Brit Inns Ltd v. BDW Trading Ltd is an illustrative example of where litigation (and in this case, a subrogated claim) can go wrong. Indeed, the judge said “[t]his litigation has gone wrong for everybody.” It does, though, have important aspects that can improve Claimants and Defendants approaches to subrogation claims.
A contractor caused flooding to a basement of a bar and restaurant during the course of their development work. The repairs to the basement and the subsequent losses that arose due to the closure of the business were handled by the insurers for the bar and restaurant. The claimants brought a subrogated claim for losses arising out of the defendant’s defective work. This comprised of the insurers’ claim of £660,000 and an uninsured claim, mainly loss of rent and profit, for £522,000. At an early stage liability was admitted. So far so good….
However, the claimant became unstuck when it became apparent that the loss adjusters had failed to correctly adjust the claim. The subrogated claim came under intense scrutiny and quantum could not be settled between the parties leading to a (costly) 6 day trial.
Damages – The Result
In relation to the material damage claim, the court said that where works had been completed by the time of the trial, the actual costs would almost always be the starting point of any assessment of the reasonable costs of reinstatement. In addition, where the scope of the works and their costs had been the subject of scrutiny by a third party, such as a loss adjuster, with a clear incentive to ensure that the sums paid had been kept to a minimum, the court would likely attach significant weight to the reasonableness of the sums paid out. In the instant case, however, the claim for the costs of the reinstatement works had been wholly exaggerated. It was found that invoices presented in support of the costs were unreliable, inadequate and impossible to analyze retrospectively and there was a lack of evidence of payment and checks by insurers that the work had been carried out. Indeed, at trial the adjuster conceded that there were items and invoices he had accepted but which should not have been paid! The inadequacies were such that the judge said they were “too numerous to identify comprehensively”. The Court also rejected the basis for the insurer’s assessment of the loss of profits claim, which was based on a competitor’s business, even though actual profit and loss figures were available upon which a reasonable adjustment could have been made.
The insurer, under the insured’s name, claimed about £660,000. The Court awarded just £157,467 (or 26%).
The insured claimed £522,000 as uninsured losses. The Court awarded a meager £16,403 (or 3%).
Costs – The Result
During the litigation the parties made several settlement offers. The judge endorsed the Court of Appeal’s statement in Fox v Foundation Piling Ltd that a defendant cannot expect to secure costs protection unless it makes a sufficient Part 36 offer (see author’s blog of 19 July 2011 for understanding of Part 36). As such, although the defendant had made a Part 36 offer it was not high enough to provide costs protection. For this reason, the judge awarded the Claimants their costs up until 30 May 2012, but deprived them of 40 percent of those costs because of their conduct in the claim: excluding all costs incurred in connection with the Claimants’ experts whose evidence was fundamentally flawed from the outset. As for the costs from 30 May 2012, essentially all the costs of the trial, the judge ordered the Claimants to pay the Defendant’s costs in full for the period of the trial. Furthermore, the Claimants had a smaller claim for the uninsured losses which amounted to about 10% of the total claimed. In relation to this claim the judge ordered that the Claimants pay 90% of the Defendant’s costs. In short, the Court found that it was the Claimants’ unreasonable conduct and unrealistic expectations that caused the matter to proceed to trial.
The case therefore serves as a warning that winning is not everything. In this case the Claimants spent substantially more in costs that the Defendant even had to pay them in damages. Winning on liability does not always guarantee an award of costs, even in a “loser pays” regime: the Courts will carefully consider the conduct of the parties when awarding costs.
Had the Claimant properly adjusted the loss, made a claim for a realistic figure, made a sensible offer early on and engaged with the Defendant properly, it is likely they would have recovered the majority of their costs. This case therefore serves as a reminder of the need to take early reputable advice on the merits of your claims, on both liability and damages.