B e f o r e :
MRS JUSTICE GLOSTER, DBE
|| HLB Kidsons (A Firm) v
||- and -
subscribing to Lloyds Policy No 621/PKID00101 & Others
Nicholas Davidson Esq QC and William Godwin Esq
(instructed by Holman Fenwick & Willan) for the Claimant
Gavin Kealey Esq, QC and Craig Orr Esq QC
(instructed by Fishburns) for the 1st to 5th Defendants
Michael Harvey Esq, QC and John Greenbourne Esq
(instructed by Herbert Smith) for the 6th Defendant
Roger Stewart Esq, QC and Graeme McPherson Esq
(instructed by Eversheds) for the 7th Defendant
Hearing dates: 28th September 2007;
Further written submissions: 1st October 2007.
HTML VERSION of Judgment on post-judgment matters, including costs
Crown Copyright ©
Mrs Justice Gloster, DBE:
- This is my ruling in relation to certain post-judgment matters following submissions made at a hearing on 28 September 2007.
Effect of paragraphs 206-222 of my judgment dated 9 August 2007 as to the extent of cover
- In the post-judgment submissions the parties sought clarification of the effect of paragraphs 206-222 of my judgment. The issue was whether (as Underwriters contended) the effect of my decision was that Underwriters' indemnity covers only claims arising in respect of two particular cases (known as Janvrin Limited and Le Marais Limited) where Discounted Option Schemes ("DOS") were utilised, or whether (as the other parties contended) the scope of the notification which I held to be effective covered the procedural difficulties exemplified by the two DOS cases which Mr. Tyre QC examined, and not merely claims in respect of those two cases themselves.
- As I indicated in my oral ruling, delivered on 28 September, the conclusion that I reached in my written judgment was that the scope of the notification that I found to be effective covered not merely claims arising out of those two cases, Janvrin and Le Marais, but rather all claims arising out of the procedural difficulties exemplified by those DOS. That conclusion was consistent with the manner in which Mr. Gavin Kealey QC, on behalf of Underwriters, had argued the issue throughout the trial. For example, Underwriters had contended that the notification related to procedural difficulties in the field of DOS, but they had never contended that it related solely to the two particular DOS, Janvrin and Le Marais. Thus, for example, Underwriters pleaded:
"As a result, the 28 March letter was confined to the possible 'procedural difficulties' affecting the implementation of Discounted Option Schemes (by which Mr. Patten and/or Garner-Jones meant the question concerned the tax residency of the Isle of Man companies set up as part of the schemes) considered by Colin Tyre QC."
In paragraph 101 of Underwriters' closing submissions, Mr. Kealey argued:
"The thrust of the letter was procedural difficulties in the field: i.e. in the execution and operation of the Discounted Option Schemes. The validity, or for that matter the marketing of the products was not in issue."
Likewise, in Underwriters' closing submissions at paragraph 122(7), he contended:
"The next time when any insurer was seen was on 19 April 2002, when the leading Lloyd's syndicate 839 was presented with the Millers bordereau and claims file which, by this time, included the 28 March letter. That letter only gave notice of procedural difficulties affecting the implementation of Discounted Option Schemes. Thus it was consistent with the state of Kidsons' awareness."
Mr. Kealey also put matters thus:
"In all this, my Lady, we accept that, if effective, in the sense that if those notifications between October and April 2001/2002 respectively, were effective, our primary case is that they were confined to the procedural problems relating to discounted option schemes because that was the state of awareness of Kidsons. But if that is wrong, my Lady, and the state of awareness was wider, then nevertheless that which was notified by reference to those documents were only procedural problems relating to the products of Kidsons. In other words, some procedures followed in certain cases, which we accept means procedures of implementation in contradistinction , my Lady, with the reassurance that we received which was that all the products had been validated by counsel, in some instances two opinions." (Day 14, page 55)
- That conclusion is also consistent with the fact that, at paragraphs 225 and 226 of my judgment, I accepted Underwriters' submissions that the Court should first decide the principal and substantive issues relating to notification, and then, if necessary, address the question of sample claims. Paragraph 226 of my judgment would have been redundant if indeed I had concluded that the notification only related to the cases of Janvrin and Le Marais, since the only DOS sample claim (Hale/Veeboard) related to the Isle of Man company, Telbark.
- However, since the problem has arisen, I clarify paragraphs 206-222 of my judgment to remove any possible ambiguity about the point. I do so as follows:
"Presentation on 19 April 2002 to the lead Lloyd's syndicate 839 of the letter dated 28 March 2002 and accompanying documentation
206. Although in contact with Kidsons regularly in relation to other matters, nothing further was heard by Millers (or it appears by Camerons) in relation to the S@FI matter until late March 2002. On 28 March 2002, two days after the consultation with Mr. Tyre QC, and one day after the NEC meeting when Mr. Gwilliam had told the NEC that he believed:
'that there was now less risk from the Inland Revenue, but there was still a risk of claims from clients where [discounted option] schemes had failed because of procedural mistakes'
and the NEC had agreed that it was then appropriate for a 'report on the situation to be prepared for PII underwriters', Kidsons wrote to Camerons, with a copy to Millers in the following terms:
Some months have passed since we last corresponded. We have put a lot of effort into a technical investigation of the sale of products with the intention of having a report prepared by the Independent Review Board under Ray Armstrong referred to in my letter of 31 August 2001.
This work has been slowed to a certain extent because of health problems suffered by Ray Armstrong and his ability to carry on leading the investigation is now in question. There is likely to be a further delay in the production of the report.
A meeting was held on Tuesday 26 March 2002 with Colin Tyre QC who had raised observations on two transactions concerning Discounted Option Schemes. The result of the meeting was a general view that the technical efficiency of the products was accepted but in some instances there might be procedural difficulties involving the Trustees for each scheme affecting the implementation of the scheme and this might lead to the possibility of criticism in the future.
Graham Garner-Jones, a tax partner in our Chester office and one of the Managing Partners for S@FI was present at this meeting and will very shortly be producing a report to summarise the results of the meeting and the general activity in this area over the last few months'.
Millers added the 28 March 2002 letter to its S@FI claims file.
207. Interestingly, although not relevant at this stage of the proceedings, on 4 April 2002, Ms Turnbull of Camerons replied to Mr. Patten's letter of 28 March 2002. She stated that until further information was available,
'it, of course, remains unclear whether this constitutes a circumstance/claim within the terms of the policy and, accordingly, we are not in a position to confirm whether cover will apply'.
Mr. Patten faxed a copy of Camerons' letter to Mr. Garner-Jones and Mr. Harris. Despite the warning in it that the information provided to Underwriters might not constitute a circumstance within the terms of the policy, neither of them responded to Mr. Patten on this point.
208. On 19 April 2002 the S@FI claims file, including the 28 March 2002 letter, and the Millers' 2001 bordereau were presented to Ms Constable on behalf of the Lloyd's Lead Underwriter, syndicate 839. By that time Millers' bordereau also included Camerons' bordereau for September – November 2001. This in turn included:
i) a 2001 Summary Report which identified as 'Claim No KI01-009' S@FI Ltd;
ii) the S@FI data sheet prepared by Camerons which read as follows:
'1. Miller Claim No : KI01-009
4. Policy Period : 12 months at 01/05/01
7. Date of claim made against K.I. : 31/08/01
8. Date of notification to CM : 31/08/01
9. Claimant : S@FI Ltd
13.(a) Policy Situation :- Annual aggregate excess £1 million – on exhaustion refer to wording
(b)Claim Situation :- Concern that tax products marketed by S@FI Ltd (manned entirely by staff and partners of Insured) could be criticised. Awaiting results of investigation being conducted by independent expert (retained by S@FI) to see if concerns founded.
Await update once investigations complete
(c) Liability :- Possible'
Again, the statements that purportedly recorded that S@FI was "the claimant" and that the date of claim made against Kidsons was 31 August 2001 were simply wrong. No claim had been made at all. However, the actual position, namely that S@FI was in fact marketing the products, and not the claimant, and that liability was 'possible' was discernible from the narrative. Ms Constable scratched the 28 March 2002 letter 'Await any relevant CMS [Camerons] comments'.
Conclusion in relation to the presentation on 19 April 2002
209. In my judgment, the presentation of the 28 March 2002 letter, together with the other documentation, did at this stage amount to a valid notification of circumstances to the Lloyd's Lead Underwriter, for the purposes of GC4. Underwriters were on this occasion being informed that Mr. Tyre QC had advised on two transactions concerning Discounted Option Schemes, and that, although he had accepted "the technical efficiency of the products", he had advised that in 'some instances there might be procedural difficulties involving the Trustees for each scheme affecting the implementation of the scheme and this might lead to the possibility of criticism in the future'. On a fair reading of the 28 March 2002 letter, and of the summary contained in the S@FI data sheet prepared by Camerons of the earlier 31 August 2001 letter, and in the context of the investigation into S@FI products, in my judgment the reference in the 28 March 2002 letter to the fact that
'in some instances there might be procedural difficulties involving the Trustees for each scheme affecting the implementation of the scheme and this might lead to the possibility of criticism in the future'
cannot sensibly be read as confined to the two specific named examples of Discounted Option Schemes that Mr. Tyre was considering. Mr. Tyre was clearly instructed to consider those two particular cases as examples of potentially wider procedural problems in relation to Discounted Option Schemes and that would have been clear from the information that Underwriters were given. Thus the circumstance or circumstances which were effectively being notified was or were that there had in the past, in the view of leading counsel, been procedural defects in the implementation of Discounted Option Schemes involving the Trustees, exemplified by the two particular transactions which Mr. Tyre was considering. The bordereaux adverted to the possibility of claims, and liability, and although the information provided was still exiguous, the reasonable recipient would at this stage, in my judgment, have appreciated that, in the light of the adverse observations of Mr. Tyre, Kidsons was indeed notifying the possibility of claims arising from procedural defects ('difficulties') involving the Trustees in relation to the implementation of Discounted Option schemes.
210. However I reject the wider contentions of Kidsons, Camerons and Millers that the documents presented amounted to notification of any more extensive concerns in relation to the whole range of tax avoidance products marketed by S@FI and which were said to be (but which were in fact not) the subject of the investigation for similar reasons to those which I have expressed above in relation to the presentation of earlier documents. In particular, I reject the argument that somehow the Millers' or Camerons' data sheets or bordereaux could extend the scope of the notification in the letter. As Mr. Kealey submitted, and as I have already accepted, the expert evidence showed that the bordereaux and claims data sheets were, and would be regarded as, accompaniments of the underlying letters of notification, would be regarded as intended summaries of those underlying letters, and have to be construed accordingly in that context. I thus agree with Mr. Kealey's submission that, if, as I have found to be the case, there was an effective notification in April 2002, that notification was limited to procedural problems affecting Discounted Option Schemes.
211. There was no presentation at this time to the Second Lloyd's Lead Underwriter of the 28 March 2002 letter, and accompanying documents, but that was unsurprising given the instruction by the Second Lloyd's Lead Underwriter that it did not wish to see claim files routinely. In those circumstances it seems to me that, albeit the Second Lloyd's Lead Underwriter was operating under the misapprehension that a claims handling agreement was in place, when it was not, it must be treated as having been content to accept any valid notification of circumstances to the First Lead Lloyd's Underwriter as effective notification to it. Accordingly I conclude that the presentation of the 28 March 2002 letter, together with the other documentation, to the Lloyd's Lead Underwriter did at this stage also amount to a valid notification of circumstances to the Second Lloyd's Lead Underwriter, for the purposes of GC4, but in the limited terms as to scope which I have already outlined.
212. Mr. Kealey did not suggest that these presentations did not comply with the time requirements of GC4. In my judgment, it was in any event, in all the circumstances, reasonable for Kidsons to wait until it had received the advice of Mr. Tyre in relation to these schemes before making its notification to Underwriters. Accordingly, in my view the start date for the purposes of computing the period that could be described as "as soon as practicable" should be taken as 27 March 2002, the date of the NEC meeting that considered Mr. Tyre's advice.
Presentations to the Company market
213. On 18th April 2002 Millers entered the S@FI claim details on the LPC CLASS system. The 2nd Defendant, The Underwriter Insurance Company Limited ('The Underwriter'), which was the lead IUA company insurer, and the 3rd Defendant , Royal and Sun Alliance Insurance plc ('RSA') subscribed to the CLASS system. On 19 April 2002 the claims bordereau file was presented to The Underwriter by Millers. The claims bordereau was scratched by a claims manager for The Underwriter before being returned to Millers on 22 April 2002. On 22 April 2002 the S@FI claims file was also presented to The Underwriter. That file was retained by it and only returned on 14 May 2002 . On 22 April 2002 The Underwriter's claims manager, Mr. Gage, made a 'CAA' entry on the LPC CLASS system thereby releasing the CLASS Sequence to the following IUA companies (in this case, RSA). On 25 April 2002 RSA made a 'CAA' entry of its own on the LPC CLASS system acknowledging the CLASS sequence.
214. Millers had not indicated that there was anything unusual, or any urgency, about the information presented to The Underwriter in April 2002. It could have broked, but chose not to broke, the Kidsons' notifications personally. Mr. Gage reviewed the claims files in due course. When he saw the S@FI claims file on 10 May 2002, he concluded that the information in the claims file was insufficient to constitute proper notification and scratched the 28 March 2002 letter accordingly:
'We do not accept this as a notification. It may be as the insured say material information that should be presented to uw'rs.'
The S@FI claims file was returned to Millers on 14 May 2002. Millers did not react to Mr. Gage's rejection of the S@FI notification. It appears to have been completely overlooked.
215. Admiral, which represented the 3rd Defendant, International Insurance Company of Hannover and the 4th Defendant, Great Lakes Reinsurance (UK) plc, was provided with Camerons' bordereau and data sheets, containing reference to S@FI, on 17 April 2002. The Millers' bordereaux file, and underlying Kidsons' claims files, including the S@FI file, were supplied to Admiral on 21 May 2002, following requests they had made for information on certain matters (not including S@FI) on 23 April 2002. The bordereaux and claims files were returned by Admiral, duly scratched but without comment, on 11 June 2002.
216. Underwriters contend that the notification which was purportedly given to the company market as set out above was not given as soon as practicable, and therefore was ineffective, as not complying with the requirements of GC4. Even if effective, they contend that because of the state of Kidsons' awareness, any notice was confined to procedural difficulties affecting the implementation of Discounted Option Schemes.
Conclusion in relation to presentations to the Companies market
217. In my judgment the notification given to all Underwriters in the company market was, in the circumstances, given as soon as practicable, and therefore complied with the time requirements of GC4. The relevant documents were provided to The Underwriter and RSA within the Policy Period. Although the Millers' bordereaux file, and underlying Kidsons' claims files, including the S@FI file, were not supplied to Admiral until 21 May 2002, it had received the Camerons' claims file within the Policy Period. The period of time since 27 March 2002 (namely the date on which the NEC considered Mr. Tyre QC's advice, and resolved that a report should be given to Underwriters, which, as I have said, I take as the starting date for the computation), was not that long. The market evidence showed that some latitude would be allowed in this respect.
218. For the same reasons that I have already stated in relation to the presentation on 19 April 2002 to the lead Lloyd's syndicate 839 of the letter dated 28 March 2002 and the accompanying documentation, I also regard the notification to the company market as a valid notification of circumstance or circumstances for the purposes of GC4, but in the same limited terms as to scope which I have already outlined in relation to the presentation on 19 April to the lead Lloyd's syndicate.
219. For reasons already stated, I do not accept Mr. Kealey's argument in relation to "awareness" although I have effectively reached the same conclusion by a different route.
Presentation to the following Lloyd's market
220. No information was presented to XCS, the successor to the Lloyd's Claims Office representing the following Lloyd's market, until July 2002 (over 2 months after expiry of the Policy). No presentation at all was made to XCS during the Policy period. The first presentation to XCS in respect of this policy year was on 24 July 2002. Millers' Files Left Out Book shows that the Millers' bordereau file was deposited with XCS on 24 July 2002, but there is no specific evidence that the claims files were also deposited. Mr. Salter agreed in cross-examination that he would have expected the claims files to be presented together with the bordereau file, as good practice required that the following market should receive the same information as the leading market. There was certainly no impediment to Millers providing the claims files to XCS. As Mr. Kealey accepted, the likely explanation was that the claims files were presented to XCS but that there was an oversight in recording this deposit in Millers' Files Left Out Book 2002.
Conclusion in relation to the presentation to the following Lloyd's market
221. In my judgment the notification given to the following Lloyd's market was not given as soon as practicable and therefore was not compliant with the time requirements of GC4. Notice which was not given until 24 July 2002 almost 3 months after the expiry of the policy period, cannot, on any realistic basis, be regarded as given 'as soon as practicable', if the start date is taken as 27 March 2002. There was no impediment to the following market being notified within the Policy Period, as indeed the Lead Underwriters and for the most part, the Company market were. Although the experts agreed that it was not unusual for there to be delay in presentation to the following market, and Mr. Ellis opined that 'in practice' no point would be taken, Underwriters are nonetheless entitled to take the point that strict compliance with the requirements of the Policy was necessary and that, even allowing for latitude in presentation to the following market, notification at the end of July was not on any basis 'as soon as practicable'.
222. Even if I were wrong in this conclusion, for similar reasons to those stated above, any notification was confined to procedural difficulties affecting the implementation of Discounted Option Schemes as referred to in the letter dated 28 March 2002."
- The various issues which arise, post-judgment, are as follows:
i) As between Kidsons and Underwriters, what proportion of Underwriters' costs should Kidsons pay and in respect of what period?
ii) Should such costs be paid on the indemnity basis?
iii) Should Kidsons have to pay interest on outstanding costs from the date of Underwriters'Part 36 offer at the normal Commercial Court rate of base rate plus 1%, or simply at the base rate?
iv) Should Kidsons be ordered to make an interim payment on account of costs, and, if so, in what amount?
v) Should Camerons and Millers be ordered to pay all, or any proportion of, Underwriters' costs if Kidsons do not pay.
(i) What proportion of Underwriters' costs should Kidsons pay?
- As Mr. Davidson QC, for Kidsons, realistically accepted, the outcome of the trial was predominantly a win for Underwriters, albeit that Kidsons succeeded to the extent that I decided that there was a valid notification to the lead Lloyd's Underwriters and the Companies Market (but not the following Lloyd's Market) of procedural difficulties relating to DOS. That Underwriters were in reality the successful party was underlined by the fact that on 8 June 2006 Underwriters made a Part 36 Offer to Kidsons. Paragraph 1 of the Offer offered to settle Kidsons' claim against Underwriters on the basis that Kidsons was entitled to be indemnified by them in respect of claims made against Kidsons:
"…arising from the implementation of Discounted Option Schemes promoted by S@FI ('DOS claims'), pursuant to clause 1 of Section 1 of the Policy; and (b) costs and expenses incurred with Underwriters' written consent in the defence or settlement of any DOS claims, pursuant to Special Condition 1(a) of Section 1 of the Policy..'"
The Offer was expressed to be open for acceptance for a period of 21 days.
- Although, obviously, the court was not informed about the Part 36 Offer until after judgment, the reality was that, subject to certain minor issues, the substance of the battle at trial was whether Underwriters' indemnity extended beyond procedural difficulties relating to the implementation of DOS to claims arising out of the numerous other tax avoidance schemes marketed by S@FI.
- Mr. Davidson argued that in relation to the pre-offer period before 29 June 2006, Underwriters should be ordered to pay Kidsons' costs in their entirety. In respect of the period after the date for accepting the Part 36 officer, Mr. Davidson's starting point was that Underwriters should have their costs and interest thereon, but subject to proportionate deductions to reflect the fact that there were a number of issues on which Underwriters were unsuccessful. He referred to the court's powers under CPR Part 44.3 to order a party only to pay a proportion of another party's costs, or only from a certain date, or only in respect of certain issues, on the grounds, inter alia, that a party has succeeded on part of its case or on certain issues. The major plank in Mr. Davidson's submissions was that the real expense of the trial was in the wide-ranging factual inquiry in relation to which he submitted that Kidsons had won on the principal issue, namely the awareness issue: see paragraph 102 of my judgment. He further submitted that, insofar as the evidential inquiry related to whether a timely presentation had been made to Underwriters, since the responsibility for that lay primarily with Kidsons' brokers, no order in relation to the costs of that phase of the litigation should be made until after resolution of Kidsons' claims against Millers and Camerons, when the court would determine liability for the failure to make the notification within the required period.
- The principles applicable as to costs were not in contention. The court's discretion as to costs is a wide one. The aim always is to "make an order that reflects the overall justice of the case" (Travellers' Casualty v Sun Life  EWHC 2885 (Comm) at paragraph 11 per Clarke J. As Mr. Kealey submitted, the general rule remains that costs should follow the event, i.e. that "the unsuccessful party will be ordered to pay the costs of the successful party": CPR 44.3(2). In Kastor Navigation v Axa Global Risks  2 Lloyd's Rep 119, the Court of Appeal affirmed the general rule and noted that the question of who is the "successful party" for the purposes of the general rule must be determined by reference to the litigation as a whole; see paragraph 143, per Rix LJ. The court may, of course, depart from the general rule, but it remains appropriate to give "real weight" to the overall success of the winning party: Scholes Windows v Magnet (No 2)  ECDR 266 at 268. As Longmore LJ said in Barnes v Time Talk  BLR 331 at paragraph 28, it is important to identify at the outset who is the "successful party". Only then is the court likely to approach costs from the right perspective. The question of who is the successful party "is a matter for the exercise of common sense": BCCI v Ali (No 4) 149 NLJ 1222, per Lightman J. Success, for the purposes of the CPR, is "not a technical term but a result in real life" (BCCI v Ali (No 4) (supra)). The matter must be looked at "in a realistic … and … commercially sensible way": Fulham Leisure Holdings v Nicholson Graham & Jones  EWHC 2428 (Ch) at paragraph 3 per Mann J.
- There is no automatic rule requiring reduction of a successful party's costs if he loses on one or more issues. In any litigation, especially complex litigation such as the present case, any winning party is likely to fail on one or more issues in the case. As Simon Brown LJ said in Budgen v Andrew Gardner Partnership  EWCA Civ 1125 at paragraph 35: "the court can properly have regard to the fact that in almost every case even the winner is likely to fail on some issues". Likewise in Travellers' Casualty (supra), Clarke J said at paragraph 12:
"If the successful Claimant has lost out on a number of issues it may be inappropriate to make separate orders for costs in respect of issues upon which he has failed, unless the points were unreasonably taken. It is a fortunate litigant who wins on every point."
- In my judgment, contrary to Mr. Davidson's submissions, this is not a case that could have been determined by a trial of a discrete preliminary issue as to the effect of the presentation of the 31 August 2001 letter to Underwriters. The evidential inquiry into the circumstances leading up to, and following the 31 August 2001 and 28 March 2002 letters, was necessary not only to decide the quantum of Kidsons' awareness, but also to place the letters in their commercial context. It was also necessary for the purposes of dealing with Kidsons' submissions that the circumstances identified in the Tax Faculty Report had been presented as soon as reasonably practicable within GC4 because that Report was in effect a seamless continuation of the IRB report – submissions which I rejected: see paragraphs 161, 165 and 223 of my judgment. Resolution of this issue, on which Underwriters succeeded, required a close examination and investigation of the progress of the various investigations carried out into S@FI's activities from the time that the IRB was established until October 2003. Much of this evidence necessarily overlapped with evidence relating to the awareness issue.
- In my judgment (but subject to the exceptions made in the next paragraph), it is not appropriate, either in respect of the pre-offer period or the post-offer period, to reduce the costs that would otherwise be payable by Kidsons to reflect either success on the awareness issue or their success on other issues. As I have said, and as Mr. Davidson accepted, the reality is that the overall winners here are Underwriters. An order that Kidsons should pay Underwriters' costs reflects the overall justice of the case. That conclusion is apposite not merely in relation to the following Lloyd's market who, as a result of my decision, have no liability whatsoever, but also to the two lead Lloyd's Underwriters and the Companies Market, whose liability under their indemnity is limited to claims in respect of the implementation of DOS. I reach that conclusion notwithstanding that up until the start of the trial, Underwriters' pleaded position was that no valid notification had been made of anything.
- However, in relation to two discrete issues it is, in my judgment, appropriate to make a different order. Firstly, Underwriters for a time pursued a case that Kidsons should have attempted to make a notification materially before 31 August 2001. Thus, for example, in their re-re-re-amended Defence, Underwriters pleaded a substantial case that the notifications relied upon by Kidsons were not given as soon as practicable because Kidsons was aware long before August 2001 of the Torrance concerns as to S@FI's activities. This remained Underwriters' case until trial, but was not pursued at trial. Kidsons' evidence showed that the costs relating to this issue were approximately £132,084 assessed on a "broad brush basis". Secondly, Underwriters relied upon a defence based on General Exclusion 6. This defence was that claims and losses, or some of them, in respect of which Kidsons claimed to be entitled to an indemnity were in connection with investment business activities arising out of advice given and/or services performed which were not authorised where such authorisation was required under the Financial Services Act 1986; and that, in consequence, any claims or losses in respect of investment business carried on by S@FI were excluded by General Exclusion 6 of the policy and/or at common law because the carrying out of such business was a criminal offence. The allegation was that General Exclusion 6 and/or a common law exclusion applied because a criminal offence had been committed. The allegation was maintained up until the re-amendment pleaded on 14 September 2006. The evidence before me at the post-judgment hearing showed that this defence required substantial investigation by Kidsons and their lawyers, involving the consideration of the financial services legislation as it applied to the complex tax avoidance schemes marketed by S@FI. Substantial work was undertaken and costs incurred in dealing with the allegation which had been made.. The evidence shows that approximately £93,176.50 was incurred by Kidsons in relation to this discrete issue, again, provisionally, on a broad brush basis.
- In my judgment, in theory Kidsons are entitled to be paid their costs of and incidental to these two issues (namely, on a rough and ready basis, the sum of £225,261) and to be relieved from paying Underwriters' costs of such issues. Under CPR Part 44.3(7) the court is required, if practicable, rather than making an order for costs relating only to a distinct part of the proceedings, to make an order that the paying party pays either "a proportion of another party's costs" under CPR Part 44.3(6)(a) or "costs from or until a certain date only". Here, on a rough and ready basis, Kidsons' costs relating to these two discrete abandoned issues represented 6.21% of their total estimated costs bill of £3,628,853.40. I doubt, however, whether Underwriters incurred distinct costs in relation to these discrete issues of anything like the same magnitude or proportion of their total spend as Kidsons did.
- In the circumstances, and in order to avoid the costs of a detailed assessment of both parties' costs relating to these issues, and to reflect my conclusion that, in broad terms, Underwriters should pay for the costs of litigating these issues, I am going to order that Underwriters should suffer a deduction of £225,000 from their total bill; on the present estimate of their bill of costs, that reflects a deduction of 11.16% from their total bill. This reflects my view that:
i) it is likely that, on a detailed assessment on the standard basis, Kidsons would not recover as much as £225,261 in respect of their costs in relation to these discrete issues; and
ii) it is unlikely that Underwriters' costs of litigating these discrete issues would be anything like as much as 6.21% of their total bill.
(ii) Indemnity Costs
- In relation to the period after the Part 36 offer, Underwriters submit that they should have their costs on an indemnity basis, under CPR Part 44.4, and that their Part 36 offer provides justification for this. Underwriters accept that failure by a claimant to better a defendant's Part 36 offer does not, without more, warrant an order for indemnity costs in the defendant's favour. There must be some conduct or circumstance taking the case out of the norm: see Excelsior Commercial & Industrial Holdings v Salisbury Hamer Aspden & Johnson  EWCA Civ 879 at paragraph 32, per Woolf CJ and paragraph 39 per Waller LJ. Mr. Kealey submitted that the circumstances taking this case out of the norm were:
i) the reasonableness of Underwriters' Part 36 offer, especially having regard to the tenuous nature of Kidsons' claim to be entitled to an indemnity in the wide-ranging terms sought;
ii) Kidsons' conduct in intentionally crafting the 31 August 2001 letter in a manner that was designed to put Underwriters off the scent, rather than alerting them to the matters of which Kidsons had become aware. He referred to the fact that the letter was, as the court has found: "…coy in the extreme if it was indeed intended to be a notification of circumstances giving rise to a claim" (judgment paragraph 177). Mr. Patten and Mr. Flaxman set out to "…present the S@FI matter to Underwriters in such a way as not to give the latter any cause for alarm; and, in particular, so that they would not react by disputing coverage for S@FI" (judgment paragraph 183). As the court said, Kidsons could have notified Underwriters in full and frank terms, of Mr. Torrance's allegations, but they (through Mr. Patten and Mr. Flaxman) chose not to do so, for reasons which Mr. Patten then sought to deny in the witness box (judgment paragraph 184); and
iii) the misleading presentation of the Tax Faculty Report.
Mr. Kealey submitted that, against this background, it was unreasonable for Kidsons to persist in this action after receipt of Underwriters' Part 36 offer; he argued that realism should at that stage have been brought to bear on the extent of the indemnity they were seeking. Mr. Kealey referred to Reid Minty v Taylor  1 WLR 2800, where Kay LJ said, at paragraph 37:
"The approach of the Civil Procedure Rules is a relatively simple one: namely, if one party has made a real effort to find a reasonable solution to the proceedings and the other party has resisted that sensible approach, then the latter puts himself at risk that the order for costs may be on an indemnity basis."
Mr. Kealey submitted that these words were apposite in the present case.
- In my judgment it is not appropriate, in the circumstances of this case, to make an order for indemnity costs. Despite my conclusions as to the somewhat unsatisfactory manner in which the 31 August 2001 letter was presented to Underwriters by Kidsons, there has been nothing in the conduct of the litigation of the claim by Kidsons that takes their rejection of the Part 36 offer out of the norm. In the light of my judgment, they were wrong to have done so, but no doubt they were advised by their legal advisors not to accept the offer. In a complex piece of commercial litigation of this nature, I cannot say they were unreasonable to have done so. Accordingly, subject to the deductions already referred to, I shall order Kidsons to pay Underwriters' costs in respect of this period on the standard basis also.
(iii) Interest on costs
- Mr. Davidson accepted that it followed under Part 36.14(1) and (2) that interest should be paid on Underwriters' costs as from the date of payment in respect of the post-offer period. He also did not dispute, in relation to the pre-offer period, that Underwriters were entitled to interest on costs as from the date of payment. He also did not dispute that Underwriters were entitled to interest on costs paid in respect of the pre-Part 36 offer period. However, whilst he accepted that the normal rate of interest awarded by the Commercial Court is base rate plus 1% (see Reed Executive plc v Reed Business Information  EWCA Civ 887, paragraph 6, per Jacob LJ), he nevertheless argued that, in the circumstances of this case, an award of base rate would be sufficient. He justified this approach by reference to the normal practice of insurers to hold large positive cash balances and other liquid resources because of the nature of their business. Consequently, he submitted, the cost to Underwriters of making progress payments to their lawyers during litigation was normally that of deposit interest foregone, or equivalent return from liquid investments; the result was that an award of base rate plus 1% was over-generous. He accepted that there was no evidence to such effect before the court, but he contended that the factual premise was one of which judicial notice might be taken. The reality, he submitted, is that scrutiny of insurers' accounts will normally show large cash and liquid resources.
- I reject this submission. There is no evidence before the court to support Kidsons' assertions as to the liquid resources available to the various different underwriters who are defendants in this action. But even on the assumption (which I am prepared to make) that, as with many insurers in the London market, the defendants here hold "large positive cash balances", I see that as no reason for depriving Underwriters of the conventional rate of 1% over base rate, which was the rate awarded by the Court of Appeal in Bim Kemi AB v Blackburn Chemicals Limited  EWCA Civ 889 at paragraph 18(c), and by Colman J in National Westminster Bank Plc v Rabobank Nederland  EWHC 1742 (Comm) at paragraphs 49-58. As Colman J said, at paragraph 52, there are strong reasons of convenience in adopting a conventional measure. The burden is on the party seeking to disapply the normal rate to produce evidence to show that the conventional rate is inappropriate. Even on the assumption that Underwriters have substantial cash deposits, I see no injustice in adhering to the conventional rate. It would not have been proportionate to have conducted an inquiry as to whether each individual underwriter had, or had not had, to increase its borrowings for the purpose of funding the litigation, and, if so, at what rate. Accordingly, I order that Kidsons should pay interest on costs at 1% above base rate from the date of payment until judgment, when the normal judgment rate will apply.
(iv) Should Kidsons be ordered to make an interim payment on account of costs, and, if so, in what amount?
- Mr. Kealey seeks an interim payment of £1.2 million on account of Underwriters' costs; Mr. Davidson accepted (without prejudice to all Kidsons' arguments on a detailed assessment) that as a figure, £1.2 million does not exceed a reasonable proportion of the costs likely to be assessed in favour of Underwriters. However, Mr. Davidson submitted that this is not an appropriate case for an order for an interim payment. He pointed to the fact that all the defendants are either themselves insurers or (one would suppose) backed by adequate reinsurance so that their financial exposure is widely spread. By contrast, he submitted, the claimants are hugely exposed as a result of this decision, yet may have valid claims against Camerons and Millers, and may have the possibility of a successful appeal against Underwriters. He argued that there were well-recognised factors militating against an interim costs payment: Mars UK Ltd v Teknowledge Ltd (Costs)  2 Costs LR 44. He also relied upon the fact that Kidsons have been incurring the costs of defending, and, to the extent appropriate, meeting, third party claims as if uninsured. If (as Kidsons contend) ultimate responsibility for the costs should lie elsewhere, he submitted that the consequences for the individual partners were harsh if they had to produce substantial sums of cash to pay Underwriters at what was, overall, an interim stage of the litigation, given the appeal against my judgment, and the outstanding litigation against Camerons and Millers.
- I consider that it is appropriate that an interim payment of £1.2 million on account of Underwriters' costs should be made by Kidsons at this stage. That sum represents less than 60% of Underwriters' total costs, which exceed £2,016,000. It is also less than one third of the costs incurred by Kidsons, which exceed £3.5 million. The amount sought by way of interim payment is less than the sum which Underwriters will almost certainly recover on a detailed assessment. Like Jacob J in Mars (supra), I start from the proposition that, in general, interim payment orders for costs should be made. In the exercise of my discretion I take into account the fact that I have granted permission to appeal, and that, contrary to my views of the case, an appeal may be successful. I also take into account the fact that the parties in Kidsons are individuals who have had to fund, or find funding for, their own costs of this litigation, and to meet some claims arising out of the marketing of S@FI products. However, despite requests made by Underwriters' solicitors, no evidence or information has been forthcoming about the ability or otherwise of Kidsons, the firm, or the partners individually from their own resources, to meet an order for payment of a sum of £1.2 million, or whether the partners personally would suffer any financial hardship.
- Thus there is no basis for concluding that it would be disproportionate to the financial position of Kidsons, whether regarded as a firm or as a collection of individuals, to have such a liability imposed upon them immediately. I remind myself that they were, until the merger with Baker Tilly, a mid-size national accountancy practice. I have not been shown any relevant accounts, but I would find it surprising if, when a decision was taken by Kidsons not to accept the Part 36 offer, proper provision was not made at that time, not only to provide for Kidsons' own costs going forward, but also for the risk of Kidsons' incurring liability to meet an order for adverse costs. If no such provision was in fact made, then in my view, it should have been. Kidsons' own costs, according to the evidence, have been paid to date. I see no reason why Underwriters' costs should remain unpaid. The assertion that Underwriters are, in effect, a "long pocket", compared with the position of Kidsons' individual partners is not, in the absence of any evidence, a compelling submission. Accordingly, I order Kidsons to pay the sum of £1.2 million by way of interim payment on account of their liability to pay Underwriters' costs.
(v) Underwriters' application for costs against Camerons and Millers
- Underwriters apply for an order that, in the event that Kidsons do not pay Underwriters the full costs of the action which I have ordered them to pay, they should be entitled to recover any shortfall against Camerons and Millers. Mr. Kealey submitted that Camerons and Millers were parties to the action and prima facie liable to have an order for costs made against them, and that this was not an exceptional case such as Aiden Shipping Co Ltd v Interbulk (the Vimiera)  AC 965, where an order for costs was made under s51 of the Supreme Court Act 1981. He referred to the fact that, although Kidsons' claims against Camerons and Millers were effectively stood over shortly after the commencement of the action, pursuant to an order made by Colman J on 20 July 2005, they chose fully to participate in the proceedings by joining with Kidsons in an attempt to defeat Underwriters' defence of the claim. He further submitted that, had they succeeded at trial in their arguments as to the scope of the indemnity to which they asserted Kidsons was entitled, they would be asking for their costs against Underwriters; since they had failed, he submitted the reverse applied.
- Mr. Michael Harvey QC, for Camerons submitted that it was wrong in principle to make the costs order sought by Underwriters against Camerons and Millers. He referred to Arkin v Borchard Lines Ltd & Ors  1 WLR 3055, where, at paragraph 63, the Court of Appeal acknowledged the "separability principle", i.e. that third party proceedings are treated as quite separate from the main proceedings. At paragraph 75, Lord Phillips MR (as he then was) said:
"In the usual course of things the court will consider the incidence of costs in the main proceedings quite separately from the incidence of costs in the Part 20 proceedings, but nobody submitted that this was an inviolable rule."
- Mr. Harvey submitted that, in context, the circumstances of that case were very unusual in that the defendants and third parties were in effect all alleged to have been conspirators who were jointly responsible for the losses suffered by the claimant. He said that those circumstances explained why the Court of Appeal departed from the usual rule and ordered that expert expenses incurred by one of the third parties should be borne equally by the defendants and the third parties; and that a sum ordered to be paid by a professional funding company was to be shared rateably among the defendants and third parties.
- He submitted that, in the present case, the claim by Kidsons against Camerons and Millers was equivalent to a third party claim, and quite distinct from Kidsons' claim against Underwriters. In the alternative, he submitted that there was no lis, or cause of action, as between Camerons and Underwriters such as to give rise to any liability for costs. He reinforced these submissions by emphasising that nothing in the manner of Camerons' participation at the trial would justify a departure from the normal principle that a party in its position should not have any liability for costs. He referred to the fact that, apart from supporting Kidsons' position on the policy issues (in relation to which Kidsons lost), Camerons merely:
i) adduced evidence from Mr. Baker on an agency issue – an issue on which they were successful;
ii) explained the operation of the various tax schemes; he submitted that whilst the principal point of this was to identify the link between Mr. Torrance's concerns and the sample claims, this explanation, and the questions asked of Kidsons' witnesses, informed the court about Kidsons' awareness – an issue on which Underwriters lost.
He contended that it could not be right in principle that, just because Kidsons had started proceedings against Underwriters and had joined Camerons and Millers as co-defendants, that that could somehow make them guarantors of Kidsons' liability to Underwriters.
- Mr. Roger Stewart QC's submissions on behalf of Millers were to similar effect. He submitted that the correct analysis was effectively that of third party proceedings where Underwriters, as claimants, were seeking a declaration of non-liability against Kidsons, which in turn had made Camerons and Millers third parties. It was wrong, he submitted, that Underwriters, simply because of the possible impecuniosity of Kidsons, should be entitled to an order for costs against Camerons and Millers. In the alternative, Mr. Stewart submitted that there should only be an independent order to the extent that Camerons' and Millers' presence at trial actually increased the costs which Underwriters had to bear. In the further alternative, he submitted that Underwriters should have liberty to apply to the court in the event that they were unable to enforce any costs order against Kidsons.
- In my judgment, I should decide at this stage whether, in principle, Underwriters should be entitled to recover costs against Camerons and Millers in the event that Kidsons is unable to pay all or any part of the order which I have made in respect of Underwriters' costs.
- It is clear that in exercising my discretion, I must have regard to the over-riding objective in CPR 1(1) to ensure that the parties are dealt with justly in the circumstances of this particular case, whatever the normal practice in other cases: see Arkin v Borchard Lines (supra). I have come to the conclusion that, although Camerons and Millers were indeed parties to the suit, and chose, pursuant to the order of Colman J, to participate at trial (because, as defendants to the separate claim, they were no doubt interested in the outcome of the policy and notification issues), it would not be just to provide Underwriters with a direct claim for the entirety of their costs of the action against Camerons and Millers, in the event that Kidsons do not pay.
- The reality here is that Kidsons were the main protagonists, against whom Underwriters had to succeed. The lis or cause of action was between Kidsons and Underwriters; Camerons and Millers were only interested in the outcome because of the claims brought against them by Kidsons. However, Camerons and Millers decided positively to participate in the trial and engage in the presentation of extensive submissions. Even though the evidence which was adduced by witnesses on their behalf did not lengthen the trial (since, in any event, if it had not been adduced by them, it would have had to have been adduced by Kidsons or Underwriters), their separate representation at trial certainly added to its length and increased the work that needed to be done by counsel and solicitors acting for Underwriters in terms of responding to Camerons' and Millers' written and oral arguments and pleadings. The respective contributions of the Camerons' and Millers' legal teams were, as one might expect, of great assistance to the court, but that is not really the point. In my judgment, the appropriate order to make here, as one reflecting the justice of the case and the reality of what occurred at trial, is that Underwriters should be able to recover against Camerons and Millers respectively, Underwriters' costs of the action to the extent that they are not able to do so from Kidsons; but that should be subject to a limit in each case, namely an amount which does not exceed the costs which Underwriters have additionally incurred as a result of Camerons and Millers respectively participating in the trial, and which Underwriters would not have incurred had those parties not participated and presented the arguments which they did at trial. Subject to any further arguments, I would exclude from Underwriters' entitlement time spent in relation to witnesses called by Camerons and Millers, since in any event they would have had to have been called, either by Kidsons or by Underwriters themselves.
- The parties may prefer the precise amount to be subject to detailed assessment, but if I were asked to express the amount in percentage terms, I would be minded to quantify the combined figure for both sets of costs on a very rough and ready basis at 25% of Underwriters' total costs (i.e. a figure of £504,000 on the current estimate of £2,016,000), with the result that each of Camerons and Millers would be responsible for no more than £252,000 each. However, it would not be right to proceed on the basis of what is in effect a summary assessment, without the agreement of the parties, or further argument.
- For the purposes of the interim payment order, however, I propose that a limit of £252,000 in respect of each of Camerons and Millers be inserted into paragraph 3 of the proposed draft order submitted by Mr. Harvey. In paragraph 3 of the draft order the date of 1 April 2008 should stand, notwithstanding Mr. Kealey's submissions to the contrary. In paragraph 5 of the draft order, the period of time after the assessment or agreement of the costs should be reduced to three months, as Mr. Kealey submitted. The words in parenthesis in paragraphs 3 and 5: "… having taken all reasonably practical steps to enforce the orders …" should be removed. As Mr. Kealey submitted, they are likely to lead to disputes as to whether all reasonable steps have been taken.
- If necessary, I will hear further argument as to the terms of the order. Obviously, as Mr. Harvey's draft order indicates (but perhaps not sufficiently clearly) my order that Camerons and Millers should pay a proportion of Underwriters' costs, if, and to the extent that, Kidsons fails to do so, is without prejudice to all questions as to which party should bear the ultimate responsibility for the costs of the action, including all issues of contribution rights between the respective parties.