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Exercising subrogated rights against third parties

Matthew Olorenshaw looks at the decision in Brit Inns Ltd (in liquidation) and Others v BDW Trading Ltd which illustrates the difficulties insurers can face when exercising subrogated rights against third parties.

Introduction

The case of Brit Inns Ltd (in liquidation) and others v BDW Trading Ltd [2012] EWHC 2489 provides a stark reminder to those involved in civil litigation about the importance of dealing with disputes in a proportionate and reasonable manner and seeking to secure some costs protection at an early stage.

Background

The underlying dispute related to the design and construction of a building which was intended to incorporate a basement restaurant. The basement was flooded during the course of construction. Thames Water admitted liability and compensated the Claimant. Remedial works were commenced soon afterwards but a second flood occurred – this time due to the negligence of the Defendant and its subcontractor (which was never really in issue).

The Claimant submitted a claim to its Insurers and the Insurers paid out. Two separate claims were brought against the Defendant, namely: (1) a subrogated claim by the Claimant’s Insurers seeking recovery of the sums paid out by them (the “main action”); and (2) a claim by the Claimant itself for its uninsured losses (the “uninsured action”).

The case proceeded to trial and the Claimant ‘won’. However, as Coulson J made clear when the question of costs came before him subsequently, it was a pyrrhic victory – taking into account the costs which had been incurred, there were no ‘winners’. In summary:

  • In the main action, the Claimant claimed c.£660,000.00. It spent £528,547.02 on costs. It was awarded £157,467.89 (c.25% of its claim).
  • In the uninsured action, the Claimant claimed c.£522,000.00. It spent £157,311.16 on costs. It was awarded £16,403.24 (c.3% of its claim).

CPR Part 36

In the main action, the Claimant and the Defendant had both made CPR Part 36 offers during the course of the proceedings but neither offer had been beaten. The costs consequences under Part 36 were therefore inapplicable.

The Judge reviewed the authorities and stressed that, if the costs-shifting mechanism contained within Part 36 were to apply, then a valid Part 36 offer must have been made and it must have been bettered. Offers made under CPR Part 44 should not be treated as having the same effect as a valid Part 36 offer. However, the Court does have a discretion to take into account a Part 44 offer when the question of costs is being considered.

CPR Part 44/conduct of the parties

In arriving at his decision on costs, the Judge considered the overall outcome and the conduct of the parties. In particular:

The main action

  • The Claimant made two Part 36 offers; one for £550,000.00 and one for £300,000.00. The Defendant made one Part 36 offer for £139,000.00. Whilst the consequences of Part 36 were inapplicable, the level of the offers demonstrated that the Defendant’s assessment of the risks had been far more realistic than the Claimant’s throughout.
  • The Defendant had made two Part 44 offers, both of which were for sums in excess of the damages awarded to the Claimant.
  • The conduct of the Claimant and its solicitors in the main action was high-handed and uncompromising. They took the view that, because the sum paid out by Insurers had been approved by a loss adjuster, they did not need to provide any further supporting information or address the Defendant’s requests to interrogate the detail of the claim. It dawned on the Claimant during the trial that it actually needed to provide the further information in order to substantiate its claim.
  • The Judge found that the Claimant’s expectations were unrealistic but that the Claimant had not deliberately exaggerated its claim.
  • The Judge was critical of the fact that two separate claims had been brought against the Defendant. There was no reason why both the main action and the uninsured action could not have been run together.
  • The Judge found that the evidence of the Claimant’s experts was fundamentally flawed and he rejected it wholeheartedly. He relied heavily upon the evidence of the Defendant’s experts which he considered to be much more realistic. He also had serious reservations over the Claimant’s factual evidence.

The uninsured action

  • The Defendant had made a Part 44 offer which was in excess of the damages awarded to the Claimant.

The Judge concluded that, in order for costs to be shifted as a result of conduct so that a Claimant who has recovered something at trial still has to pay the Defendant’s costs, there needs to be either: (a) a more or less total failure on the issues which went to trial; or (b) a failure on the part of a Claimant to accept a Part 44 offer which would have put the Claimant in a better position than going on. The Judge also noted that the pursuit of deliberately exaggerated claims may deprive a claimant of some or all of its costs but that was not the case here.

The decision

The main action

The Judge accepted that the Claimant was the successful party and that it had made a significant recovery. However, it had failed to accept the Defendant’s Part 44 offer which would have put it in a better position than going on to trial. This changed the costs landscape in the Defendant’s favour.

The Claimant was awarded 60% of its costs up until the last date the Defendant’s Part 44 offer could have been accepted. The 40% reduction was said to reflect the Claimant’s unreasonable approach towards providing further information. The Judge also ordered that the Defendant should not pay any part of the Claimant’s experts’ costs.

As to the costs following the expiry of the Defendant’s Part 44 offer, the Judge ordered that the Claimant should pay the Defendant’s costs. In essence, the Claimant had to pay the costs of the trial, which could have been avoided if the Defendant’s Part 44 offer had been accepted.

The Claimant was ordered to pay 90% of the Defendant’s costs on the basis that: (a) there was no justification for there being two separate claims and two separate legal teams; (b) the level of the Claimant’s recovery was a “failure on a grand scale”; and (c) the Defendant bettered its Part 44 offer.

Conclusions

The following key points arise from this decision:

  • From the perspective of Insurers bringing a subrogated recovery action, just because a payment under a liability policy has been adjusted, it should not be assumed that the payment will not be open to interrogation. Failing to engage with the party against whom recovery is sought and/or to respond to reasonable requests for further information could result in adverse costs consequences.
  • The importance of making a carefully considered Part 36 offer cannot be overstated.
  • If it is not practical to make a Part 36 offer then consideration should be given to making a Part 44 offer. Whilst a Part 44 offer will not have the same effect as a Part 36 offer, it can still have a very significant impact on costs.

Contact

For further information contact Matthew Olorenshaw, Senior Associate on +44 (0)20 7220 5210 or email matthew.olorenshaw@dwffishburns.co.uk

By Matthew Olorenshaw

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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