Counting the cost of a dishonest defence

The Court of Appeal recently handed down judgment in TMO Renewables, regarding an appeal against a costs order awarding the successful defendants only 30% of their costs for pursuing a dishonest defence.

The Court of Appeal dismissed the appeal, holding that the trial judge had correctly taken into account the defendants’ dishonest conduct, elements of the claimant’s conduct and the parties’ approaches to settlement and mediation. The Court of Appeal was particularly critical of the defendants’ refusal to mediate, on the grounds that it would be ‘an expensive waste of time’ and warned parties and their advisers to approach mediation more positively in future.

The underlying claim was brought by the claimant against its former directors for the alleged breach of fiduciary duties by gerrymandering a vote at an extraordinary general meeting, in an attempt to defeat certain resolutions aimed at changing control of the board.

At first instance, Mrs Justice Joanna Smith held that the defendants had acted in breach of their fiduciary duties, but that this had caused no loss because the claimant was insolvent and would have gone into administration in any event.

High Court decision on costs

Smith J noted that the court had a wide discretion on costs, including the ability to apply discounts to reflect parties’ conduct. She concluded that the defendants ‘deliberately pursued a case on liability that they knew to be false’, to the extent that they ‘appeared to [have] “learned their lines” in advance of trial’, which amounted to ‘an egregious form of corporate wrongdoing’. She noted that the claimant had not succeeded in establishing every aspect of its case on liability but that the dishonest conduct of the defendants that the claimant had established was serious and had been denied by the defendants up to and throughout trial.

Smith J concluded that ‘it would not be fair or just for the defendants to recover the costs they spent in advancing their dishonest case on liability’. She assessed that this amounted to 40% of the defendants’ costs, which should therefore not be recoverable. However, she then also applied a further discount of 30%, which she considered to be ‘a fair and proportionate additional deduction having regard to the gravity of the misconduct of the defendants’.  

Smith J therefore held that an appropriate order would be for the defendants to recover only 30% of their costs, despite being the successful party. 

Court of Appeal judgment

One of the defendants, Mr McBraida, appealed the judgment on costs. His main grounds were that the judge had: (i) been wrong to say that McBraida’s conduct of his defence was dishonest; (ii) given insufficient weight to the claimant’s conduct; (iii) double-counted the defendants’ dishonesty, by applying a discount of 40% and a further discount of 30%; and (iv) given insufficient weight to the admissible settlement offers.

Lord Justice Males gave the leading judgment, with lady justices Asplin and Laing assenting.

Males LJ noted that decisions on costs were matters of discretion, which the trial judge is best placed to determine, with knowledge of and a feeling for the case that the Court of Appeal could not begin to replicate.  

On the question of dishonestly pursuing a defence, the Court of Appeal accepted that Smith J had not necessarily found McBraida to have lied under cross-examination: his responses having been vague or evasive rather than false. However, Males LJ found that Smith J had concluded that McBraida had deliberately pursued a case on liability that he knew to be false, including in his defence and written witness statement, which he did not substantiate on cross-examination.  

Males LJ held that Smith J had ‘plainly [taken] into account all aspects of the claimant’s conduct of which criticism was made… at length and explained… how that conduct impacted on her ultimate decision’.

He determined that Smith J had not double-counted the defendants’ dishonesty by applying two discounts to the defendants’ costs. He held that it was clear that she had simply been applying the principles in Bank of Tokyo, by: (i) disallowing the defendants’ costs in advancing a dishonest case, which she assessed as 40% of their total costs; and (ii) marking the court’s disapproval of this conduct, by imposing an additional 30% discount.

Males LJ also considered that it was clear that Smith J had given the settlement offers appropriate weight. He held that, when deciding to treat all of the defendants the same, despite McBraida having made an additional settlement offer, she had also taken into account that McBraida alone had pursued a weak argument that had been dropped shortly before trial.

Males LJ therefore concluded that ‘for the reasons which she explained with clarity in her admirable judgment, the judge was entitled to make the costs order which she made’ and dismissed the appeal. Lady justices Laing and Asplin agreed.  

However, before doing so, both Males LJ and Asplin LJ felt it necessary to express their strong disapproval of the parties’ refusal to mediate, on the basis that it would have been ‘an expensive waste of time’. On the contrary, they both considered that the claim would have been ‘ideally suited to mediation’, which would have avoided damaging the defendants’ reputations and the significant stress and expense of a lengthy trial. Asplin LJ warned that ‘in future, both parties and their advisers should approach the possibility of mediation in a more positive light’.

Conclusion

This claim is a salutary reminder that there will be severe costs consequences for parties who pursue a dishonest claim and/or unreasonably refuse to consider settlement offers or mediation.

John McElroy is a partner at Hausfeld and executive committee member of the London Solicitors Litigation Association; Faye Moore is counsel at Hausfeld and a member of the LSLA