was about the behaviour of the seats. I do not propose to make a deduction for this purpose. The precise behaviour of the seats turned out not to be exactly in accordance with either side's case. Experiments were necessary in order to determine this behaviour. Virgin themselves recognised this by performing experiments which turned out to be so poorly conducted that they had to abandon reliance on them. Whilst the costs of the experiments will have to be scrutinised carefully, it would be wrong in these circumstances to deprive Air Canada of their costs of this issue.
- Air Canada rely on two offers which they made in the course of the litigation:
i) An offer dated 14th October 2011 offering to settle this action on the following terms: (i) an order declaring that the seats and seating system in issue did not infringe 908, (ii) declaring 908 to be valid (iii) that there should be no order as to costs (subject to existing costs orders remaining).
ii) An offer dated 31st October 2011 under which, amongst other things (i) Zodiac's parent company Seton House Group provide a guarantee in respect of Air Canada's liability (ii) Virgin's claims against Air Canada be discontinued with no order as to costs (waiving its rights under existing costs orders).
- Mr Speck submits that these offers justify an order for indemnity costs against Virgin. He says that such an order is reinforced by the fact that Virgin had to abandon their experiments, causing Air Canada to incur unnecessary costs. Virgin submits that the offers amount to no more than an offer that it should give up, and do not justify an order for indemnity costs. The failings in the experiments were the responsibility of an outside consultant, not Virgin.
- The court has a very wide discretion as to whether to order indemnity costs when it regards the conduct of the paying party as being outside the norm. I have to say that I am not, at first sight, attracted by the prospect of making an order that costs, which I have already said I regard as disproportionate, should be assessed on the indemnity basis. Nevertheless I deal first with the two offers which are made, without regard to questions of proportionality.
- I can deal with the first of the two offers very shortly. I do not regard the fact that Virgin pressed on with the present action despite the 14th October offer to have been unreasonable, or outside the norm. Apart from the concession on costs, the offer involved Virgin conceding on infringement. I do not consider that they acted unreasonably in pursuing that case to trial, even though I have held that case to be incorrect. That conduct does not take the case out of the norm.
- The offer of 31st October raises rather more complicated questions making it necessary to set out some of the history. On 23rd September 2011 Zodiac's solicitors wrote to Virgin saying that, in order to avoid the costs of the airline actions, Zodiac would procure a parent company guarantee in similar form to that provided in the first action. On this basis, all the airline actions based on joint tortfeasance (that is to say the three airline actions) should be discontinued with no order as to costs. The offer was stated to be available for acceptance until the end of the second case management conference, which in the end took place on 19th and 20th October.
- Thereafter, by letters dated 5th October to each of the airlines, Virgin's solicitors investigated whether the airlines would be prepared to agree to the proposal. All three airlines replied that if Virgin accepted Zodiac's offer, the airline would agree that their airline action should be discontinued with no order as to costs. On 13th October Virgin's solicitors also made enquiries about the financial position of Zodiac's parent company, to which Zodiac's solicitors responded on 14th October. Virgin was at this stage saying that the financial guarantee being offered was not sufficiently attractive, but was indicating that further concessions by the airlines (in relation to unregistered design right costs and costs already ordered) might persuade it to accept it. Delta indicated through their solicitors on 18th October that they would accept this offer, if made. Solicitors for Air Canada and Jet did likewise.
- Thereafter things started to go less well. Following a discussion between leading counsel for Zodiac and for Virgin, Zodiac's solicitors wrote to clarify their position. They served a witness statement dealing with the financial position of the parent company. In addition they said:
"We understand that one issue which was raised between counsel was the question of estoppel. In light of this, Contour would like to clarify its position. Should your client accept a parent company guarantee, this would be on the basis that Contour would not be estopped from running arguments it would have been entitled to run had the respective customers still been party to the action."
- On 19th October 2011 Virgin's solicitors wrote to the solicitors for each of the airlines acknowledging their acceptance of the mooted terms, but saying that, as Zodiac had changed the nature of its offer, they would have to reconsider. By a further letter of that date they asked Zodiac to withdraw the point about estoppel. At the hearing of the CMC, Virgin explained their position to the court. They were in a position to agree with the airlines that they should come out. In a letter later that day they repeated the offer outlined by their counsel, but made it clear that the offer was open to acceptance by all the airlines (not by some only). They pointed out that it appeared to them that it was only Zodiac who were not agreeing to this offer, presumably on the basis of the disagreement about what would happen in relation to the point about estoppel. Miss Macdonald, Air Canada's solicitor, makes clear in her witness statement that it was on instructions from Zodiac that Air Canada did not accept the offer.
- On 20th October Zodiac's solicitors wrote saying that Zodiac's parent company wished to consider the position in more detail in the light of the offer in Virgin's solicitors' letter of 19th October. They said they would write again by 26th October. On that day they wrote rejecting Virgin's offer on three grounds. These were (a) that the issue of joint tortfeasance of Zodiac with the airlines in the airline actions had been "bifurcated", that is to say, dealt with after the main trial on technical issues; (b) Virgin's refusal to let Delta off its undertaking (which by this stage it had done) and (c) the estoppel point.
- On 31st October Air Canada's solicitors wrote to the solicitors for Virgin and for Zodiac, seeking to explore the possibility of an individual settlement. The offer included as its first term that Zodiac's parent provide a guarantee. Clearly this was not something which Air Canada could offer without Zodiac's cooperation, hence the fact that the offer is made to Zodiac as well. The letter stated:
"The Offer relates to the Air Canada Action alone and is conditional upon each of Virgin and [Zodiac] accepting its terms and any acceptance would not be effected until both had accepted."
- Zodiac did not respond to the offer. Miss Macdonald says that Air Canada understood at the time that Zodiac would have procured the parent company guarantee if Virgin had accepted the terms of the offer. Mr Gordon Harris, Zodiac's solicitor, says in his seventh witness statement that Zodiac was prepared to accept Air Canada's offer. However, even if all that is correct, there is no suggestion that Virgin knew that Zodiac would agree to give the parent company guarantee on an airline by airline basis. Ms Bennett, Virgin's solicitor, confirms in her third witness statement that Virgin were not told of this.
- On 22nd November Virgin's solicitors responded to Zodiac's solicitors' letter of 31st October. They say that they were aware that Zodiac had refused to accept Virgin's offer. They went on to say that, although Virgin's offer had been rejected, the parties should collectively explore whether it would be possible to reach a settlement which either (a) released all the airlines, or (b) settled the litigation overall. What the letter does not say is what Virgin's attitude was to Air Canada's individual offer.
- On 2nd December Air Canada's solicitors summed up the position in his way:
"[Zodiac] has sought to impose the terms that you have identified in your letter of 22 November 2011. Likewise, although Virgin is willing to accept a parent company guarantee from [Zodiac's parent company] to cover liability of each of [the three airlines], it appears unwilling to contemplate precisely the same terms to apply to Air Canada and Jet – which would clearly amount to a guarantee to cover a lesser amount than in respect of all three airlines together and should therefore be satisfactory to your client. That would then dispose of proceedings against Air Canada and Jet and leave only the claims against [Zodiac] and Delta. We would suggest therefore that the onus is on both Virgin and [Zodiac] to seek a resolution that would release the airlines from liability." (emphasis added)
- It is significant, to my mind, that that letter does not say that Air Canada is aware that Zodiac would provide the guarantee on an airline by airline basis. Instead, the letter was copied to Zodiac's solicitors, providing them with the opportunity of accepting the offer on this basis.
- Virgin's solicitor, Ms Claire Bennett, explains in her witness statement that Air Canada's offer was made in the context of discussions about letting all the airlines out. The giving of airline by airline guarantees had never been suggested. The offer letters simply referred to the all airlines guarantee.
- I think that I could only characterise Virgin's conduct in refusing to let Air Canada out as sufficiently unreasonable and "out of the norm" to justify an award of indemnity costs if I were satisfied that it was obvious to Virgin that a deal involving an individual guarantee was available for them to accept in respect of Air Canada. I am unable so to conclude on the evidence.
- It seems to me that both Virgin and Zodiac were engaged in a tactical battle. Both parties realised that the action was likely to continue in any event as between them. Zodiac realised that if all three airlines came out, they would or might lose the ability to re-run arguments on which they had already lost. Virgin realised that if one airline remained, Zodiac would be able to run such arguments. There is no doubt that this informed their decision to make their offers on the basis that they were open to acceptance by all and not some airlines. Virgin might well have been reluctant to accept an offer based on a guarantee of the liabilities of both Air Canada and Jet. On the basis of the estoppel arguments, Virgin were entitled to assume that Zodiac would want to keep at least one airline in, but not that they would necessarily resist two out of three coming out. Zodiac's position on estoppel would not have provided Virgin with a sound basis for rejecting a proposal by an individual airline to come out, if backed up by Zodiac's guarantee. The critical question is therefore whether it was obvious that Zodiac would offer such a guarantee.
- Zodiac's position on estoppel was not, by 31st October, the only basis which Virgin had for forming a view about Zodiac's approach to offering the guarantee. Zodiac's solicitors' letter dated 26th October had rejected Virgin's offer on three grounds, not all of which were capable of being responded to on the basis that one airline remained in. Moreover the rejection of 26th October made no counter-offer to deal with Air Canada or Jet. It is true that Virgin were asking for all three airlines to come out, but if Zodiac has always been prepared to do airline by airline deals, then this was an opportunity for Zodiac to have said so. When Air Canada made its individual offer on 31st October, Zodiac did not respond. Again, Virgin were entitled to conclude that Air Canada's position made no difference to Zodiac's stance. When Air Canada's solicitors wrote on 2nd December, making the point about the feasibility of individual deals with the airlines, Air Canada's solicitors did not say that they understood that Zodiac would provide the individual guarantee. Furthermore, Zodiac's solicitors did not take advantage of the opportunity, on receipt of that letter, to say that they would provide such a guarantee.
- I conclude from this, firstly, that no offer was made by Zodiac to provide an individual airline guarantee for Air Canada's liability. Secondly, I conclude that it was not obvious to Virgin that such a guarantee would be provided by Zodiac. It is true that Air Canada is not to blame for any of this. But the focus of the inquiry about indemnity costs has to be on Virgin's conduct. I am unable to condemn Virgin's conduct as so unreasonable as to justify an order for indemnity costs.
- Air Canada seek an interim payment. There is no dispute about the principles to be applied. I consider that I should be particularly cautious in this case about the level of the payment, given the factors to which I have referred. I propose to order an interim payment at 35% of Air Canada's total estimated costs of £2.6 million, or £910,000.
Jet's costs against Virgin
- The points in relation to the costs of Jet can be dealt with shortly. Jet's total costs were "over £400,000". Jet agreed to be bound by the outcome of the action, and played no part in the action from May 2011. Its costs seem high by comparison with those of Delta, for example, who did take part in the action and claim broadly comparable costs.
- Jet made similar offers to those made by Air Canada. It was not suggested that Jet and Air Canada could be distinguished for this purpose, so I decline for similar reasons to make an order for indemnity costs.
- I propose to make an order for an interim payment of £160,000, representing about 40% of the estimated costs.
- Jet also sought an order for payment of interest on costs which they had paid at the rate of 13% from the date of payment until judgment. This figure for the rate of interest was based on the rates actually payable by Jet for borrowing. Virgin accepts the principle that it should pay interest at a reasonable commercial rate. In Tate & Lyle Food and Distribution Ltd v Greater London Council  1 WLR 149, Forbes J explained that the rate to be applied was the rate relevant to "plaintiffs with the general attributes of the actual plaintiff", but disregarding the special situation in which that plaintiff may find himself from time to time. He said that if commercial rates were appropriate, he would take 1 per cent over the minimum lending rate.
- The evidence filed on behalf of Jet establishes that its business is financed through loans with heavy rates of interest. I am not persuaded that this qualifies Jet for a higher than normal rate of interest. I will award interest at the rate of 1% over the clearing bank base rate from the date of payment up to 23nd November 2012, the date of this judgment.
- After this judgment had been handed down in draft, Air Canada and Jet asked that the order should apply the judgment rate to the costs even though they have not been assessed. Virgin responded that the court has power to postpone the application of the judgment rate. Whilst that is so, it should not do so routinely, and any decision to postpone it must be justified: see Standard Chartered Bank v Ceylon Petroleum Corporation  EWHC 2094 (Comm) (Hamblen J) at  to . In that case the costs were large, and there were issues of proportionality and reasonableness. On that basis, Hamblen J ordered a four months postponement of the judgment rate. Roth J had made a similar order in London Tara Hotel Ltd v Kensington Close Hotel Ltd  EWHC 29 (Ch).
- Applying those principles, and in the light of the findings I have made above, the judgment rate will apply to both interim payments from 23 November 2012. As to the disputed balance, I do not think that a postponement of the application of the judgment rate is justified in respect of Jet's costs. In the case of Air Canada I think that short postponement is justified. I will order that the application of the judgment rate be postponed for 4 months from 23 November 2012, and 1% over clearing bank base rate apply in the meantime.
- I will accordingly:
i) defer consideration of all further issues of costs as between Virgin and Zodiac;
ii) order Virgin to pay Air Canada's costs on the standard basis to be assessed, less the sum of £228,000 incurred in respect of the designation issue;
iii) order an interim payment of costs in favour of Air Canada in the sum of £910,000;
iv) order Virgin to pay Jet's costs on the standard basis to be assessed;
v) order an interim payment of costs in favour of Jet in the sum of £160,000;
vi) direct that the rate of interest to be applied on Air Canada's and Jet's costs be 1% over the clearing bank base rate from the date of payment up to the 23rd November 2012. Thereafter the rates of interest provided for in paragraph 74 shall apply.
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