England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON CIVIL JUSTICE CENTRE
Mr Recorder Cohen QC
CHY08423

		Royal Courts of Justice Strand, London, WC2A 2LL
		22nd July 2010

Lord Justice Patten :

1. This is an appeal by the fourth defendant ("MW"), which is a firm of solicitors, against an order of Mr Recorder Cohen QC made on 18^th December 2009 who directed that there should be no order in respect of the costs of the claim against MW following the service by the claimant, Mr Messih, of a notice of discontinuance. This is therefore a costs only appeal in which, in order to succeed, MW must demonstrate that the Recorder has either misdirected himself in the principles to be applied or has failed to apply the correct principles by making a decision without taking into account some relevant factor or by including, as part of his reasoning, considerations which were immaterial.
2. Permission for the appeal was refused by the Recorder and by Jacob LJ on the papers but was subsequently granted on a renewed application by Lloyd and Moore-Bick LJJ.
3. Before I come to the principles to be applied and to the Recorder's reasons for his decision, it is necessary to summarise the history of the litigation which resulted in the discontinuance of the proceedings against MW.
4. Mr Messih was the tenant of commercial premises at 208 and 210 Queenstown Road, Battersea, London, SW8 which were held under two separate leases granted for terms of 12 years from 16^th November 1994. Each lease contained covenants by the tenant to keep the premises in good repair and a proviso for re-entry in the event of a breach.
5. In the particulars of claim Mr Messih alleged that on 6^th August 2001 he consulted the first defendant, Ms Fitzpatrick, about a proposed assignment of the two leases. She was a partner in the firm of Laurie Moran Arthur based in Wimbledon. The second and third defendants were the other partners in that firm. I shall refer to them collectively as "LMA".
6. Shortly afterwards on 22^nd August the landlord of the claimant's premises, a Mr Menten, served on LMA as the claimant's solicitors two notices under s.146 of the Law of Property Act 1925 accompanied by schedules of dilapidations relating to both properties. The notices required the items of disrepair to be remedied within one month of the date of the notices.
7. Because the unexpired residue of the terms of both leases exceeded three years Mr Messih was entitled to the protection of the Leasehold Property (Repairs) Act 1938 ("the 1938 Act). Had a counter-notice or notices been served on the landlord claiming the benefit of the 1938 Act Mr Menten could not have enforced the repairing covenants or exercised his right to forfeit the leases for breach of those covenants without the leave of the court. It was Mr Messih's case against LMA and MW that none of the grounds for giving leave specified in s.1(5) of the 1938 Act was applicable at the time.
8. Mr Messih's case against LMA was that Ms Fitzpatrick failed to advise him of his right to claim the benefit of the 1938 Act by serving counter-notices on the landlord; failed to serve any such notices within the 28 days allowed or at all; and failed to advise him of the consequences of that omission and, in particular, that he should make an application to the court for relief from forfeiture.
9. It is said that, had such an application been made, relief would have been granted on terms that the repairs were carried out. The costs of the repairs at the time were estimated by Mr Messih's surveyor to have amounted to £2,229.50 plus VAT. In the event, no steps were taken to protect the leases and Mr Menten forfeited them by peaceable re-entry on 8^th October 2002. The combined value of the forfeited leases was alleged to have been some £20,000. On this basis Mr Messih claimed damages for negligence against LMA.
10. The claim against MW was for the same loss but had a more limited factual basis. Mr Messih's case was that, on a date prior to 19^th October 2001, he consulted Mr Ian Butler, a solicitor employed by MW, in connection with the s.146 notices which had been served on 22^nd August. By then the 28 day period for the service of counter-notices under the 1938 Act had, of course, expired. On 24^th October Mr Butler wrote to Mr Messih advising him that it appeared that no counter-notices had been served but failed, it is alleged, to advise him of the need to apply to the court for relief from forfeiture.
11. In their defence LMA admitted the retainer by Mr Messih but alleged that the first defendant had served counter-notices under the 1938 Act on the landlord's solicitor by 14^th September and had passed this information on to MW in a letter of 8^th October 2001. They therefore denied that they had been negligent or that they were responsible for the claimant's loss of the leases. They also put in issue Mr Messih's ability to fund the necessary repairs to the premises as a condition of obtaining relief from forfeiture.
12. MW's defence was that they were consulted by Mr Messih sometime in October 2001 under the Community Legal Service's Green Form scheme. This enables initial advice to be given to the client but does not extend to the funding of representation in court proceedings. Their case is that Mr Messih was advised by Mr Butler that there was no evidence on the LMA file that Ms Fitzpatrick had in fact served any counter-notices under the 1938 Act; that the claimant had a right to apply to the court for relief from forfeiture; that he should obtain counsel's advice about possible proceedings; but that no further CLS funding was available for that purpose and that if MW was to give Mr Messih further assistance he would have to instruct the firm as a private client for that purpose. Their case is that they went so far as to write to Mr Menten's solicitors indicating that the claimant proposed to seek relief from forfeiture and, if necessary, an injunction to prevent peaceable re-entry but that Mr Messih was unwilling or unable to instruct them to take such proceedings on a private client basis and to put them in funds for that purpose. After reminder letters sent in January 2002 went unanswered, they closed their file.
13. Mr Messih issued his claim against LMA and MW in March 2008. Pleadings, disclosure and the exchange of witness statements followed and the trial was listed for 3 days beginning on 1^st September 2009. No evidence was served by LMA. The partnership had by then been dissolved and the defence was conducted by their professional indemnity insurers. Mr Messih's own costs were funded by his solicitors under a CFA. On 10^th August 2009 the claim against LMA was settled on terms contained in a Tomlin order of that date. LMA agreed to pay to Mr Messih the sum of £21,500 in full and final settlement of his claims against them and to pay his costs of the claim which were to be assessed on the standard basis if not agreed.
14. It was a term of the settlement that LMA would discontinue the contribution proceedings which they had served on MW and this was subsequently done. But MW refused to agree to Mr Messih discontinuing his claim against them with no order for costs. Their position had always been that the claim against Mr Butler was unmeritorious and had no realistic prospect of success. Following their refusal to settle on a drop-hands basis, Mr Messih nonetheless went ahead and served notice of discontinuance of his claim against them on 10^th August. The costs consequence of this are prescribed by CPR 38.6 which provides that:

"(1) Unless the court orders otherwise, a claimant who discontinues is liable for the costs which a defendant against whom the claimant discontinues incurred on or before the date on which notice of discontinuance was served on the defendant."

15. On this basis MW proceeded to commence detailed assessment proceedings for the recovery of their costs. This was met by an application by the claimant issued on 22^nd September for an order under CPR 38.6(1) that he should not be required to pay MW's cost of the action. The application notice states that Mr Messih has received and accepted an offer from LMA which renders the claim against MW academic. In a witness statement in support of the application Mr Hogan of Messrs Dewar Hogan, the claimant's solicitors, summarised the basis of the claim. This includes a critique of Mr Butler's evidence that he did advise Mr Messih of the need to apply for relief from forfeiture. Mr Hogan says that this allegation was not included in the original draft defence served in response to the letter before action; is not corroborated by the contemporaneous correspondence; and appears to be based on a telephone conversation between Mr Butler and Mr Messih on 10^th January 2002, of which there is no note. He describes MW's defence as not strong but says that, following the settlement with LMA, it would have been unjustifiable to have proceeded with the claim simply in order to establish Mr Messih's entitlement to his costs. Given the saving of court time and additional costs, it was appropriate, he said, for the claim against MW to be discontinued with no order for costs.
16. At the hearing of the application on 18^th December 2009 the Recorder took the same view. He said that he had not found the decision straightforward or easy but, on balance, thought that there should be no order for costs. He referred to the decision of this court in Re Walker Wingsail Systems plc [2006] 1 WLR 2194 CA which is the leading authority to date on the exercise of the discretion to disapply the costs rule contained in CPR 38.6. In that case a liquidator served a notice of discontinuance in respect of misfeasance proceedings against directors on the grounds that the proceedings had become commercially worthless. The judge directed that there should be no order for costs. The Court of Appeal allowed the defendant's appeal on the basis that there had in fact been no change in circumstances since the commencement of the proceedings. Although the figures had changed, the claim had always been commercially worthless in the sense that the costs outweighed any possible return for the creditors. The judge, they held, had been wrong to assume otherwise and the liquidator's subsequent realisation of the true position was not a change of circumstances that justified disapplying the normal rule that the party discontinuing the action should pay the defendant's costs.
17. A number of principles can be said to emerge from the judgment. They can be summarised as follows:-

(i) it is not usually part of the function of the court on an application under CPR 38.6 to attempt to reach a decision on whether or not the claim would have succeeded;

(ii) the rule embodied in CPR 38.6 that the party who discontinues should pay the defendant's costs is the normal rule and it is for the party discontinuing to justify some other order:-

"[24]….The form in which that rule is expressed—which differs from the earlier rule, RSC Ord 21, r 3—makes it clear that the normal order on discontinuance is that the claimant bears the defendant's costs up to the date on which notice of discontinuance is served. The rule makes it clear that a court may order otherwise; but the burden is on the party who seeks to persuade the court that some other consequence should follow; and the task of the court is to consider whether there is some good reason to depart from the normal order.

[25] The judge directed himself by reference to two authorities to which he referred—Britannia Life Association of Scotland v Smith [1995] CA Transcript 353, a pre-CPR case and Everton v World Professional Billiards and Snooker Association (Promotions) Ltd [2001] All ER (D) 172 (Dec), a post-CPR case—that he had to look at the state of the action as it was at the date when the application for leave to discontinue was made and see what was the fair and just thing to do at that time. He thought that that was really all that had to be done. He went on to say ([2004] All ER (D) 159 (Jun) at [12]):

'Taking into account what is fair and just, I take into account the following matters: whether the application by the defendant can be safely equated with defeat or an acknowledgment of defeat, whether the proceedings have in some way become academic, whether the claimant has obtained some legitimate benefit from the proceedings which it might not otherwise have obtained, what the economic value of the claim is, what the potential benefits of the claim might be, what the strength of the claim on a very prima facie basis is, not so as to conduct a mini-trial but simply to see whether there was a reasonable basis for the claim and a continuing reasonable basis for the claim.'

[26] In making that list of the matters which he took into account, the judge made no reference to the relevance of any change (or not) in circumstances between the date when the proceedings were started and the date when the application to discontinue was made or the decision to discontinue was taken. In other words, he left out of account any consideration as to why a claim which was started on the basis of certain expectations should be discontinued without an order for costs against the claimant in circumstances where the expectations have not, in fact, changed—even though they may have been re-evaluated."

(See Chadwick LJ at paras 24-26);

(iii) The court has therefore to be persuaded that it is just to depart from the normal rule but:-

"…. The rule recognises that justice will normally lead to the conclusion that a defendant who defends himself at substantial expense against a plaintiff who changes his mind in the middle of the action for no good reason—other than that he has re-evaluated the factors that have remained unchanged—should be compensated for his costs."

(See paragraph 36).

18. The Recorder purported to direct himself in accordance with these principles. He said that it was indisputable that the settlement of the claim against LMA was a material change of circumstances of the kind envisaged by Chadwick LJ in Walker Wingsail:-

"…. The substratum of the claim, that is to say the entirety of the damage which has been sought to be recovered, has substantially been recovered. True it is, that that recovery was a voluntary act on the part of the claimant in accepting the Part 36 which has been made; but, as it seems to me, that is nonetheless a change of circumstances. Through, in itself, it is not necessarily determinative, it leads on to the consideration of other factors or features of the case in deciding how the discretion should be weighed.

14. Secondly, it seems to me really the nub of the question here must come to what was the appropriate order, what was the appropriate course to be followed, in circumstances where the substratum of the claim had disappeared as a result of the Part 36 offer made by the first three defendants? Is the defendant right in saying that the claimant really should have insisted that there be a trial in order to decide how the costs ought to fall? In some situations, unfortunate though that may be, this may be the correct view. However, it is not in my judgment the invariable position and the court has to consider many features."

19. He then proceeded to set out what, in his view, were the relevant factors to consider. On one side was the obvious benefit in terms of saving court time and avoiding additional costs which resulted from the discontinuance of the claim; the fact that MW was relieved from having to defend the claim; and the abandonment of the contribution proceedings. Against this was the entitlement of MW to protect its professional reputation and to defend itself against what it regarded as an unfounded claim.
20. His conclusions, based on this balancing exercise, are set out in paragraph 19 of his judgment as follows:

"Having weighed all of these factors together, it seems to me that the overriding feature is in the circumstances of this case, the right thing to do was for the claimant to accept the Part 36 offer and to have discontinued the proceedings. That said, it seems to me that the court's discretion in this case ought to be exercised in favour of disapplying the ordinary rule because of that change of circumstances which have saved costs, court time and, I would add as well, professional time on the part of the defendants who are solicitors, who would inevitably have had to come, attend and give evidence in a way for which they would have received no professional compensation at all".

21. The Recorder therefore regarded the saving of costs and court time which resulted from Mr Messih's decision to discontinue as decisive in relation to the exercise of his discretion to depart from the normal costs consequences of a discontinuance. Although he did not say so in terms, I accept Mr Calland's submission that the Recorder was undoubtedly influenced by the fact that the only remaining issue between Mr Messih and MW was liability for the costs of the action and that this was not a case of hardship in which the defendants had had to fund their costs out of their personal resources and would be financially disadvantaged should they fail to recover these costs. MW is a firm of solicitors and is insured in respect of the claim. The savings brought about by the decision to discontinue therefore outweighed, in the Recorder's view, the desire of MW to resist the claim and their entitlement under CPR 38.6 to have their own costs up to the date of discontinuance.
22. Although the Recorder mentions other factors in his judgment (largely to dismiss them), Mr Calland was not able to identify any other facts or considerations in the judgment which could be relied on as constituting a good or sufficient reason for departing from the normal rule.
23. Mr McCormick QC for MW submits that the exercise of discretion carried out by the Recorder is flawed both in respect of what the Recorder did and did not take into account and more fundamentally in his assessment that the settlement of the claim against LMA constituted a material change of circumstances which made it appropriate to consider what order to make in place of the normal rule under CPR 38.6.
24. He points to the fact that the claimant and those advising him must have known of the risks of suing both firms of solicitors and of the possibility that they would face an offer to settle by LMA but a refusal to do so by MW. MW had always indicated its intention to contest the claim and what transpired in August last year was entirely foreseeable. The effect of the notice of discontinuance was to put an end to the action and to prevent his clients from presenting and the court from considering the evidence as to what in fact transpired between Mr Butler and Mr Messih when the latter consulted him about the notices served by his landlord. In the absence of a consideration of the evidence at trial, the court should be very reluctant, he submits, to displace the rule devised by the draftsman of the CPR to apply on a discontinuance. Indeed the rule, he submits, owes its rationale in large part to the inability of the court in most cases to form an accurate view about the merits and likely outcome of the claim. The normal rule should therefore only be disapplied in exceptional circumstances.
25. His principal submission is that nothing in the Recorder's reasoning in paragraph 19 of his judgment amounts to a good reason for departing from the normal rule. In particular, the critical factors identified by the judge: i.e. the saving of court time, professional time, and further costs, are inevitably and always the consequence of discontinuing proceedings. They cannot therefore provide a justification for making some other order in respect of the costs of the claim. There has to be something more than this.
26. I think Mr McCormick is right about this. The starting point has to be the recognition that discontinuance of a claim will under CPR 38.6(1) ordinarily result in the defendant receiving his costs up to the date of discontinuance. Had the intention been to create a general discretion as to costs in these circumstances CPR 38.6 would have said so. There would be no need for a default rule. As drafted, these provisions make it clear that the defendant starts from the position of being entitled to his costs and it is for the claimant to justify the making of some other order.
27. That much is, of course, settled law following the decision of this Court in Re Walker Wingsail. The issue here is whether the settlement of the claim against LMA with the result that the claimant had little more than a claim for nominal damages and costs against MW justified the Recorder in making no order for costs following the discontinuance of the claim against LMA. The Recorder began his analysis of this issue by considering whether the settlement of the action against LMA constituted a change of circumstances which entitled the court to consider how to exercise its discretion under CPR 38.6(1). If the Recorder intended to suggest by this that there should be some kind of threshold test based on a change of circumstances then he was wrong, in my view, to do so. A material change of circumstances may, of course, amount to a sufficient justification or reason for departing from the normal rule. It will depend on what the circumstances are. But the correct approach is for the court to consider all the matters relied on as justifying the making of some alternative order for costs and then to decide whether they are sufficient to support such an order.
28. That assessment will inevitably be case and fact specific and it is impossible to attempt a comprehensive summary of what might constitute a good reason for making a different costs order. But the appeal does, I think, raise, in relatively stark terms, a question, the answer to which could be of some general application in similar cases. The argument for MW challenges as contrary to principle the Recorder's conclusion that a claimant who has achieved what amounts to the satisfaction of his whole claim against one set of defendants can rely upon the avoidance of a trial on liability against the remaining defendants to recover costs alone as justifying a departure from the ordinary rule that on discontinuance a claimant should pay the defendant's costs.
29. Part of the argument rested on the premise that Mr Messih (having settled with LMA) made an informed choice to discontinue knowing the probable costs consequences of doing so. This is undoubtedly true. But the court still has to decide whether the obvious benefits which discontinuance brings in terms of a saving of court time and expense are to be rewarded by depriving the defendants whose chance to contest and defeat the claim has been removed, from at least being able to recover their costs.
30. No judge encourages litigation about costs and a major theme of the CPR is the avoidance of unnecessary disputes and the costs which they can generate. But the avoidance of the costs of a trial is the necessary consequence of any discontinuance and cannot, of itself, justify a departure from the normal rule that the discontinuing party pays the other side's costs up to the date of discontinuance. There has to be something more than that to justify that departure. Otherwise the normal rule would be displaced in every case.
31. In this case there was nothing more. As already mentioned, the claimant knew what MW's position was and that it wished to contest its liability for the claim. The claimant made his decision to discontinue notwithstanding this and in the knowledge that the settlement with LMA made no provision for the payment of MW's costs against the claimant as opposed to those of the third party proceedings. By doing so Mr Messih removed the ability of MW to establish its defence and left the court in the position of being unable to determine what the outcome of the trial is likely to have been. The circumstances were therefore the quite usual consequences of a decision to discontinue and I can see nothing in them to justify the order which the Recorder made.
32. Had separate proceedings been taken against MW, it is difficult to see how the claimant could have avoided paying their costs on a discontinuance. If the claimant chooses to join as defendants in the same action two separate firms of solicitors against whom he pleads separate causes of action based on different breaches of their respective retainers the costs consequences of a discontinuance against one of them ought in principle to be the same.
33. The claimant's natural desire to settle his claim against LMA on terms that they paid the claim in full should not be allowed, in my judgment, to override the entitlement of MW to be paid their costs when the claimant chose no longer to pursue them. I would therefore allow this appeal and order the claimant to pay the costs of MW up to the date of discontinuance. Mr Messih also sought permission to appeal against the costs order made by the Recorder in respect of the costs of the hearing before him but in the event that we allow MW's appeal this point does not arise. I would therefore dismiss that application.

Lord Justice Elias :

34. I agree.

Lord Justice Ward :

35. I also agree.