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Sugar Hut Group & Ors v A J Insurance

Rachel Coppenhall looks at the judgment in this well reported and interesting business interruption claim, which saw the claimants being penalised in costs in respect of a Part 36 offer, which they beat. The case underlines the benefits of making a Part 36 offer, even in cases where a defendant is having to “guesstimate” and that costs protection may still be obtained where that offer is subsequently beaten, however the outcome in this claim is likely to be viewed as highly fact specific. 

Facts

On 13 September 2009 a fire destroyed a wing and offices of the Sugar Hut Club, made famous by the ITV programme The Only Way is Essex (“TOWIE”). The club was unusable for 49 weeks until it reopened on 25 August 2010.

The defendants were engaged by the claimants to obtain insurance cover for the club in March 2009. Following the fire, the claimants sought to make a claim on the policy arranged by the defendant but the insurers declined the claim. The claimants sued their insurers but the claim was dismissed at trial for non-disclosure before inception of the insurance policy and because there had been breaches of warranties under the policy.

The claimants then looked to the defendants on the basis that the grounds upon which they were held to have no right under the policy was as a result of negligence on the defendants’ part. Shortly before the trial on liability the defendants agreed to pay 65% of the claimants’ losses excluding interest.

The matter then progressed to a trial on quantum. 65% of the claimants’ property damage costs and the claimants and insurer’s legal costs of the unsuccessful action were agreed in advance. Only the claims for business interruption (£1,345,794), accountant’s fees (£19,275) and interest remained in dispute. 

The claim

Both parties relied on evidence from forensic accountants:

  • The claimants’ expert used two “perspectives” and an average between the two to reach an overall conclusion:

    • The first perspective (“P1”) involved an extrapolation of the club’s turnover in the period before the fire (excluding agreed spikes for certain weekends of the year) which indicated an upwards trend of 27%. This was applied to the period that the club was closed.

    • The second perspective (“P2”) considered the actual turnover achieved after the club re-opened in August 2010.

  • The defendants’ expert concluded that the club’s turnover in 2009 – 2010 would have only increased by the modest amount of the consumer price index (“CPI”).

Findings

Eder J held:

  • It was difficult to establish a trend in turnover for the period prior to the fire because of the limited evidence in respect of turnover before the fire and the impact of the limited physical improvements made to the club prior to the fire.
  • However it was possible to say that there was a general increase in turnover for the 2008 – 2009 pre-fire period and this was assessed at 20%.

  • There was not enough contemporaneous documentary evidence to conclude what steps would have been taken to change the layout of the club, had the fire not taken place.

  • It did not follow that the 2008 – 2009 growth would continue for the entirety of the next year, and there was insufficient data to support this conclusion.

  • The approach that was to be adopted to the calculation of projected turnover:

    • Taking the 12 week period utilized by the claimants' expert for October 2008 - February 2009, the 20% uplift was applied to arrive at the projected turnover for the equivalent weeks following the fire (excluding the 6 week "spike" period which would be increased by 10%).

    • A notional increase, equivalent to CPI, applied for the remaining period until re-opening

    • A rate of gross profit of was 75.8% drawn from both experts' evidence.

  • The claimants’ insurance policy included a “Trends Clause” which permitted the adjustment of the gross profit to take account of trends affecting the business. The “P2” approach could have been relevant but had to be ignored in these circumstances as the club was not comparable after the refurbishment. It was essentially a new club with double the capacity and the suggestion that the club would have grown in a similar manner without the “TOWIE” effect was unsupported.

  • The claimants’ claim for staff wages, alternative accommodation for a live in employee, redundancy costs, loss of profit at two other Sugar Hut clubs in the group and accountancy fees (claimed as a result of a professional accountants clause in the policy) failed due to lack of evidence. Similarly a late submission from the defendants for depreciation to be applied to the loss of profits failed for the same reason.

  • Interest was awarded at a rate of 5% p.a. simple based on evidence from the Bank of England on what rate of interest would have been earned by a company like the claimants.

  • Following the findings in the main judgment the parties agreed damages inclusive of interest in the sum of £1,090,021.02. Allowing for interim payments, this left an outstanding balance of £277,021.02. Of the overall sum, business interruption (“BI”) losses amounted to £568,670 gross. 

Costs

The general rule is that the unsuccessful party will be order to pay the successful parties costs.  Following the approach of Gloster J in HLB Kidsons v Lloyds Underwriters [2008] 3 CLR 427, the court has a wide ranging discretion allowing them to depart from the general rule, but it remains appropriate to give “real weight” to the overall success of the winning party. Equally, there is no rule requiring the reduction of a successful party’s cost if he looses on one or more issues and in complex litigation this is likely to happen.

  • There was good reason to depart from the general rule in this case for the following reasons and reduce the claimant’s costs by 30%, to be assessed if not agreed:

    • In relation to three of the claims set out above Eder J awarded nothing. These items totalled £320,000 and represented a significant amount of the claim but also gave rise to discrete issues relating to disclosure and factual and expert evidence.
    • The claimants’ BI claim also relied heavily on the second perspective advanced by the claimants’ expert. Both parties spent significant time examining this approach but the exercise was rejected in its entirety by Eder J.
  • In a letter dated 23 May 2014 the defendant had made an offer to settle, stated to be "without prejudice as to costs" and to be a Part 36 offer. The offer was expressed as based on lost profit of £600,000 gross, less agreed 35% reduction and interest. After allowing for interim payments and the 35% reduction, this resulted in a total further payment of £247,272.53 which the defendant rounded up to £250,000 and offered inclusive of interest, plus costs of the quantum action.
  • It was common ground that the claimants “beat” the Part 36 offer and whilst it was accepted that the offer was just shy of the award, a “near-miss” cannot trigger the Part 36 regime.
  • However, CPR 44.2(4)(a) requires the court to have regard to "all the circumstances" including "the conduct of the parties" and CPR 44.2(5) provides that the conduct of the parties includes "whether it was reasonable for a party to...pursue or contest a particular allegation or issue". The claimants pursued the BI aspect of their claim because of an insistence that the appropriate figure for settlement was much higher that the £600,000 offered. Their approach was unreasonable and had an impact on costs.
  • This finding would not reintroduce a “near-miss” rule by the back door as there were distinguishing features which were:
    • "This was a paradigm example of a claim, where the overall claim and certain individual components were much exaggerated, a consideration permitted by CPR 44.2(5)(d)".
    • The claimants dragged their heels on disclosure and there remained significant gaps in evidence at trial which caused the defendant difficulties in protecting their position.
    • The matter which divided the parties was the BI element of the claim, this alone did not mean the claimants’ position was unreasonable, but combined with the above, the behaviours could be characterised as such.
  • The claimants were required to pay the defendant’s costs from 14 June 2014.

Comment

Eder J commented that the business interuption calculation he applied was crude and inexact but this was as a result of the evidence from the claimants which the Judge described as “unavailable, unreliable or incomplete”. From a practical point of view it underscores the need for policyholders to ensure that they can provide evidence which demonstrates a trend through yearly or seasonal comparisons when submitting BI claims. The impact of the claimants’ exaggeration and inability to substantiate the BI claims in this case impacted upon both recovery of the claim itself and the order for costs.

The case also highlights the importance of having proper regard to offers made during the course of litigation. Even though the defendants were faced with a lack of disclosure, they still made a Part 36 offer and the Judge had regard to the difficulties facing them, when considering that offer and whether it should offer them any protection.

It is worthwhile noting that the approach taken by Eder J is at odds with Ramsay J’s warning in Hammersmatch Properties (Welwyn) Ltd v Saint-Gobain Ceramics and Plastics Ltd & Anor [2013] EWHC 2227 (TCC) against allowing CPR 44.2(4)(c) to be used as a basis to order the claimant to pay the defendant’s costs where there is a “near miss” Part 36 offer. It appears to us that Eder J’s approach in this case focused on the express provisions in the CPR to consider the conduct of the parties, in particular the claimants’ conduct; the claimant unreasonably holding out for more than was offered, combined with their poor disclosure, which resulted in distinguishable issues of conduct rather than issues of general principle.

Contact

For further information, contact Rachel Coppenhall.

By Rachel Coppenhall

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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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