Malhotra Leisure Limited v Aviva Insurance Limited [2025] EWHC 2901 (Comm)

[2025] EWHC 2901 (Comm)Case No LM-2021-00020
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT
Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A 1NLDate 07/11/2025
Before
Nigel Cooper KC
Between
MALHOTRA LEISURE LIMITEDClaimantAVIVA INSURANCE LIMITEDDefendant
RICHARD WALLER KC AND MICHAEL RYAN (instructed by Clarke Mairs LLP) for ClaimantBEN ELKINGTON KC AND NICHOLAS BROOMFIELD (instructed by Clyde & Co.) for DefendantHearing Hearing date: 10 July 2025
Approved JudgmentThis judgment was handed down remotely at 10.30am on 6 November 2025 by circulation tothe parties or their representatives by e-mail and by release to the National Archives.
MR NIGEL COOPER KCMr. Nigel Cooper KC:

Introduction

[1]This is my judgment on certain consequential matters arising following the judgment in this action, which I handed down on 07 May 2025 (“the Judgment”). The matters in dispute between the parties are: i) Whether the Defendant should pay the Claimant’s costs of these proceedings on an indemnity or standard basis; ii) Who should bear the costs of an application for specific disclosure issued by the Defendant on 07 March 2023; and iii) What quantum of payment on account should be ordered.[2]In their skeleton argument for the hearing, the Claimant also asked the Court to give indications to certain matters in which it is appropriate for recoverable costs to exceed the costs budgets. However, the Claimant did not pursue this request at the hearing.

The Basis of Assessment of the Claimant’s costs

[3]The Defendant accepts that it must pay the Claimant’s costs of the action (subject to the issue of the costs of the specific disclosure application). The Claimant contends that those costs should be paid on an indemnity basis while the Defendant submits that they should pay the costs on the standard basis. As became apparent during the course of the oral hearing, the principal consequence of an order that the costs should be paid on an indemnity basis is that it would enable the Claimant to seek to recover costs in excess of the sums allowed in the approved costs budget in circumstances where the total of the Claimant’s approved budgeted costs is £546,730.50 and the Claimant claims to have incurred costs of £1,202,957.09. In other words, the Claimant’s claimed actual costs spend exceeds the approved budgeted costs by £656,226.59.

The Applicable Legal Principles

[4]The principles applicable to determining whether an order for indemnity costs is appropriate were largely common ground. Nevertheless, I was referred to a number of authorities as providing guidance both as to the applicable principles and as to their application.[5]An order for an assessment on the indemnity basis is a matter of real significance, Excelsior Commercial and Industrial Holdings Ltd v. Salisbury Hannah Aspden and Johnson [2002] EWCA Civ 879 per Woolf LJ at [15]. It is considerably more favourable than an award on the standard basis because: i) it places the onus of showing that costs are unreasonable on the paying party, White Book 2025, paragraph 44.3.5; ii) disapplies the requirement of proportionality; and iii) renders the parties’ approved budgets irrelevant for the purposes of assessment; Lejonvarn v Burgess [2020] 4 WLR 43 per Coulson LJ at [90] – [93], CPR r.3.18(a) and the guidance in the White Book 2025 at paragraph 3.18.1.[6]The starting point in all cases is that costs should be assessed on the standard basis and the burden of proving that costs should be assessed on an indemnity basis lies with the receiving party. In Thakkar v Mican [2024] 1 WLR 4196 at [28] and [29], the Court of Appeal recently rejected submissions that there is a presumption in favour of indemnity costs or that the usual burden of proof is reversed when a defendant makes unsuccessful allegations of fraud or dishonesty. However, the Court went on to say that nevertheless failed allegations of fraud will frequently attract indemnity costs:
“… But nothing that I say … is intended to detract in any way from this statement of the obvious: that because the making of a dishonest claim will very often attract an indemnity costs order against a claimant, a failed allegation of dishonesty will very often lead to the making of an indemnity costs order against the defendant, on the simple basis that ‘what is sauce for the goose is sauce for the gander’: see Tomlinson LJ in Manna v Central Manchester University Hospitals NHS Foundation Trust [2017] 1 Costs LO 89 at para 42. A defendant who makes allegations of this kind therefore runs a very significant risk that, if the allegations fail, indemnity costs will be awarded against them.”
[7]To similar effect is the statement of David Richards J (as he then was) in Clutterbuck v HSBC Plc [2016] 1 Costs LR 13 at [16] cited with approval in Thakkar v Mican at [22] and [29]:
“The general provision in relation to cases in which allegations of fraud are made is that, if they proceed to trial, and if the case fails, then in the ordinary course of events the Claimants will be ordered to pay costs on an indemnity basis. Of course. the court retains complete discretion in the matter and there may well be factors which indicate that notwithstanding the failure of the claim in fraud, indemnity costs are not appropriate.”
[8]David Richards J. went on to say at [17]:
“The underlying rationale of that approach is that the seriousness of allegations of fraud are [sic] such that where they fail they should be marked with an order for indemnity costs because, in effect, the defendant has no choice but to come to court to defend his position.”
[9]There is a certain tension between the proposition that where allegations of fraud are made there is no presumption in favour of indemnity costs and a proposition that the making of failed allegations of fraud will nevertheless ordinarily lead to the making of an order for indemnity costs. However, that tension can be resolved by accepting that allegations of fraud which have failed, while not giving rise to any presumption in favour of an order for indemnity costs, are a significant factor when it comes to determining whether there are circumstances which justify treating a case as being out of the norm so as to attract an order for indemnity costs. In this regard, Tomlinson J. (as he then was) in Three Rivers DC v Bank of England at [8] put the position in the following terms:
“The following circumstances take a case out of the norm and justify an order for indemnity costs, particularly when taken in combination with the fact that a defendant has discontinued at a very late stage in proceedings. (a) Where the claimant advances and aggressively pursues serious and wide-ranging allegations of dishonesty or impropriety over an extended period of time; (b) Where the claimant advances and aggressively pursues such allegations, despite the lack of any foundation in the documentary evidence for those allegations, and maintains the allegations, without apology to the bitter end; …”
[10]More recently in Suez Fortune Investments Ltd v. Talbot Underwriting Ltd [2019] Costs LR 2019, Teare J. made an order for indemnity costs against a bank, which had brought a claim for an indemnity under a war risks policy in respect of the constructive loss of a vessel by piracy. The bank’s claim failed in circumstances where the court found that the Vessel was lost by reason of the wilful misconduct of her owner and not by reason of an insured peril. Teare J. accepted at [11] that for an order for indemnity costs to be appropriate what matters is whether, when one looks at the circumstances of the case as a whole, the case is out of the norm in such a way as to make it just to order costs on the indemnity basis. Teare J. held that an order for indemnity costs was appropriate in all the circumstances because he found at [18] and following: i) The claim was in character a claim which was out of the norm. Even though the bank’s claim was honestly brought, it was based on a fraudulent conspiracy. ii) Even though the claim was out of the norm, it was still necessary to look at the other circumstances of the case to see whether an order for indemnity costs was justified. iii) By the relevant date (May 2016 when the owners’ claim was discontinued), some of the improbabilities in the bank’s case as to the cause of the loss of the vessel must have been reasonably apparent as should the risks associated with continuing the claim. iv) The bank had been ready to argue every point, however, weak. v) Claims such as those made by the bank typically give rise to considerable cost. vi) The bank continued its claim in circumstances where, even allowing for the dangers of hindsight, it should have been apparent that the claim was weak and that there was a real risk of failure. vii) The bank lost on every point of substance and did so for reasons which could have been predicted at the commencement of trial by an objective observer familiar with the case.[11]The Claimant further submits that: i) An additional justification for the approach identified in both Thakkar and in Clutterbuck was that the making of very serious allegations will very often inflict, without more, financial and reputational damage and impose an intolerable strain on the individuals concerned. Justice therefore demands in such circumstances that the party against whom the allegations are made should be able to recover their costs on an indemnity basis where such allegations turn out to be misconceived. ii) The consequence of an order for indemnity costs is not a penal sanction but results generally in an enhanced percentage recovery of the costs which the wrongly accused party has been forced to incur in order to defend and vindicate itself. This is, of course, all the more so in a case like the present where the Claimant’s actual costs significantly exceed their budgeted costs.[12]So far as whether an order for indemnity costs is appropriate in circumstances where the allegations of fraud are properly made and pursued, the Claimant relies on the following passage from the judgment of Zacaroli J. in Farol Holdings v Clydesdale Bank [2024] EWHC 1044 (Ch) at [8] – [9] for the proposition that it is no answer to an application for indemnity costs to say that the allegation was reasonably made or advanced by experienced and responsible counsel. “I accept that the case was advanced by experienced and responsible counsel. I also accept that they adopted a measured approach throughout the trial, and I do not suggest (nor did the defendants) that there was anything improper in the claimants’ legal representatives’ behaviour in pleading and pursuing the claims in deceit. … That is not an answer, however, to the claim for indemnity costs. For reasons which are set out at length in the Judgment, I consider that the allegations of deceit were weak and subject to inherent flaws but were nevertheless pursued to the bitter end.”[13]Teare J. also held, to similar effect, that the bank in Suez Fortune Investments Ltd was entitled to pursue its claim and to argue every point, but it did so in circumstances where its claim was weak and there was a high risk of failure (at [42]).[14]In turn, the Defendant submits that what is required for an order for indemnity costs is conduct which is unreasonable to a high degree. In particular, where a party pursues a claim or relies on a line of defence which is speculative, weak, opportunistic or thin, then that party is taking a high risk and can expect to pay indemnity costs; see Three Rivers District Council v. The Governor and Company of the Bank of England [2006] EWHC 816 (Comm), especially at [25]. The Defendant further submits that a defence (including a fraud defence) supported by credible, lay and expert evidence is not deemed to be speculative, weak, opportunistic or thin simply because it ultimately proves unsuccessful at trial. The Court must be careful not to use hindsight when assessing the strength of an unsuccessful party’s case; see Governors and Company of the Bank of Ireland & Anr v Watts Group Plc [2017] EWHC 2472 (TCC) at [7] – [8].[15]In support of its argument against an award of indemnity costs, the Defendant points out that the insurance industry is plagued with fraudulent claims and the financial pressures facing businesses both during and following the lockdowns imposed by the UK government in response to the Covid-19 pandemic only exacerbated the problem. The Defendant submits that insurers have a duty to challenge insurance claims which appear disingenuous (in whole or in part). If insurers fail to do so and fraudulent claims go unchallenged then this adversely impacts upon premiums across the industry and all policy holders suffer.

Is an order for indemnity costs appropriate in this case?

[16]In deciding whether an order for indemnity costs is appropriate, I have kept in mind the danger of being influenced by hindsight. I have also kept in mind the difficulties insurers face with fraudulent claims although these difficulties must be counter-balanced by the financial and reputational risks to an insured if allegations of dishonesty are made, which later prove to be unfounded.[17]Both parties highlighted that the significance of an order for indemnity costs in this case is that it makes it more likely that the Claimant will recover a greater proportion of its unbudgeted costs. This is because if no order for indemnity costs is made, the Claimant will have to show good reason why it should recover more than its approved budgeted costs; CPR r.3.18(b). If an order for indemnity costs is made, then the approved budget becomes irrelevant; see White Book 2025 at 3.18.1 and Lejonvarn v Burgess [2020] 4 WLR 43 per Coulson LJ at [90] – [93]. However, I do not consider the effect of an order for indemnity costs on costs management to be a relevant circumstance, at least in the context of this case, for the purposes of deciding whether or not to make an order for indemnity costs.[18]I do consider it appropriate to make an order for indemnity costs for the following reasons.[19]First, the allegations of dishonesty made by the Defendant both in relation to the escape of water and in relation to statements made on behalf of the Claimant during the Defendant’s investigation of the escape are a circumstance, which takes this case out of the norm as Tomlinson J. recognised in The Three Rivers case and as Teare J. recognised in the Suez Fortune Investments Ltd case.[20]Second, the allegations of dishonesty made by the Defendant are at the highest level of seriousness, namely that Mr. Meenu Malhotra, Mr. Atul Malhotra and Mr. Vadheera had entered into a fraudulent conspiracy to damage the Claimant’s own property and thereafter defraud the Defendant of a payment. Allied to these allegations were necessary further allegations that each of these individuals had lied to the Defendant during the Defendant’s investigation of the loss and also lied to this court in their evidence.[21]Third, the witness statements of Mr. Banning and Mr. Hilder demonstrate that the Claimant has suffered financially because of the Claimant’s allegations of dishonesty and that both Mr. Meenu Malhotra and Mr. Atul Malhotra have suffered reputational harm and that the Malhotra Group’s cost of insurance has significantly increased in the period that the allegations were pending. Mr. Meenu Malhotra has been unable to obtain bank financing for developments in India and both Mr. Meenu Malhotra and Mr. Atul Malhotra have suffered in respect of their health and their business and social relations.[22]Fourth, the allegations of dishonesty made by the Defendant were pursued through to the end of trial without the opportunity for settlement discussions being pursued.[23]Fifth, the serious risks associated with the Defendant’s allegations of dishonesty were or should reasonably have been apparent from when they were first raised. In this regard: i) There was no direct evidence to support the Defendant’s case that the flood had been directly induced. ii) The Defendant’s case depended on the court accepting that inferences of dishonesty should be drawn from the circumstances in which the escape of water occurred and from the Claimant’s financial position at the time of the escape. In particular, it was a central part of the Defendant’s case that a fortuitous escape of water was implausible. However: a) The Defendant’s expert, Mr. Knak, initially considered that the escape was fortuitous. b) As Mr. Knak accepted in cross-examination, it was plausible in respect of each of the three elements, which needed to fail for the escape to be fortuitous, that they had each failed fortuitously. c) There was physical evidence, which was consistent with Tank 18 overspilling, while none of the deliberate mechanisms put forward by the Defendant involved the tank overspilling. d) None of the individual dishonest mechanisms were put to the Claimant’s witnesses in cross-examination. iii) The pleaded motive for the dishonesty was financial. But the evidence provided no good evidential foundation to establish this motive; see the judgment at [232], [248] to [250]. In particular, it remained unclear at trial how the alleged fraud was to alleviate any financial pressure on the Claimant in circumstances where any recovery by the Claimant would be an indemnity in respect of the repair costs for the damage to the hotel. Further, the Defendant had available to it at an early stage the public audited accounts of the Malhotra Group and a screening report from its agent, Sedgwick, which concluded, inter alia, that the Malhotra Group was both profitable and solvent and that the Claimant exhibited no signs of financial stress or pressure. In other words, the weakness of the Defendant’s case on financial motive was not something which was only apparent with hindsight but could be seen from an early stage of the litigation. iv) In relation to the Defendant’s case on false statements, the case that each of Mr. Meenu Malhotra, Mr. Atul Malhotra and Mr. Vadhera had lied during the Defendant’s investigation of the escape of water was predicated on the Defendant being right that the escape was deliberate. The alleged false statements did not, therefore, offer an independent basis upon which to infer that serious criminality had occurred.[24]Sixth, the Defendant’s case on motive evolved at trial with a new case being put forward based on the presence of asbestos in the Hotel and the alleged aim of constructing a sports bar. Neither aspect of this case on motive was pleaded in circumstances where it should have been. Both aspects of the Defendant’s new case required the preparation of a supplemental witness statement from Mr. Atul Malhotra and a supplemental written opening from the Claimant and both aspects failed.[25]Seventh, the Defendant pursued an allegation that Mr. Meenu Malhotra was not in fact celebrating his 60th birthday on the night of 11 July 2020. The Claimant provided extensive disclosure on this issue in August 2021 and by way of extended disclosure in August 2022. The allegation was, however, only dropped some three weeks before trial after the Claimant had procured witness statements from 10 individuals to address this issue and obtain witness summons for those individuals to attend.[26]As I record in the judgment, there was evidence which supported the possibility that the escape of water was caused deliberately (see, for example, the judgment at [142] to [146]) and there were reasons to be careful about accepting the evidence of Mr. Meenu Malhotra, Mr. Atul Malhotra and Mr. Vadhera where it was not supported by contemporaneous documents (see the judgment at [115], [120] and [127]). The Defendant’s case was also supported by the expert evidence of Mr. Knak, whose evidence I found helpful in determining what was the cause of the escape of water (see the judgment at [136] to [142]).[27]Further, I accept, as did Zacaroli J. in the Farol Holdings case and as did Teare J. in the Suez Fortune Investments Ltd case, that the Defendant’s allegations were properly pleaded and pursued in an appropriate way by the Defendant and those representing it.[28]But, as set out in paragraphs 23 to 25 above and in the judgment (see, in particular, the discussion at [286] to [296]), there were obvious difficulties with the Defendant’s allegations of dishonesty such that the Defendant would or should have recognised that there was at least a serious risk that its case on dishonesty would fail and that as a consequence there was a significant risk that an order for indemnity costs would be made. Despite these difficulties, the Defendant was determined to pursue this case through to trial, as was apparent from the oral submissions made by Mr. Elkington KC on behalf of the Defendant.[29]Further, the potential consequences for the Claimant of the Defendant’s allegations were also ones which were reasonably foreseeable to the Defendant; a point emphasised by the letter from the Defendant’s then solicitors to the Claimant dated 05 March 2021.[30]This is not to start from any presumption that an order for indemnity costs is always appropriate. It is a recognition, however, that the making of allegations of fraud, whether by a claimant or by a defendant, is a circumstance which can take a case out of the norm and where the allegations are pursued aggressively over an extended period of time, as they were in this case, then an order for indemnity costs is likely to be made; see the Three Rivers case at [25](8). In this case, I am satisfied that looking at the circumstances of the case overall an order for indemnity costs is appropriate.

Costs of the Specific Disclosure Application

[31]On 07 March 2023, the Defendant issued a disclosure application (“the Disclosure Application”) in which it sought disclosure of 4 discrete categories of documents (“the Additional Documents”) on alternative bases that(a) the Additional Documents should have been disclosed in accordance with the DRD and(b) Section 1B of the DRD be varied to include the Additional Documents.[32]The Disclosure Application was compromised two days before the hearing on terms which required the Claimant to provide the majority of the Additional Documents (“the Disclosure Order”), but the costs of the Disclosure Application were reserved to the conclusion of the trial.[33]In very broad summary: i) The Defendant’s position is that it is entitled to its costs of the disclosure application because as a result of the compromise reached with the Claimant, the Claimant agreed to provide and did provide the majority of the documents sought. Further, the Claimant only provided those documents because the Defendant issued the Disclosure Application. ii) The Claimant’s position is that the Defendant’s criticisms of the Claimant’s disclosure process are unfounded and that the Defendant was seeking to obtain further extensive disclosure which it had not sought at the time the DRD was agreed. The Claimant reasonably agreed to conduct further disclosure searches in order to avoid a hearing and further discussions then took place between solicitors which refined these search terms such that the disclosure ultimately agreed to and undertaken was materially narrower to that initially sought by the Defendant. The Claimant also submitted that ultimately the disclosure did not assist the Defendant in defending the claim.[34]The inevitable difficulty that I am faced with is that I am being asked to second-guess what would have happened if a contested disclosure application had been heard and whether the documents originally sought or a sufficient sub-set would have been deemed relevant and disclosable such that the Defendant was entitled to its costs of the application. That is not an exercise which I can now easily undertake nor is it an exercise which it seems to me it is fruitful to undertake in circumstances where the parties did cooperate to resolve the application. I consider that the fair order in all the circumstances is that there should be no order as to the costs of the Disclosure Application so that each party bears their own costs of that application.

Payment on Account

[35]The parties are agreed that: i) If I were to make an order for the assessment of the Claimant’s costs on the standard basis, then an appropriate payment on account is £475,000. ii) If I were to make an order for the assessment of the Claimant’s costs on the indemnity basis then an appropriate payment on account is £660,000.[36]It follows that, as I consider that an order for the assessment of the Claimant’s costs on an indemnity basis is appropriate, the appropriate payment on account is £660,000.[37]Given my decision that there should be no order as to the costs of the Disclosure Application, the sum of £660,000 does not need to be adjusted to take account of the costs of the Disclosure Application.

Conclusion

[38]For all the above reasons I order that: i) The Defendant shall pay the Claimant’s costs of these proceedings, to be assessed forthwith on the indemnity basis if not agreed. ii) There shall be no order as to the costs of the Disclosure Application such that each party is to bear their own costs of that application. iii) The Defendant shall pay the Claimant the sum of £660,000 on account of the costs ordered to be paid by sub-paragraph (i) above within 21 days of the date of the court’s order.[39]If the parties can provide a final version of draft order which is in the hearing bundle with any corrections to this judgment, I will approve the order for handing down with the judgment.