Stubbins Marketing Ltd & Ors v Rayner Essex LLP & Anor and the dangers of unjustified allegations within a Letter of Claim
The First Claimant runs a fruit and vegetable business owned by members of two families, of which the remaining 7 Claimants are members of these families. The First Defendant was the accountant, auditor and business advisor for the First Defendant.
During a transaction on 1 April 2016, the First Claimant sold off most of its business and assets to two companies, SFP and SGP. It was intended that after the transactions had completed, the First Claimant’s business would largely consist of leasing two valuable nurseries to SFP and SGP. A claim was issued against SFP and SGP and 3 of the then directors of the First Claimant alleging that the transaction had not been properly authorised in accordance with Section 190 of the Companies Act 2006 and the parties issued against were liable to indemnify the First Claimant against any loss or damage suffered as a result of the transaction. A trial was heard in November and December 2019 where ultimately, the Court ruled in favour of the First Claimant. The Defendants in this dispute were not parties in this claim however, they did provide evidence for the Defendants.
A letter of claim was sent to the Defendants on 30 June 2021 which set out various serious allegations, including deceit, dishonest assistance and unlawful means conspiracy. These allegations were also included within the draft claim form but were deleted prior to service on 20 April 2022.
The First Defendant made an application on 20 December 2022 for costs of responding to the Letter of Claim of 30 June 2021 on the indemnity basis due to the allegations being baseless and abandoned when challenged. The First Defendant also argued in the alternative that by not advancing the claims against the First Defendant, the Claimants have effectively discontinued that part of the claim and therefore, the First Defendant should be entitled to their costs as per CPR 38.6 on the indemnity basis.
The First Defendant was of the view that the Claimants should pay the costs that have been incurred in having to deal with the allegations eventually abandoned within the Amended Claim form. It was estimated that RPC for the First Defendant had incurred around £273,000 dealing with the abandoned allegations.
The Claimants view
The Claimants provided four primary submissions opposing the application. Firstly, they suggested that pre-action costs are not recoverable by Rayner Essex in principle. Secondly, the amendment of a claim form cannot constitute the discontinuance of an element of the claim. Thirdly, they suggested that even if it might be right that the Court has the jurisdiction to order the Claimants pay costs in relation to the letter of claim, the question to use jurisdiction should not be determined now and finally, even if the Claimants are liable for costs on a discontinuance, then CPR 38.6(2)(b) should be followed, which states that the costs the Claimants are liable to pay must not be assessed until the end of the proceedings.
The findings of Deputy Master Nurse
Deputy Master Nurse considered points raised by the Claimants and, in relation to jurisdiction, considered Galazi and found there was nothing that would require the Deputy Master Nurse to not determine the issues raised in this application, so therefore decided that they can and should hear
the application now and not adjourn to the trial judge. Deputy Master Nurse also considered that pre-action costs are also recoverable as the claim had been issued, meaning the proceedings have commenced and a party to those proceedings becomes immediately liable to pay costs of another party to those proceedings and a consequence of issuing the claim form is the potential for liability to pay such costs as are usually recoverable as pre-action costs.
In relation to the amendment of the unserved claim form constituting a discontinuance, Deputy Master Nurse considered that the facts of the case and was entirely satisfied that while not strictly speaking a formal discontinuance, it should be treated as such. Deputy Master Nurse confirmed he should exercise his discretion under Section 51 of the 1981 Senior Courts Act to produce the same consequences as if there had been a formal Notice of Discontinuance. The Deputy Master agreed that the First Defendant should have its costs of and occasioned by the discontinued claimed.
The Deputy Master then considered the form of the Order. The Deputy Master was unable to find any evidence in support of the allegations made and was unable to locate a justifiable explanation for the approach taken by the Claimants. It was also considered that the Claimants would have been aware that the First Defendant would be bound to incur substantial costs responding to the allegations within the Letter of Claim and that had they proceeded with the allegations and lost, there would have be a likelihood that indemnity costs could be awarded against them and if proceedings were not commenced with the allegations of dishonesty and fraud, any costs of the proceedings awarded against them could not include the costs of the First Defendant responding to the allegations. Deputy Master Nurse considered this a case where indemnity costs would be appropriate and made an order as such, to be assessed at the conclusion of the rest of the proceedings.
This case serves as a warning to litigators that including unjustified allegations in the Letter of Claim but not in the final served claim form may result in an adverse costs order. The Court will also take steps to prevent any loopholes in the litigation process that could lead to opposing parties being forced to incur costs that would otherwise be considered unrecoverable.
This prevents Claimants from removing unfounded allegations from their pleadings to avoid cost implications, as this could result in the same outcome as if the allegations remained and were defeated at trial, i.e. an Order for costs on an indemnity basis.