Sugar Hut Group Limited –v- A J Insurance Service  EWCA Civ 46
This case arose out of a serious fire on 13 September 2009 at a well-known nightclub in Brentwood, Essex, the Sugar Hut Club. The club was effectively unusable for 49 weeks until it reopened on 25 August 2010. The Claimants alleged losses under the heads of (i) Property Damage of £345,000; (ii) Business Interruption Losses of £1,345,794; and (iii) Accountants’ costs of £19,275 excluding VAT; together with interest accrued on these losses.
The Claimants initially claimed against their insurers under the insurance policy arranged by the Defendant. The insurers rejected the claim on the grounds that there had been non-disclosure before inception of the policy and also because there had been breaches of warranties under the policy. The insurers’ position was upheld by the High Court in 2010 and so the Claimants sued the Defendant for the losses it considered that it would have been able to recover on the insurance policy were it not for the Defendant’s advice.
Shortly before the trial on liability, the Defendant agreed to pay 65% of the Claimants’ recoverable losses. Property Damage costs were agreed so only the claims for Business Interruption losses, Accountants’ costs and interest remained in dispute. These matters went to trial before Eder J on 6, 7 and 8 October 2014. The effect of his judgment was (in gross terms) (i) Business Interruption losses of £568,670; (ii) the Accountants’ costs were held irrecoverable; (iii) interest was payable at 5% for the entirety of the periods claimed. The effect of the judgment was that, after taking into account interim payments, a further £277,021 was payable by the Defendant to the Claimants.
Prior to the trial, Part 36 and Calderbank offers had been made by both sides, but it was common ground that none had been “effective”. The last of the Part 36 offers made by the Defendant on 23 May 2014 was to settle the claim for a further £250,000 in addition to the payments made on account. The letter explained that the basis for the calculation of the Defendant’s offer was a figure of £600,000 for Business Interruption losses, and interest at 2.5% over various periods reduced from those claimed by the Claimants.
The Judge heard the parties’ submissions on costs on 10 November 2014. In summary, the Judge allowed the Claimants their quantum costs up to 13 June 2014, but subject to a reduction of 30% by reason of the issues on which the Claimants had failed at trial. He also ordered that, in relation to the period from 13 June 2014, the Claimants should receive no costs, save for the costs of the issue of interest, and should pay the Defendant’s costs. The Order provided:
- The Defendant shall pay 70% of the Claimants’ costs of the assessment of damages up to and including 13 June 2014 on the standard basis, to be assessed if not agreed
- That the Defendant shall pay the Claimants’ costs after 13 June 2014 relating to the assessment of interest on the standard basis, to be assessed if not agreed.
- The Claimants shall pay the Defendant’s costs of the assessment of damages after 13 June 2014 (excluding the Defendant’s costs relating to the assessment of interest) on the standard basis, to be assessed if not agreed.
The Claimants appealed against paragraphs 2 and 3 of the costs order, submitting that the Judge had effectively treated the Defendant’s Part 36 offer of 23 May 2014 as having been successful. Furthermore, the Judge had justified his order denying the Claimants their costs from 13 June 2014 and awarding the Defendant its costs over the same period by his conclusion that the Claimants had, after 13 June 2014, acted unreasonably in pursuing a claim for Business Interruption losses in excess of the £600,000 on which the Part 36 offer was based. This, the Claimants submit, involved an element of double counting or double penalty. The Judge had already reduced the costs recoverable by the Claimants in respect of the period up to 13 June 2014 to reflect the issues on which the Claimants had failed at trial. To justify depriving the Claimants of their costs and requiring them to pay the Defendant’s costs incurred in the period after 13 June 2014 amounted to penalising the Claimants twice for the same shortcoming.
The Court of Appeal found that the Judge came to a decision which was outside the bounds of reasonable decision-making, which was moreover in large part based upon an error of principle, treating the 23 May letter as containing a free-standing offer to compromise the Business Interruption claim at £600,000. In those circumstances, paragraphs 2 and 3 of the Judge’s Order were set aside. The Court of Appeal held that the Claimants’ recovery exceeded the Part 36 offer by a comfortable margin, and that there was no basis upon which it was appropriate to deprive the Claimants of their costs after 13 June 2014, still less to require them to pay the Defendant’s costs. The Claimants’ failure to succeed on all of their claim was adequately reflected in the Judge’s Order depriving them of 30% of their costs. Paragraph 1 of the Judge’s Order was therefore amended to remove the words “up to and including 13 June 2014” so that the Claimants were awarded 70% of their costs of the assessment of damages on the standard basis, to be assessed if not agreed.