Factual and Procedural Background
On 18 May 2017, the appellants and the first respondent were involved in a road traffic accident (RTA). The appellants alleged that the first respondent drove his van into their car, while the first respondent contended that the first appellant pulled out from a parked position into his van. The second respondent was the insurer of the first respondent. The appellants lodged a Claims Notification Form on 31 May 2017, and liability was denied by the second respondent on 21 June 2017.
A witness, Mr Bigesh Patel, unrelated to the parties, was contacted by an investigator instructed by the second respondent. The investigator suggested to Mr Patel's uncle that Mr Patel might be accused of fraud, which led Mr Patel to withdraw cooperation. Proceedings were filed on 28 October 2020. The respondents initially denied liability and later sought permission to amend their defence to allege fundamental dishonesty by the appellants, which was refused by the trial judge on 16 July 2021 for lack of sufficient basis.
The trial took place over two days in April 2022. The trial judge found in favour of the appellants, relying primarily on the credible evidence of the witness Mr Patel. The judge did not find the first respondent dishonest, but preferred the appellants' account. The issue of costs arose, focusing on whether indemnity costs should be awarded for the period after 6 May 2021, when the respondents applied to amend their defence to plead fundamental dishonesty.
The trial judge awarded indemnity costs only for the trial period after 18 April 2022, as the appellants had beaten the relevant Part 36 offer. The appellants appealed the refusal to award indemnity costs for the period between 6 May 2021 and the trial start. Richard Smith J upheld the trial judge's decision. The present appeal concerns whether there is a default entitlement or presumption to indemnity costs for claimants who defeat fundamental dishonesty allegations, and whether the trial judge applied the correct test and gave adequate reasons.
Legal Issues Presented
- Whether there is a default entitlement or presumption in favour of indemnity costs for a claimant who successfully defeats allegations of fundamental dishonesty made by a defendant.
- Whether the trial judge misdirected herself as to the legal test for awarding indemnity costs or failed to provide adequate reasons for her decision.
- Whether the trial judge's refusal to award indemnity costs was perverse, i.e., a decision no reasonable judge could have reached.
Arguments of the Parties
Appellants' Arguments
- The appellants contended that there should be a presumption or starting point in favour of awarding indemnity costs when allegations of fundamental dishonesty by a defendant are unsuccessful.
- They argued that such a presumption would reverse the usual burden of proof, requiring the paying party to justify why indemnity costs should not be awarded.
- The appellants submitted that the trial judge misapplied the test for indemnity costs by focusing on exceptionality rather than the "out of the norm" standard and only considering conduct rather than all circumstances.
- They further argued the trial judge failed to provide adequate reasons for refusing indemnity costs.
- The appellants claimed the refusal to award indemnity costs was perverse given the circumstances, including the persistence of the respondents in pursuing the dishonesty allegations and the detrimental effect on witnesses.
Respondents' Arguments
- The respondents maintained that there is no automatic entitlement or presumption to indemnity costs where fundamental dishonesty allegations fail.
- They argued the trial judge correctly exercised her discretion considering all circumstances and that the appellants had not surmounted the high hurdle required for indemnity costs.
- The respondents contended that the trial judge's reasons were sufficient and that her decision was neither legally erroneous nor perverse.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Howlett v Davies [2017] EWCA Civ 1696; [2018] 1 WLR 948 |
Allegations of fundamental dishonesty need not be pleaded but can be raised at trial. |
Confirmed that respondents were entitled to raise dishonesty at trial but only if appropriate and in accordance with professional obligations. |
| SCT Finance Ltd v Bolton [2003] 3 All ER 434 |
Appellate courts must interpret cost discretion broadly and discourage appeals on costs. |
Supported the wide discretion of the trial judge in awarding costs and the heavy burden on appellants to overturn such decisions. |
| Three Rivers DC v The Governor of the Bank of England [2006] EWHC 816 (Comm) |
Wide discretion to award indemnity costs considering all circumstances including conduct. |
Reinforced the principle that indemnity costs require conduct or circumstances that take the case "out of the norm". |
| Excelsior Commercial & Industrial Holdings Ltd v Salisbury [2022] EWCA Civ 879 |
High hurdle for indemnity costs requiring conduct or circumstances "out of the norm". |
Confirmed the test for indemnity costs and cautioned against creating presumptions outside CPR. |
| Clutterbuck v HSBC PLC [2015] EWHC 3233 (Ch); [2016] 1 Costs LR 13 |
Failure of fraud claims generally leads to indemnity costs but court retains discretion. |
Held that there is no automatic rule but failure of fraud claims is a relevant factor for indemnity costs. |
| Natixis S.A. v Marex Financial Limited [2019] EWHC 3163 (Comm); [2020] 2 All ER (Comm) 867 |
Failed or withdrawn fraud allegations may be a starting point for indemnity costs but no presumption or burden reversal. |
Applied discretion without presumption; awarded indemnity costs on facts where fraud claim was unjustified. |
| Bishopsgate Contracting Solutions Ltd v O'Sullivan [2021] EWHC 2628 (QB); [2021] Costs LR 1357 |
No automatic indemnity costs on failed fraud claims; discretion remains. |
Rejected submission that indemnity costs automatically follow failed fraud claims. |
| Libyan Investment Authority v Roger Milner King & Ors [2023] EWHC 434 (Ch) |
Failure of fraud/dishonesty claims is a relevant factor but no automatic entitlement or presumption to indemnity costs. |
Confirmed that standard costs are the default unless the court orders otherwise; no burden shifting. |
| English v Emery Reimbold & Strick Ltd [2002] EWCA Civ 605; [2002] 1 WLR 2409 |
Judgments affecting substantive rights must give adequate reasons, especially for costs orders. |
Applied to assess whether trial judge gave sufficient reasons for costs decision. |
| Volpi and Another v Volpi [2022] EWCA Civ 464 |
On appeal, a decision is perverse only if no reasonable judge could have reached it. |
Used to assess whether trial judge's refusal to award indemnity costs was perverse. |
Court's Reasoning and Analysis
The court first addressed the appellants' central submission that there exists a default entitlement or presumption to indemnity costs when fundamental dishonesty allegations fail. It rejected this, agreeing with several first-instance authorities that no such presumption or reversal of the burden of proof exists. The court emphasized that the discretion to award indemnity costs is broad and must be exercised considering all circumstances, without creating extra-CPR rules or presumptions.
The court acknowledged that while failed dishonesty allegations often lead to indemnity costs orders, this is not automatic. Rather, it depends on the circumstances and the judge's discretion. This preserves the court's ability to assess each case individually.
Regarding the trial judge’s application of the legal test, the court found no error. The appellants' complaint that the trial judge used "exceptionality" rather than "out of the norm" was unfounded, as neither term was expressly used, and the difference was immaterial. The trial judge considered both conduct and circumstances, including the respondents' persistence in pursuing the dishonesty allegations and the potential chilling effect on witnesses, and was entitled to conclude the high hurdle for indemnity costs was not met.
The court further held that the trial judge provided adequate reasons. Although brief, the reasons were sufficient given the context of a short oral judgment delivered immediately after trial. The judge explained her doubts about the propriety of raising fundamental dishonesty allegations in this case and concluded that the conduct did not justify indemnity costs.
Finally, the court considered whether the trial judge’s refusal was perverse. It concluded that the judge’s decision was within the range of reasonable outcomes, noting that the test is not whether another judge might have decided differently, but whether the decision was one no reasonable judge could reach. The court found no perversity.
Holding and Implications
The court DISMISSED the appeal.
The holding confirms that there is no automatic entitlement or presumption to indemnity costs simply because a claimant successfully defeats allegations of fundamental dishonesty. The discretion to award indemnity costs remains broad and must be exercised based on all relevant circumstances, without reversing the burden of proof or creating default rules outside the CPR framework. The decision underscores the importance of judicial discretion in costs matters and cautions against aggressive or unwarranted allegations that unnecessarily increase costs and aggravate witnesses. No new legal precedent was established beyond reaffirming established principles regarding indemnity costs and the exercise of discretion.