Case No: B2/2001/1753
Neutral Citation Number:  [2003] EWCA Civ 904
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM SHEFFIELD COUNTY COURT
(HIS HONOUR JUDGE MOORE)
Royal Courts of Justice
Strand, London, WC2A 2LL

Thursday 3 July 2003

Before :

LORD JUSTICE POTTER
LORD JUSTICE CHADWICK
and 
MR JUSTICE CRESSWELL
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Between :

	BOYNTON & ANR	Appellant	
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	WILLERS	Respondent	

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Mr Robert C Smith (instructed by Peel & Co) for the appellants
Mr Jonathan Klein (instructed by Messrs Keeble Hawson) for the respondent

Hearing date : 12 June 2003
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JUDGMENT : APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

Lord Justice Potter: 
1.	This is an appeal by the defendants, Mr and Mrs Boynton, against the judgment and order of His Honour Judge Moore in the Sheffield County Court in respect of a claim brought by the claimant, a builder and their neighbour, in respect of building works carried by the claimant for the defendants at their home at Riverdale, Low Bradfield, Sheffield.  The defendants denied liability in the amount claimed and they counter-claimed in respect of various items of allegedly defective workmanship and for damages for inconvenience during the extended period of the contract work and the carrying out of works of rectification by other builders.
2.	The trial lasted for 10 days.  There were numerous issues, involving detailed evidence and examination in relation to a number of comparatively small items with which we are not concerned on this appeal, save to express concern at the amount of the costs involved in resolving a relatively small monetary claim on both sides.  For present purposes it is sufficient to state that in the Case Summary signed by the solicitors for the parties on 8 May 2001 pursuant to an earlier order of the court, it was set out that:
“It is common ground that each item of the Works, and its price, falls into 1 of 2 distinct categories:
•	Quoted Works, with a fixed price of £53, 460 under a Quotation dated 20 July 1991 … or 
•	Additional Works, the price of which is set out in an Advisory Note dated 26 March 2001 …
The Claimant’s principal claim is for £20, 086.05, being the net balance … of:
(a)  the Quoted Works + the Additional Works, less
(b)  the Defendants’ interim payments + an agreed credit, plus
(c)  VAT on the balance of (a) minus (b).
The defendants deny they are liable in respect of the above, and have a principal counterclaim for £45, 726.49 for remedial work (either executed or pending – “the Remedial Work”) by other contractors, which they  claim is necessary following the claimant’s failure to carry out various of the Works properly …
The issues between the parties are:
1.	Does the Quoted Works price include VAT?
2.	Did the Claimant carry out all of the Works in a proper manner (see Bundles C and D throughout, but especially the experts’ agreed Schedule of Issues at Bundle D, pages 96-110)?
3.	If not, what Remedial Work was/is necessary … ?
4.	If so, what sums may the Defendants recover … ?
5.	Was there an agreement between the parties as to the time for completion of the Works … ?
6.	If so, did the Claimant breach it, and what (if any) damages may the Defendants recover in this regard?”
3.	In the event, the judge decided that the Quoted Works price did not include VAT, a good deal of time having been spent on resolving that issue.  He decided that the claimant had carried out various items of the works in a defective manner and that the amount due to the appellants under their counter-claim for the necessary works of rectification, was in round figures £11,850, plus an award of general damages for inconvenience in the sum of £500.  He found that the total of the claim, after interim payments made were taken into account, was £16,260.  He gave judgment for the claimant on the claim and counterclaim together in the amount of the balance due to the claimant, namely £3910, plus interest of £1281.  He ordered that the defendants pay the claimants’ costs of the action to be assessed (if not agreed) on the standard basis to 15 May 2001 inclusive and thereafter on an indemnity basis with £10,000 to be paid on account.
4.	Following the judgment, the defendants applied to the judge for permission to appeal in respect of three matters, which permission was refused by the judge but later granted upon application to this court by Brooke LJ.
5.	The first ground concerns the building and installing of two bay windows in the appellant’s house.  The judge held that the cost of that work was not included in the original contract price quoted by the respondent.  Although the respondent had built and installed the defective bay windows, he had not invoiced or otherwise charged for them as ‘extras’.  In those circumstances, the judge limited the measure of the appellants’ damage in respect of the cost of the works of rectification to “the extra cost of getting things redone and carrying out other works like redecorating”, which he assessed at £500 + VAT.  He refused to award the sum of about £3,600 which would have been the cost of rebuilding and replacing the windows to the specification appearing in the original quotation.  
6.	It is the appellants’ case that the judge erred in that respect and that the work in respect of the bay windows was included within the original quoted works for the fixed price of £53,460 and thus that the judge should have awarded the sum of about £3,600. 
7.	The second ground of appeal is that the judge’s assessment of general damages for distress and inconvenience caused by the defective and remedial works was so low as to be outside the normal band or level of award in such cases.  
8.	The third ground of appeal is that the judge’s decision to set off the damages awarded on the counterclaim against the sums claimed, and thereafter to award the costs of the entire action to the respondent was, in the circumstances of the case, wrong and unfair.  
The Bay Windows
9.	The position in relation to the bay windows was as follows.  By his Quotation of 20 July 1991 the claimant offered to carry out the works listed at the prices quoted which totalled £53,460, (plus various provisional cost items). In particular he offered to:
“1.	Construct as per drawings the three new sections to existing building to receive new roof.
[Items 2 and 3 related to the roofing works and are therefore not quoted.]
4.	Supply and fit meadowstone heads and sills to all windows, complete with copings to roof … £1,880.00
5.	Supply and fit John Carr windows as per drawing … £2830.00
6.	Supply and fit D/Glazing to above windows … £2,100.00.”
10.	The drawings referred to in item 1 were two detailed scale drawings dated 29 March 1991 which had earlier been submitted to and approved by the Peak Park Planning Board.  The first drawing showed the various elevations of the house.  It depicted on the north east elevation the two bay windows concerned.  
11.	It is important at this point to note that the second drawing which showed the construction works in plan depicted the construction of new external walls in four discrete sections, one section on each elevation of the house.  On the N.W., S.W. and S.E. elevations, the external walls to be constructed were up to roof level and were those referred in item 1 of the Quotation.  The building of the bay walls supporting the bay windows at ground floor level and the roofs to the bays were not itemised or referred to anywhere in the Quotation in which no reference to “bays” or “bay windows” (as opposed to “windows” generally – see items 4, 5 and 6) appeared at all.
12.	It was not in issue that the appellants accepted the Quotation and the work proceeded on that basis.  The case was conducted on the basis of a Scott Schedule which set out the items and amounts in issue between the parties in conventional form with completed columns containing the defendants’ and claimants’ comments and with columns also for “Amount admitted by defendants” and “Amount at issue” also completed by the parties.  The Bay Windows item appeared at item 9 of the Scott Schedule in respect of the counterclaim under the description “Front Bay Windows and Stonework around”.  The defendants’ Comments were “Did not fit.  Finish very poor.  Had to be dismantled and rebuilt.”  The remedial cost claimed was shown at £5,489.12.  The claimant’s Comments related to the quality of the work, no reservation being recorded to the effect that the claimant had not been obliged to carry out the work under the contract.  Nor had any such point been pleaded in the Defence to Counterclaim.
13.	Nonetheless, the claimant stated at paragraph 16 of his witness statement:
“At the date of the Quotation the defendants told me that, although they wanted bays, they could not make up their minds on their appearance.  I therefore omitted bays from the Quotation with the intention of picking them up later.  In the event however, I did not actually do so.  The defendants therefore received their bay windows for nothing.”
14.	It was also made clear to us in the course of the appeal that this point was maintained by the claimant in his version of the Scott Schedule originally prepared by his advisors, but was (no doubt by oversight) omitted from the defendants’ composite version subsequently prepared by their advisors and used at the trial.  Certainly it is clear that the claimant advanced that case in his evidence at the trial without objection.  He confirmed orally that he did not quote for the bays in the quotation and forgot to price them in the extras (see page 13 of the judgment).  He was cross-examined in relation to that evidence by Mr Smith who appeared for the defendants below as well as in this court.  
15.	Following the close of the evidence and prior to the speeches of counsel, with a view to the saving of time, the judge offered to state to the parties his preliminary conclusions on most of the outstanding matters so that each could be aware of the areas in which he had to work hard in closing submissions.  Both counsel indicated that they were agreeable to that course.  The judge then dealt with the matter briefly under various headings his only reference to the bays or bay windows being as follows:
“I think the defendants will win on the stone, that is both on the bay windows and the extension.”
16.	In the light of that observation, Mr Smith did not address the bay windows item in his final submissions save as to the reasonableness of the remedial charges claimed.  He saw no reason to address the question of whether or not the construction of the bays and installation of the bay windows were included in the original quotation.  
17.	Mr Smith has explained to us, and we do not doubt, that his reasons for not addressing that issue were that the judge’s provisional indication to which I have alluded indicated that he was in the defendants’ favour not simply upon the much argued question as to whether the stonework installed on the bay windows and extension were a suitable match to the existing stonework, but on the contractual issue raised in the claimant’s evidence.  Furthermore, it was Mr Smith’s view that the terms of the fixed price Quotation read in conjunction with the drawings included construction of the bay windows and that he had obtained answers from the claimant in cross-examination which effectively accepted that position.  
18.	However, following Mr Smith’s submissions, Mr Klein for the claimant, in the course of his final address, submitted that the judge should accept the evidence of the claimant that the work of constructing the bays and bay windows was not covered by the original Quotation.  At the end of Mr Klein’s submissions Mr Smith reminded the judge of an earlier indication that he would be entitled to reply on any matters he had previously left aside in the light of the judge’s provisionally stated conclusions.  He then referred to an item relating to a pathway in order to ascertain whether the judge had changed his view since giving an original indication in favour of the defendants.  The judge said he had not and permitted Mr Klein to address him briefly in that respect in case he had not appreciated the effect of the judge’s invitation.  The question of liability for the bay windows was not however raised by Mr Smith.  Again, he has told us that he did not do so because of his clear view that the Quotation was definitive as to the claimant’s obligation to construct the bay windows within the fixed price of the Quotation and that the claimant’s evidence was insufficient to avoid that position.
19.	Mr Smith was thus somewhat dismayed when the judge, in proceeding through the items of counterclaim, stated in respect of item 9, i.e. the bay windows, as follows:
“The front window bays was not an item ever costed by the Claimant, either in his estimate or his bill for extras.  He overlooked it.  I find that the quality of the work done does not justify an addition to the contract price as an extra, and the work done should be rejected.
The Defendants thus have a free hand as to the works and, in fact, they chose to have the bays redone.  The damages for breach of contract comprise of the extra cost of getting things redone and carrying out other works like redecorating.  The full cost and the details of the specification are shown in Bundle C, page 110, and in the photographs at pages C87 and 88.  They chose a much higher specification, and it cost £4671 + VAT in ’94 – not a lot higher, I find, in terms of prices from 1992/93 but on Mr Robinson’s evidence, over £1,100 due to higher specification. 
Doing the best I can to assess the value of the extra work required in repeating the same job when everything else is completed, I assess damages for Item 9 at £500 + VAT, which includes Mr Robinson’s estimate of £100 for the internal decoration.”
20.	Following the delivery of the judgment, Mr Smith asked for clarification of the judge’s finding in respect of the bay windows and the following exchange took place:
“MR SMITH:  Your Honour has indicated that … the claimant did not put a price in for that [i.e. the bay windows]. 
JUDGE MOORE:  He did not put the price in for it.  It was not therefore included in the pricing.  It is rejected because of the quality of the work.  So it stands as an item that he cannot actually claim for.  
MR SMITH:  Your Honour, it is whether your Honour finds as a fact it was part of the original contract works that he should have included in the price given at Item 1.
…
JUDGE MOORE:  … if you want me to find on that, I certainly will find on that.  To avoid any doubt, the finding on that will be, and I will express it if you want me to after lunch, … it was not on the original contract, because at the time when they were discussing the original contract they had not decided the final … ”
21.	At that point (when he was plainly about to refer to the evidence of the claimant at paragraph 16 of his witness statement), the judge was interrupted by Mr Smith who said that he did not ask the judge to go further.  However the judge added:
“And, indeed, you see that going through the items on the original specification, the bay windows just are not referred to.”
22.	Following the midday adjournment at that point, Mr Smith invited the judge, to deal specifically with the question and he did so in the following terms which he expressed “by way of addendum to the judgment”:
“The item concerning the bay windows arose thus: the matter was in the counterclaim, and it was quite soon part of the agreed evidence in the case, that the bay windows had never in fact been incorporated in any of the invoices from the claimant, that is to say they were not part of the estimate in 1991.  Notwithstanding that there were other references to “design of windows”, “construction of bay windows” particularly was not part of the estimate.
When it came to extras which were itemised, again there were references to all sorts of other building work, but not specifically to the bay windows.  The experts agree that the bay windows had in fact neither been estimated for nor charged for.  
On the evidence which I found, the bay windows were in fact defective, and had they been charged, they would have been rejected [as] in breach of contract.  Because they were in fact not charged, the defendants have never been under any obligation to pay for those, in other words, they are not a contractual item, and the defendants can therefore do what they want with the bay windows, which they did.
Nevertheless, because the work was carried out defectively, there is a charging item to the defendants, because they have to pay, or they would have had to have paid to put the state of the building in exactly the same state as it was before the original bay windows were removed by the claimant.  It is that extra cost (the cost of doing the job again once everything else has been dealt with) that is the item of damages, and that is the item which I have assessed which is set out in the judgment and the schedule.”
23.	There then followed a dialogue between Mr Smith and the judge arising out of the judge’s observation that it was part of the agreed evidence in the case that the bay windows were not part of the estimate in 1991.  The judge reiterated his view that it was agreed on all sides that the bay windows were not quoted for and did not feature in the estimate.  Mr Smith recorded that his understanding of the evidence was that there had never been an agreement to that effect either in evidence or by the experts, the matter resting upon the defendants’ case that as a matter of construction the wording of the Quotation included the provision of the bay windows.  In the dialogue which followed, Mr Smith indicated that he had not addressed the judge on the issue of contractual construction because of the judge’s indication to which I have referred.  The judge then asked Mr Klein what he wished to say.  Mr Klein stated his understanding that the judge had already found as a fact that it was expressly agreed between the parties that the bay windows would be left out of the original Quotation until the defendants decided what they wanted to do and that, if the judge had made that finding, then it should stand and that for Mr Smith to suggest that he was not given a proper opportunity to reply was incorrect.  The judge indicated his agreement with that position and the matter was left there.  
24.	Upon this appeal, Mr Smith submits that the judge was in error in treating the construction of the bays and installation of the bay windows as excluded from the contract.  Shortly, he puts the matter as one of construction in this way.  He says that, taken together, items 4, 5 and 6 of the Quotation contemplate a situation where all the windows appearing on the drawings are to be the subject of supply and fitting with meadowstone heads and sills (item 4), John Carr windows (item 5) and double glazing (item 6).  While obliged to acknowledge that item 1 of the Quotation does not refer to the construction of the bays, which are indeed nowhere referred to in the Quotation, he argues that it is implicit in the references to “all” windows (item 4) and windows “as per drawing” (item 5), which drawing shows the bay windows, that construction of the bays within the total of the contract price quoted was contemplated.  Against the background that the defendants (as is not disputed) were anxious to keep the cost to a minimum and to obtain a fixed price estimate for the works to be done, the Quotation should be so construed.  If that is so, then the fact that (as the judge stated in his judgment) the claimant “overlooked” costing the bay windows in his estimate (see paragraph 19 above) cannot assist him.  
25.	I accept that, if Mr Smith were correct in his construction argument, it would follow that a mere oversight by the claimant in drafting the terms of his Quotation would not absolve him from the obligation to build the bays under its terms.  However I do not consider that Mr Smith’s submission is correct.  The fact that the building of the bays with their substantial walls and roofs represented a significant and expensive item of building works not covered by item 1, immediately raises an ambiguity as to whether the bays were included.  It does not seem to me that the reference to the supply and fitting of the windows, heads and sills resolves that ambiguity.  That being so, oral evidence as to what was or was not intended to be included in the quotation in that respect was admissible and susceptible to a finding by the judge as to the common intention of the parties at the time.
26.	In the event, it is clear to me from the first sentence of the judgment as quoted at paragraph 19 above and from the judge’s (interrupted) observation quoted at paragraph 20, that the judge accepted the evidence of the claimant that the construction of the bay windows was excluded from the Quotation because the defendants had not decided upon the final appearance they required for the bays.  
27.	Mr Smith has sought to avoid that conclusion by pointing to the terms in which the judge delivered the addendum to his judgment, in which he appeared to base his decision on an agreement by the experts that the bay windows had neither been estimated nor charged for.  As Mr Smith rightly pointed out, and Mr Klein conceded, there was no such agreement, the experts being concerned to give evidence as to the pleaded defects and not to deal with the contractual position so far as the bays were concerned.  Mr Smith also condemns as a non sequitur the judge’s observation that, because the bays had not been incorporated in the invoices sent, it followed that they were not part of the estimate.  Whether or not that be so, it is clear that, in response to Mr Klein’s intervention (see paragraph 23 above), the judge confirmed that his finding was that there was express agreement between the parties that the bay windows were not to be included the original Quotation.
28.	Assuming that finding was justified on the evidence (and, despite encouragement to the defendants at the stage leave to appeal was granted, no transcript of the relevant parts of the evidence has been obtained) it sounds the death knell to Mr Smith’s submission upon construction.  Even if the evidence did not justify a finding of actual agreement i.e. a common subjective contractual intention that the bays be excluded from the Quotation, the judge was in my view right to conclude that the absence of any reference to such construction of the bays in the Quotation, viewed against the contractual background, meant that they were indeed excluded.  So far as that background was concerned, the judge found that, in contrast to his view of the defendants, the claimant was in all respects an honest, reasonable and accurate historian.  It was the claimant’s evidence that, at the time the Quotation was given, the parties had not decided upon the precise type or detailing of the bays to be constructed, in which circumstance it is clear that accurate assessment of the costs of the bays would have been impossible.  Given that they were a major item in respect of which the necessity for a quoted price would have been apparent in the interests of both parties, and given that not even a p.c. sum was provided for in the Quotation, the reasonable and businesslike construction of the Quotation was that it did not cover the construction of the bays.  
29.	Accordingly, I would reject the first ground of appeal.
Inconvenience
30.	The defendants counterclaimed for “Substantial distress, inconvenience and disruption resulting from the Plaintiff’s Breach of Contract”.  The claim fell into two parts.  First, in respect of the period of three months by which it was said that the substantial completion of the works exceeded the date agreed for completion of the contract during which the defendants lived uncomfortably in a caravan.  Second, in respect of disruption and distress said to have been caused during the rectification works which were not undertaken immediately and took place piecemeal and at intervals over a considerable period.  
31.	The judge rejected the defendants’ case on delay in completion of the contract works and thus considered an award simply in relation to the second head.  In this respect he said:
“The pleading reasonably encompasses the consequences of the claimant’s breach of contract which necessitated a lot of inconvenience, general upset, dirt and dust whilst works carried on for several years, on and off, longer than was anticipated …
It is clear to me that the defendants, for all their attempts to slide out of their obligations – like the VAT and the new garage wall – were the victims of some substandard work, and this will have caused material inconvenience.  I reject their Counsel’s submission, made without quoting authority, that the damages should be in the region of £5,000.  But, equally, I reject the claimant’s counsel’s submission that the defendants have brought this all on themselves.  I assess general damages for material inconvenience in the sum of £500.”
32.	Mr Smith has accepted in this court that damages awarded under this head are ordinarily modest, but submits that the sum of £500 falls well below even a modest award.  He points out that the judge found for the defendants on a number of issues which involved works of rectification as follows:  work to the floors of two bedrooms and a downstairs wc; work to the kitchen floor; replacement of various internal doors; replacement of the patio door; replastering part of one bedroom; rendering to the exterior of the house except for the front elevation; interior re-decorations and the taking up and relaying of the rear path. 
33.	Upon this appeal he has produced (as he did not produce below) authorities and articles illustrating levels of award made in respect of distress and inconvenience in cases where works of rectification have been necessary either as the result of the negligence of a surveyor or breach of contract by a builder in executing building works.  In particular we have been shown an article by Franklin in the Construction Law Journal of 1992 shortly after the decision in Watts v Morrow [1991] 1 WLR 1421.  Attached to that article is a table of cases cited, in which very brief details are contained as to the period and severity of the inconvenience in respect of which the award was made.  However, all these precede in time the decision in Watts v Morrow in which Bingham LJ stated that, in cases not falling within the exceptional category of contracts whose object is to provided relaxation, peace of mind or freedom from molestation:
“ … damages are in my view recoverable for physical inconveniences and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort.  If those effects are foreseeably suffered during a period when defects are repaired I am prepared to accept that they sound in damages even though the cost of the repairs is not recoverable as such.  But I also agree that awards should be restrained.”
34.	The author of the article summarised the position as being that, whereas in 1988 it could be said that as a rule of thumb an award of £500 per person per annum would be made in respect of substantial inconvenience, it now seemed that the figure had increased only to £750.  
35.	Mr Smith submits that in this case, even assuming no great increase for inflation in the general level of inconvenience awards, the sum should have been far higher than the £500 awarded.  He referred us to only one case concerning damages for inconvenience decided since Watts v Morrow, namely Ezekiel v McDade (CA) [1995] 47 EG 150 in which the Court of Appeal reduced an award of £6,000 to £4,000 for general damages for physical inconvenience and discomfort caused by the defendants’ negligence and for mental suffering directly related to it.  That case was in no way comparable to this, in that as a result of the negligence the plaintiffs were rendered homeless persons living in single room council accommodation for a long period.
36.	At first blush, I found the appellant’s case persuasive that the award in this case should have been substantially higher in respect of inconvenience.  However, having heard the submissions for the respondent I am satisfied that it would be wrong for the court to interfere with the judge’s award in this particular case.  Mr Klein has forcefully made a number of points in this respect.  First, as he submits, the primary case for damages as pursued at court was in respect of a period of three months during which the defendants were inconveniently living in a caravan during the winter before substantial completion of the works.  That aspect of the claim was rejected by the judge.  The secondary claim for disruption and distress due to spasmodic rectification works was headlined in the counterclaim but was not the subject of any chapter and verse in the witness statements presented to the court.  Further, we have not seen any transcript of the defendants’ evidence in relation to the claim for inconvenience.  We are told that it was dealt with orally by the appellant Mrs Boynton rather than her husband, and that the nature of her evidence was less an account of the extent of the inconvenience during identified periods when repairs were carried out, than a general complaint of mental distress at the fact that works had not produced her “dream house” as she had hoped.  Furthermore, the judge specifically found in the course of his judgment (albeit not specifically with reference to the claim for inconvenience) that he was:
“ … quite satisfied that there were distinct and important parts of her evidence which just cannot be relied upon.”
37.	Thus the position before this court is that the evidence of the nature and level of the inconvenience suffered is fragmented and unreliable.  Certainly the evidence as recounted by the judge does not demonstrate prolonged, as opposed to spasmodic, periods of inconvenience over the years following substantial completion of the works.  Equally, it appears that the judge received no assistance at the time by way of citation of authority or close examination of the position.  Similarly, so far as this court is concerned, the level of actual inconvenience involved is based on the impressionistic and unparticularised observations of counsel.  Despite my impression that the judge might well have been more generous in his award, I do not consider that this court has sufficient material, nor would it be appropriate, to interfere with the judge’s undoubtedly low award, in a case where his view of the credibility of those advancing the claim was generally adverse.  
38.	Accordingly, I would reject the second ground of appeal.
Costs
39.	In giving his judgment, the judge made clear, having calculated the amounts due between the parties on claim and counterclaim, that the appropriate form of the judgment was for an order that the defendants pay to the claimant the balance due to him after set-off of the counterclaim against the claim.  Despite the absence of any specific plea of set-off in the defence, on which feature Mr Smith has relied in his argument before us, it was plainly open to the judge to take the course which he did: see Hanak v Green [1958] 2 QB 9 and CPR 40.13(2).  The judge considered that the issues as to the quality of the work and the necessity for rectification involved a substantial overlap of the issues as between claim and counterclaim; indeed the reliance of the defendants upon the allegation of bad workmanship was the only defence raised to the claimant’s claim under the Quotation and invoices, liability and quantum thus being inextricably intertwined.  In my view the judge was plainly entitled to decide as he did.  That said, however, he was of course not precluded from making an order for costs which reflected his view as to the propriety and/or success of the points raised by either party.  In such circumstances it was open to him to make a separate order for costs against each party according to his view of the justice of the case: see CPR 40.13(3) and the broad discretion afforded by CPR 44.3(4) and (6).  
40.	Given the judge’s approach to the question of set-off in respect of the judgment sum, Mr Klein applied for the claimant’s costs of the action, coupled with an application that the defendants pay those costs on an indemnity basis as from the first day of trial (i.e. Monday 14 May), the claimant having delivered to the defendants a letter containing a “drop-hands” offer of settlement the previous Friday, which offer the defendants rejected prior to the start of the trial on 14 May.
41.	Mr Smith resisted the application before the judge and submitted that he should treat the issues separately as between claim and counterclaim, reflecting the success of the defendants on a number of the issues tried, and should make no order as to costs on the basis that, had the claimants sued for the balance found due, it would have been a “small claim” carrying no costs.  The judge, rightly in my view, rejected the latter point on the basis that the claim was reasonably brought for £20,000 – odd and reasonably defended to the extent of the defects found proved.  So far as the first point was concerned, the judge rejected the argument on the basis, not only that the matters were inextricably intertwined as between claim and counterclaim, but also on the basis of the conduct of the defendants in defending in respect of various items, in particular the large claim for VAT, in respect of which the judge found that the male defendant had told lies.  He therefore awarded the costs against the defendants.
42.	He went on to make an order that the costs be paid on an indemnity basis, not from the first day of trial, but as from Wednesday 16 May.  He selected that date because, on the Tuesday evening, two days into trial, he had given an indication to the parties of a likely outcome of the trial which largely approximated to his eventual judgment and he urged them to settle the case at that stage.  He regarded the defendants’ failure to make any kind of counter-offer to the claimant at that point as confirmation of their failure to conduct the litigation reasonably and so awarded indemnity costs from that date.  
43.	In the grounds of appeal and before us, Mr Smith has directed his fire on the issue of costs in the direction of persuading us of the judge’s error in deciding to award the costs overall to the claimant rather than making some issue-based order more favourable to the defendants.  He has failed to persuade me that in that respect the judge was guilty of any mis-exercise of his undoubtedly broad discretion under CPR 44.3.
44.	Presumably because the amount involved in the issue whether or not the claimant’s costs should be paid on an indemnity basis following their “drop hands” offer is relatively insignificant, the defendants’ notice of appeal takes no separate point in that respect.  It is not in issue between the parties that the offer to settle relied upon by the claimant was not in form or content a Part 36 offer.  It is equally not in issue that, as provided by CPR 36.1(2), there is nothing to prevent a party making an offer to settle in whatever way he chooses but that, if it is not made in accordance with Part 36, it will only have the consequences specified in Part 36 and, in particular, an entitlement to costs on an indemnity basis under CPR 36.21(3), if the court so orders.  Thus the existence of a Calderbank-type letter of the kind sent by the claimant remains an important element in the exercise of the court’s discretion as to costs generally: see CPR 44.3(4)(c).  Speaking for myself, I have considerable doubts about the appropriateness of the judge giving weight in the exercise of his discretion in respect of indemnity costs to the failure of a party to respond to encouragement to settle from the court, as opposed to considering that party’s reaction (or failure to react) to the overtures of the other side.  However, since the point has not been argued, I do not consider it further.  I would reject the defendants’ appeal on costs on the grounds raised in the notice of appeal.
45.	I would therefore dismiss the defendants’ appeal with costs to be paid on the standard basis.
Lord Justice Chadwick:
46.	I agree.
Mr Justice Cresswell:
47.	I also agree.