England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JULES SHER QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		26th February 2007

Lord Justice Chadwick:

1. The appeal before the court under reference 2006/1474 is from paragraphs 4 and 5 of the order made on 19 June 2006 by Mr Jules Sher QC sitting as a deputy judge of the High Court in proceedings HC04CO1190 ("the guarantee proceedings") brought by National Westminster Bank Plc against Mr Angeli Kotonou for payment under a guarantee dated 12 July 2001. The order of 19 June 2006 was concerned only with the costs of those proceedings. By paragraph 4 of that order the judge ordered that the bank, as claimant, should pay 50% of Mr Kotonou's costs of the case including counterclaim; and by paragraph 5 of the order he ordered that Mr Kotonou, as defendant, should pay 50% of the bank's costs of the case. Permission to appeal from those two paragraphs of that order was granted by Lloyd LJ on 27 September 2006.
2. Paragraphs 1 and 2 of the order of 19 June 2006 in the guarantee proceedings required Mr Kotonou to pay costs which had been reserved of hearings before Master Bragge on 21 February and 25 April 2005. Paragraph 3 provided that, subject to paragraph 2, there should be no orders as to the costs reserved by orders of Pumfrey J dated 3 May, 6 May, 27 May and 1 July 2005. Permission to appeal from paragraph 3 of the order in the guarantee proceedings was refused by Lloyd LJ on 27 September 2006 after consideration on the papers. Mr Kotonou renews the application for permission to appeal, as he is entitled to do, in relation to paragraph 3 of the order. That renewed application is also before the court.
3. On the same day, 19 June 2006, Mr Sher made an order for costs in related proceedings ("the mortgage proceedings") -- reference HC05CO1080 -- brought by Mr Kotonou and his wife, Mrs Deborah Kotonou, against the bank seeking declarations as to the true construction of a mortgage, also dated 12 July 2001, in respect of property known as Domani, Mount Park Road, Harrow on the Hill, Middlesex. Paragraph 1 of the costs order in the mortgage proceedings reflected paragraph 3 of the order in the guarantee proceedings: that is to say, there should be no order as to costs reserved by the orders of Pumfrey J dated 3 and 6 May, 27 May and 1 July 2005. Paragraph 2 in the costs order in the mortgage proceedings ordered the bank to pay the claimant's costs of the case in those proceedings. By an appellant's notice under reference 2006/1475 Mr and Mrs Kotonou seek to appeal paragraph 1 of the order of the 19 June 2006 made in the mortgage proceedings. There is no appeal from paragraph 2 of that order. Permission to appeal from paragraph 1 of the order in the mortgage proceedings was also refused by Lloyd LJ on 27 September 2006 after consideration on the papers. Mr and Mrs Kotonou renew their application for permission to appeal and that renewed application is also before the court.
4. The guarantee proceedings were heard before Mr Sher QC over some nine days in March 2006. They were heard with the mortgage proceedings; but the mortgage proceedings seem to have occupied little more than an hour or so of those nine days. The substantive judgment in the mortgage proceedings, [2006] EWHC 1021 (Chancery), was delivered by Mr Sher on 12 April 2006; although, as he said, those proceedings were no more than ancillary to the guarantee proceedings which had been commenced a year earlier. But as the judge also observed, the dispute as to the proper interpretation of the mortgage was unaffected by the substantial issues of fact in the guarantee proceedings and so he felt able -- and was urged -- to give his judgment on that question of construction at an early opportunity.
5. The question in the mortgage proceedings was whether the property charged was security only for a maximum amount of £425,000 -- being the amount of a loan made by the bank to Olympic Resources and Services Plc (referred to as ORS in the judgment) repayment of which had been guaranteed by Mr Kotonou under the guarantee of 12 July 2001 -- or was security also for (1) the amount of interest on that loan "from demand hereunder" and (2) the bank's costs and expenses on a full indemnity basis incurred in connection with the enforcement of the mortgage. It was said that those two additional elements, if added to the loan, would have the effect of increasing by 100% or thereabouts the amount for which the property charged stood as security. That had the consequential effect that, if the bank's contention was correct, there was little equity in that property on which Mr Kotonou could draw for the purposes of funding the guarantee proceedings. The judge decided that issue of construction in favour of Mr and Mrs Kotonou on the 12 April 2006. The declaration sought is contained in an order which was not made until 22 May 2006. By that order the costs of the mortgage proceedings were reserved.
6. The substantive judgment in the guarantee proceedings was handed down on 22 May 2006. The judge had to decide in those proceedings whether certain representations had been made by or on behalf of the bank; any one of which, if made, would have had the effect that the guarantee should be set aside. The judge found against Mr Kotonou's case on what he described as the first representation -- paragraphs 32 to 38 of his judgment -- and on three further representations introduced by amendment on the second day of the trial, summarised at paragraph 39 and discussed at paragraphs 41 to 81 of the judgment. A convenient synopsis of the judge's findings is set out at paragraphs 81 to 84 of his judgment. It is sufficient, I think, to indicate that the judge dismissed the allegations that the representations were made as alleged or at all.
7. The fifth and final representation alleged -- again, added by amendment on the second day of the trial -- was to the effect that an officer of the bank dealing with the ORS account (Mr Wilson) had represented to Mr Kotonou that, if the guarantee and the mortgage were put in place, then the ORS account would continue to be dealt with within the bank by himself and by his subordinate Mr Brown, the account manager, and would not be in danger of immediate transfer to the specialised lending services (SLS) department of the bank.
8. The judge examined that issue with obvious care at paragraphs 85 to 93 of his judgment. He held that the representation was made. He went on to hold that the representation as to non-transfer to SLS was of importance to Mr Kotonou in making his decision whether or not to execute the guarantee: paragraphs 94 to 107 of the judgment. Although true at the time when made, the representation was a continuing representation which had ceased to be true at the date when the guarantee was executed on 12 July 2001. There had, in fact, been a last minute change of mind on the part of Mr Wilson: see paragraph 108 of the judgment. By that date, 12 July 2001, Mr Wilson had decided to refer the ORS account to SLS.
9. On the basis therefore that there had been a change in the bank's intention between the time when the representation as to intention was first made and the time when the guarantee was executed -- a change in intention which had not been disclosed to Mr Kotonou -- Mr Kotonou was entitled to succeed in his claim to have the guarantee set aside. Accordingly, by an order made in the guarantee proceedings on 22 May 2006 the bank's claim on the guarantee was dismissed. The guarantee was set aside and the costs of that claim and counterclaim were reserved.
10. Costs of both the mortgage proceedings and the guarantee proceedings were argued before the judge on 22 May 2006. He delivered his judgment on costs on 19 June 2006. At paragraph 1 of that judgment he identified five heads of costs for consideration.

1. Costs of the mortgage proceedings;

2. (a) Costs of hearings before Master Bragge on 25 February 2005;

(b) Costs of hearing before Master Bragge on 5 April 2005;

(c) Costs of hearings before Pumfrey J on 3, 6 and 27 May and

1 July 2005;

3. Costs of the guarantee proceedings.

11. As I have said, the judge awarded Mr and Mrs Kotonou their costs of the mortgage proceedings. He required Mr Kotonou to pay the costs of the hearings before Master Bragge. There is no appeal from those parts of his order. He made no order as to costs of the hearings before Pumfrey J. Mr and Mrs Kotonou seek, in each set of proceedings, permission to appeal from that order. The judge made a split order for costs of the guarantee proceedings and that is contained in paragraphs 4 and 5 of the costs order, in those proceedings in respect of which Mr Kotonou has permission to appeal.
12. I will consider, first, the renewed application for permission to appeal from the judge's orders in both the mortgage and the guarantee proceedings: that is to say, that there be no order for the costs of the hearings before Pumfrey J. The judge explained the factual position at paragraph 11 of his judgment of 19 June 2006:

"On 3 May, the Judge [is Pumfrey J] heard Mr Kotonou's application to adjourn the guarantee proceedings and to substitute for them the hearing of the relief asked for in the mortgage proceedings. This was Mr Kotonou's application dated 22 April. In the alternative to that relief, Mr Kotonou asked for the trial of the action to be adjourned. The hearing went over 3 May to 6 May and at the end of it the Judge adjourned the trial, but he did not grant the primary relief Mr Kotonou was seeking. In his judgment, the Judge said that neither side had won. He then adjourned the hearing to enable Mr Kotonou to produce concrete proposals in relation to a new mortgage to secure funding for his representation and in relation to the question of priority of that new mortgage over the Bank's existing charge. The costs of those two hearings were not dealt with by the Judge and were in effect simply left to be dealt with at the next hearing, which was on 27 May. At that hearing there were proposals and counter-proposals put forward and at the end the Judge sent the parties off to discuss the matter further, and all the costs were, in effect, left to be dealt with at the next hearing, which took place on 1 July 2005. The parties eventually came to terms in relation to further funding and its priority over the Bank's charge, and that agreement was incorporated into the order of the court of 1 July 2005. That order included an order that the two sets of proceedings should be heard together, not because the Judge had so ruled but because the parties had agreed to such a direction."

The paragraph ends with this sentence:

"As to costs the Judge said that the proper order was to adjourn all questions of costs to the trial Judge."

13. We were taken through the transcripts of the hearings of 3, 6 and 27 May and 1 July and to the judgment of Pumfrey J on 27 May. It is, I think, sufficient to note that Mr Jules Sher QC was correct when he summarised the position by saying that all costs of the first three of those hearings were left over to be dealt with at the conclusion of that round of litigation which took place on 1 July. But it is also material to refer to what Pumfrey J said on 1 July when reserving all those costs over to the trial (at page 7 of the transcript of proceedings):

"I think this is a case in which I ought to reserve costs, ought to, not just not do so as a result of the range of various orders open to me largely because I think that if a serious case as to unreasonableness either way or 'misleadingness' comes out, I should not have pre-empted the costs decisions. I think this is something to be dealt with at trial."

He then met an interjection by counsel for Mr Kotonou with this observation:

"I have been considering this since last night, what I ought to do about costs on the footing of the consent this morning. I came to the very clear conclusion that this is one where I ought to reserve. I think the interests of justice require it."

And a little later (transcript page 8 line 18) he said this:

"It seems to me that the proper order is to adjourn all questions of cost to the judge taking the trial of the two applications. As I say, I will be very reluctant to do anything else and certainly not to restrict it to the Part 8 proceedings. In fact the Part 8 proceedings are properly viewed as wholly ancillary to the guarantee proceedings because the Part 8 proceedings are actually only there to raise the funds for the hearing."

14. The Part 8 proceedings in that context are, of course, the mortgage proceedings. The judge's observation was prompted by the consideration that it was in order to raise funds to instruct lawyers to fight the guarantee proceedings on Mr Kotonou's behalf that Mr and Mrs Kotonou wanted a declaration as to the true construction of the mortgage, so that they and any funder would know the limit of the security under the mortgage. It is in that sense that the mortgage proceedings were ancillary to the real dispute which lay in the guarantee proceedings.
15. Mr Sher, at paragraph 12 of his judgment of 19 June 2006, indicated that the costs of 3 and 6 May should lie where they fell -- largely because Pumfrey J had indicated that no-one had won. He went on, at paragraph 13, to say that the hearings on 27 May and 1 July were about negotiations between the parties which resulted ultimately in an agreed order which did not provide for costs; and so, again, there was no question of either side winning or losing. In those circumstances it seemed to him that the fairest, if not the only possible, order was that there should be no order as to costs.
16. The judge referred to Pumfrey J's observations that he did not regard the costs of those hearings as costs to be confined to the mortgage proceedings and that the mortgage proceedings were wholly ancillary to the guarantee proceedings. He then asked himself why it was that Pumfrey J had reserved the costs of the hearings in May and July 2005. He found no certain answer to that question. He said this, at paragraph 13:

"It is unclear what, if anything, he [Pumfrey J] had in mind might happen afterwards that would put the trial Judge in a better position than he was in to judge where the costs before him should fall. Certainly, it was not the actual outcome of the mortgage proceedings. If anything, it was the outcome of the guarantee proceedings, but I do not think that he had that in mind either. Essentially, the hearings before the Judge resulted in a settlement as a matter of agreement between the parties, an agreement which the court had no power to impose upon them. In my judgment, the costs of those hearings, in the absence of agreement between the parties, is that they should lie where they fall."

17. In my view Mr Sher was clearly correct in thinking that Pumfrey J had not intended that the costs of the 2005 hearings should turn on the actual outcome of the mortgage proceedings. If that had been his intention, Pumfrey J would have made an order which had that effect. Nor did Pumfrey J intend that the costs of the 2005 hearings should follow the outcome of the guarantee proceedings. Again, if that was what he had intended, he could and would have said so. What he did say, in the passages that I have referred to from the proceedings on 1 July 2005, was that it would be more sensible that the trial judge should look at the matter with the hindsight of knowing how the proceedings had continued, been litigated and turned out. In other words, Pumfrey J was taking the very understandable view that a judge at trial would be in a better position than he was to decide what order should be made in relation to the costs of those funding proceedings. That is the exercise which Mr Sher sought to carry out. In my view he was entitled to come to the conclusion which he did: namely, that in the absence of agreement the costs of those funding proceedings should lie where they fell. He was not obliged to take the view -- as has been urged before us today -- that the costs of those funding proceedings should, in effect, follow the result of the mortgage proceedings. The issue was a much wider one than that.
18. I turn, therefore, to the costs of the guarantee proceedings. It is important to have in mind an observation made in this Court in Summit Property Limited v Pitmans (a firm) [2001] EWCA Civ 2020 as to the role of this Court on appeals in relation to costs. In a passage, which has been adopted in later appeals, I said this:

"The first question for this court is not whether it would have made the order which the judge made. The first question is whether this court is satisfied that the basis upon which the judge reached the conclusion that he did has been shown to be flawed. It is only if that question is answered in the affirmative that this court can properly interfere with the exercise of the judge of the discretion entrusted to him. It is only then that this court will go on to consider what order it would make in the exercise of its own discretion."

It is necessary, therefore, to look at the judge's reasons for the order which he did make; and to ask whether it is possible to identify some error of principle which has infected those reasons. If there is some error of principle, then this court is at liberty to make the order that it thinks appropriate. If there is no error of principle which vitiates the reasoning of the judge below, then this court must respect the exercise of discretion which led him to make the order which he did as a result of applying that reasoning.

19. The judge's reasoning in the present case is set out between paragraphs 14 and 25 of his judgment of 19 June 2006. He reminded himself that, as a starting point, the unsuccessful party will be ordered to pay the costs of the successful party -- CPR 44.3(2). Looked at overall, Mr Kotonou was the successful party in the guarantee proceedings. Those proceedings had been brought for the purposes of enforcing the guarantee and had failed. The judge then observed, at paragraph 15 of his judgment, that he was in no doubt that an order that the bank should pay the costs of Mr Kotonou would be grossly unjust to the bank. That was because Mr Kotonou had fought the case on a number of distinct bases on which he had lost. He explained, by reference to his substantive judgment in the guarantee proceedings, the issues on which Mr Kotonou had fought and lost. He said that those separate issues amply justified a departure from the normal rule that winner takes all. But he added an additional factor:

"But it is not only the fact of separate issues which justifies such a departure. In my judgment, Mr Kotonou unreasonably and improperly raised those further allegations, which turned out to be untrue, and the allegation of fraud against upright Bank officials was wholly unjustified."

20. So the judge came to the conclusion that the right approach was to make an order based on the separate issues in the case: an order which he described as a split costs order or an issue-based order. That course was plainly open to him in an appropriate case; as appears from CPR 44.3(6) paragraph (f):

"(6) The orders which the court may make under this rule [rule 44.3] include an order that a party must pay –

(f) costs relating only to a distinct part of the proceedings."

21. The first question, therefore, is whether the judge was entitled to proceed on the basis that this was a case which called for an issue based costs order. In my view, this case cried out for such an order. The issues which were fought and lost by Mr Kotonou included issues which, in the judge's view, should never have been raised at all: including issues on which the allegation of representation was dismissed on the basis that the representation had simply not been made. I would have been surprised if a judge, hearing a trial of this nature, had not reached a conclusion that this was an appropriate case for an issue based order. At the least, it is impossible to hold that this judge's conclusion that that was the correct approach was flawed in principle.
22. CPR 44.3(7) requires that, where the court would otherwise consider making an order under paragraph (6)(f), it must instead, if practicable, make an order under paragraphs (6)(a) or (c) instead. Paragraph (6)(f), as I have indicated, is the power to make an issue-based costs order. Paragraph (6)(a) enables the court to make an order that one party pay a proportion of another party's costs. It is unnecessary I think to refer to paragraph (6)(c) in detail. The thinking behind rules (6)(f) and (7) is not difficult to understand. Separate assessments of the costs relating to individual issues are likely to be complex and expensive: difficult to carry out in circumstances in which there are common factors which spread over a number of issues. How should the costs of those common elements be apportioned between the separate issues? A more convenient method, while keeping in mind the issue based approach, is to assess all the costs together and then apply a proportion which reflects the fact that one party has won on some issues and has lost on the other issues. That is what the Costs Rules require.
23. At paragraph 21 of his judgment this judge recognised that it would be difficult accurately to identify the separate costs occasioned by the separate issues. That is exactly the sort of case which the rule making body had in mind when it provided in paragraph (7) that, if practicable, the court must make an order under paragraph (6)(a). The judge indicated, in the first two sentences of paragraph 22 of his judgment, that he had decided to make a split order -- which in context meant an issue-based order as appeared from the last sentence of paragraph 20 -- but, to translate that split into simple percentages of the overall costs. That would obviate the need for a detailed assessment of the separate costs of each issue. That, as it seems to me, is not only a proper approach: it is the approach which is positively required by the Rules.
24. The third question, then, was what proportions should be adopted in order to reflect the fact that the bank had won on some issues and Mr Kotonou on one of the issues; while recognising that overall Mr Kotonou was successful. The judge said this at paragraph 22:

"I think that I am well placed to translate the contribution of the issues on which Mr Kotonou lost and that on which he succeeded into broad percentages."

A judge who had heard nine days of argument and delivered the substantive judgment at the trial can be expected to be well placed to translate issues into percentages. Indeed, that is why costs are best dealt with by the trial judge.

25. In the exercise of translating the issued-based approach into percentages, the judge was right to have in mind (as he did) a further passage in the judgments in this court in Summit Property v Pitmans (a firm). I said this:

"An issue based approach requires a judge to consider, issue by issue in relation to those issues to which that approach is to be applied, where the costs on each distinct or discrete issue should fall. If, in relation to any issue in the case before it the court considers that it should adopt an issue based approach to costs, the court must ask itself which party has been successful on that issue. Then, if the costs are to follow the event on that issue, the party who has been unsuccessful on that issue must expect to pay the costs of that issue of the party who has succeeded on that issue. That is the effect of applying the general principle on an issue by issue based approach to costs."

26. The "general principle" to which reference is made in that passage is, of course, the general rule set out in CPR 44.3(2)(a). The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. Applying that principle to an issue based approach, the judge was required to decide what apportionment of costs would fairly reflect the fact that the bank had won on four out of five issues and Mr Kotonou had won on the fifth. The judge, giving the matter the best consideration that he could, took the view that the split should be 50/50: that is to say, that each side should pay 50% of the other side's costs. He then asked himself whether that would produce, overall, a fair or an unjust result. He said this (at paragraph 25 of his judgment):

"I am conscious of the fact (having regard to the estimated costs I have been given) that on a detailed assessment that [the 50/50 split] will mean that there would be a net payment by Mr Kotonou, because the Bank's costs are likely to be greater than his. If that is the consequence on a detailed assessment, so be it. I have thought long and hard about this and, as I have indicated, I have taken into account the fact that, at the end, of the day Mr Kotonou has won (and, indeed, won on an issue which, if it had been conceded at the start of the trial, would have meant that the extravagant allegations on which he lost would not have needed to have been investigated at all). Standing back and taking everything I have mentioned into account, my judgment is that the appropriate order is as I have stated above."

27. The judge clearly applied his mind to the various factors which he was required to consider in making a costs order in a case of this nature. Having applied his mind, and in the exercise of his discretion, he made the 50/50 split costs order which is reflected in his judgment. In my view no error of principle and no flaw in the reasoning can be detected in his judgment. In those circumstances it is not for this court to interfere. It is not for this Court to consider whether it would have made the same order or some other order.
28. I would dismiss the appeal.

Lord Justice Lloyd:

29. I agree. So far as the application for permission to appeal is concerned in both cases, when I dealt with the matter, as my Lord, Lord Justice Chadwick has mentioned, on paper on 27 September 2006 I observed that, although the deputy judge could have made a different order, it seemed to me clear that the order he made was within the proper scope of his discretion as to costs. I remain of that view. Nothing that Mr Bacon, for Mr Kotonou, has said in his clear and well-presented submissions either by way of the statement under practice direction paragraph 4.14A in which he supplemented and restated the relevant parts of the skeleton argument, prepared by Mr Wellington, nor in his oral submissions this morning has he persuaded me that Mr Sher made any error or misdirection in leaving those costs where they lay.
30. In relation to the appeal, when dealing with the matter on paper I expressed the view that there was scope for arguing that it was not a proper exercise of the judge's discretion to order the successful defendant, Mr Kotonou, to pay any part of the bank's costs. That is paragraph 5 of his order, but I thought it would be right that the court should be able to consider paragraph 4 as well. Mr Bacon urged upon us what he said was an inconsistency between the opening part of paragraph 21 of the judge's judgment to which my Lord has referred and the conclusion that 50% of the costs could be attributable to the issues on which Mr Kotonou had lost. But as it seems to me that is not, when fairly considered, a self contradiction in Mr Sher's judgment, as Mr Sher makes clear at the end of paragraph 21 when he says the real point is that all of this could have been done much more economically than it was done as a result of the addition to the pleadings of the many allegations on which Mr Kotonou lost. He says specifically near the beginning of paragraph 24 that at least half of the time and costs incurred from the beginning of the proceedings to the end was wasted by the additional unsuccessful issues raised and pursued by Mr Kotonou. So it seems to me that there is nothing in Mr Bacon's submission that it was not open to the judge to make a proportionate order for costs on the basis that he could not identify what costs were attributable to what issues.
31. So far as the question whether Mr Kotonou should have to pay some of the bank's costs, as it seems to me in the light of Mr Bacon's submissions both orally today and by way of a very short and clear and helpful summary of what he said are the errors of principle, what it came down to was that the judge, having concluded that a 50/50 split was appropriate, did not expressly consider whether he might appropriately disallow half of Mr Kotonou's costs but not order Mr Kotonou to pay 50% of the bank's costs. Of course it is open to a court to make such an order disallowing part of a successful party's costs but not ordering any costs the other way. But as my Lord points out, where some issues have been won and other issues have been lost by the successful party, the general approach to costs -- namely, that the loser pays -- would often, and perhaps normally, lead to the conclusion that the loser on a particular issue pays the costs attributable to that issue. That is translated, by virtue of CPR 44.3(7) in a case such as this, to the proposition that the winner overall nevertheless pays a percentage of the loser's costs. It seems to me that the fact that the judge did not in terms consider the intermediate position of leaving Mr Kotonou with only a proportion of his costs but not liable to pay any of the bank's costs does not demonstrate a misdirection and accordingly, notwithstanding Mr Bacon's submissions for the appellants, I agree that both the application and the appeal should be dismissed.

Mr Justice Stanley Burnton:

32. I agree that the appeal should be dismissed and the application refused for the reasons given by my Lords.

Order: 1) Appeal dismissed. 2) Application refused. 3) Application refused.