Zagora Management Ltd & Ors v Zurich Insurance Plc & Ors No. 3 (Costs)

Factual and Procedural Background

This judgment determines the appropriate costs orders following the principal judgment handed down on 30 January 2019 and a supplemental judgment regarding interest on 7 February 2019. The case involved multiple claimants ("the ZBC claimants") suing the Second Defendant ("ZBC") and claims against the First and Third Defendants collectively referred to as "ZIP". The ZBC claimants lost their claims against ZBC. Against ZIP, the first claimant freeholder ("Zagora") lost its claim, while the individual leaseholder claimants succeeded in obtaining a substantial judgment totaling over £4.3 million including interest.

The general rule under CPR Part 44.2 is that the unsuccessful party pays the costs of the successful party, but the court may vary this order considering factors such as conduct, relative success, and settlement offers. The judgment addresses detailed submissions from all parties concerning these factors and sets out costs orders accordingly, while reserving certain issues for later determination.

Legal Issues Presented

1. Whether the general rule that the unsuccessful party pays costs should be applied or varied in light of the parties' conduct, relative success, and settlement offers.
2. The appropriate costs order in respect of claims against ZBC, particularly considering findings of deceit but ultimate failure due to lack of reliance.
3. The appropriate costs order in respect of claims against ZIP, including how to treat the differing outcomes for Zagora and the leaseholder claimants and the impact of ZIP's settlement offer.
4. The effect and reasonableness of settlement offers made by ZBC and ZIP on the costs orders.
5. Whether and to what extent conduct and relative success justify departures from the general rule on costs.

Arguments of the Parties

ZBC's Arguments

• Costs should follow the event, i.e., the unsuccessful parties should pay ZBC's costs in full.
• ZBC relied on an admissible settlement offer of £250,000 inclusive of costs, made on 29 May 2018, to justify costs protection from that date.
• ZBC contended that the claimants acted unreasonably in relation to the reliance issue, which was a key reason for their failure.

ZBC Claimants' Arguments

• To award ZBC all costs would ignore that the claimants succeeded in proving deceit by ZBC in issuing Building Regulations final certificates.
• The settlement offer should be disregarded as it was trifling and lacked any admission or apology for deceit.
• The claimants never realistically relied on the certificates, but the deceit finding was significant and should affect costs.

ZIP's Arguments

• Zagora, as a separate claimant who failed, should pay ZIP's costs of its claim.
• The court should not depart from the general rule based on commercial considerations or lack of detailed costs information.
• ZIP made a detailed without prejudice settlement offer on 29 June 2018, which was reasonable but included certain unreasonable stipulations.
• ZIP argued that the claimants unreasonably opposed a preliminary trial on the maximum liability cap, causing additional costs.

Claimants' Arguments Against ZIP's Offer and Costs

• The offer was not open for unqualified acceptance and contained unreasonable terms, including indemnities and security provisions.
• Claimants contended it was inappropriate to compare the offer only with the judgment sum without considering interest and the circumstances at the time of the offer.
• The claimants argued that the failure of the agreement to rectify claim by Zagora should not lead to adverse costs orders against the group as a whole.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Yentob v MGN Limited [2015] EWCA Civ 1292	Consideration of limited admissions in settlement offers and their impact on costs consequences.	The court rejected the claimants' argument that absence of admission or apology in the offer justified refusal to accept it, noting commercial cases differ from public interest cases.
Ashdown v Griffin [2018] EWCA Civ 1793	Claimants cannot justify refusal of reasonable offers for public exposure of wrongdoing in commercial cases.	Supported the court’s view that public interest does not justify refusal of reasonable settlement offers in commercial fraud claims.
Fulham Leisure Holdings v Nicholson Graham & Jones [2006] EWHC 2428 (Ch)	Effect of rejecting a "drop hands" offer and costs consequences when claimant does not do better at trial.	Used as analogy for assessing the effect of ZBC’s settlement offer on costs orders.
Atlasjet v Kupeli [2018] EWCA Civ 1264	Costs orders as between multiple claimants and defendants; starting point that successful defendant recovers costs from unsuccessful claimants.	Supported the court’s discretion to make a collective costs order for claimants including Zagora despite separate claims.
Budgen v Andrew Garden Partnership [2002] EWCA Civ 1125	Permissibility of broad brush proportionate costs orders even with limited detailed costs information.	Supported the court’s decision to make a proportionate costs order for Zagora’s claim without detailed cost breakdowns.
Hammersmatch v Saint-Gobain [2013] EWHC 2227 (TCC)	Assessment of reasonableness in rejecting Part 36 offers and the effect of changes to Part 36 on “near miss” offers.	Referenced regarding assessment of ZIP’s offer and claimants’ conduct in refusing it.
Multiplex Construction v Cleveland Bridge [2008] EWHC 2280 (TCC)	Original statement on penalising rejection of near miss offers under Part 36.	Discussed as superseded by later changes to Part 36 with caution about penalising near misses.
Coward v Phaestos [2014] EWCA Civ 1256	Distinction between Part 36 offers and admissible offers to settle in relation to costs consequences of near misses.	Clarified that near miss conduct may be relevant for admissible offers to settle but not Part 36 offers.
Fox v Foundation Piling Ltd [2011] EWCA Civ 790	Warning against departing too frequently or far from the general rule on costs.	Quoted to emphasize restraint in departing from the general rule despite conduct arguments.
Murphy v Brentwood DC [1991] 1 AC 398	Limitation of negligence claims in building regulation contexts.	Referenced regarding the amendment of claims to include fraud after negligence claims were bound to fail.

Court's Reasoning and Analysis

The court began by summarizing the relative successes and failures of the parties: ZBC was successful against all ZBC claimants; ZIP was successful against Zagora but not the leaseholder claimants; and the leaseholder claimants succeeded against ZIP with a substantial judgment.

Regarding ZBC, the court acknowledged the claimants proved deceit, a significant finding, but failed due to lack of reliance by most claimants. The court found the costs related to deceit and reliance roughly equal and significant. It considered ZBC’s settlement offer and concluded that the claimants should have appreciated the weaknesses in their reliance case by the time of the offer. The court ordered no costs between parties up to the offer expiry date and that claimants pay ZBC’s costs thereafter, reflecting the offer’s commercial reasonableness and the claimants’ conduct.

On ZIP, the court noted the leaseholder claimants obtained a substantial recovery, albeit reduced by the maximum liability cap and Zagora failed entirely. The court considered whether to treat costs collectively or separately and decided a proportionate collective costs order was appropriate, given the commercial unity of the claims. It allowed a 7.5% reduction to reflect Zagora’s failed claim and a further 12.5% reduction for the claimants’ partial failure and conduct, totaling a 20% reduction from claimants’ costs against ZIP.

The court analyzed ZIP’s settlement offer, finding it more advantageous than the judgment sum excluding interest but burdened by unreasonable stipulations such as indemnities and control over costs entitlement. The claimants were justified in refusing the offer. The court rejected the argument that the claimants should be penalized for failing to accept a "near miss" offer due to the offer’s unreasonable terms and the late claim for interest by claimants.

On conduct, the court recognized hard-fought litigation with aggressive approaches on both sides and declined to adjust costs further for conduct, emphasizing the need to avoid departing too far from the general rule.

Holding and Implications

The court made the following key costs orders:

• ZBC Claimants must pay all of ZBC's costs from 13 June 2018, the day after the expiry of ZBC's settlement offer, reflecting the claimants’ failure to accept a reasonable offer given the weaknesses in their reliance case.
• No order as to costs between the parties for the period up to and including 12 June 2018, reflecting the equal significance of deceit and reliance issues and the vigorous contest on liability.
• A proportionate costs order in favour of the leaseholder claimants against ZIP with a 20% reduction in claimants’ costs to reflect Zagora’s failure and partial success of the claimants, including conduct considerations.
• Zagora’s costs are included in the collective costs order with a modest discount recognizing the commercial unity of the claims and avoiding complex separate assessments.
• The claimants were justified in refusing ZIP’s settlement offer due to unreasonable terms and conditions attached to the offer.

These decisions directly affect the parties’ liability for costs but do not establish new legal precedent beyond applying established principles on costs, offers to settle, and conduct under CPR Part 44.2.