Case No: B2/2010/1772
Neutral Citation Number: [2011] EWCA Civ 737
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HUDDERSFIELD COUNTY COURT
RECORDER PHILLIPS
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Thursday 12th May 2011
Before:

THE PRESIDENT OF THE QUEEN'S BENCH
LORD JUSTICE JACKSON
and
LORD JUSTICE TOMLINSON
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Between:

	Naseem t/a SH Builders and Contractors	
Appellant	
	- and -		
	
Kang	

Respondent	
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(DAR Transcript of 
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Mr Stuart Roberts (instructed by Direct Access) appeared on behalf of the Appellant.

Mr Ian Pennock (instructed by Stachiw Bashir Green Solicitors) appeared on behalf of the Respondent.
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Judgment

Lord Justice Jackson:

1.	This judgment is in four parts, namely: 
Part 1	Introduction,  
Part 2	The Facts, 
Part 3	The Present Proceedings, 
Part 4	The Appeal to the Court of Appeal.

Part 1. Introduction
2.	This is an appeal against a costs order made at the conclusion of litigation in the Huddersfield County Court concerning a building dispute.  The action was tried before Mr Recorder Phillips, to whom I shall refer as "the judge".  The proceedings were fraught with complexity and confusion, which the judge dealt with carefully through a difficult trial.  We have been assisted this morning by counsel who have presented their submissions concerning a confused and complex case with considerable economy. 

3.	After these brief introductory remarks I shall now turn to the facts.

Part 2. The Facts
4. The claimant is a building contractor.  The defendant is the owner of a shop with associated residential accommodation at 52 Dryclough Road, Crosland Moor, Huddersfield (“the premises”). 

5.	In June 2004 it was orally agreed between the claimant and the defendant that the claimant would carry out building works to the premises as shown on two architects’ drawings, MK 01 and MK 02.  The works involved demolition of the ground floor porch, certain excavation works, building a new storage area, building a new entrance lobby and a number of other extension works.  The agreed price for these building works was £48,000 plus VAT.  The claimant commenced work on the premises in July 2004. 

6.	In early 2005 the parties agreed that a further batch of building works would be carried out for the sum of £15,500 plus VAT.  These works are described in a barely legible manuscript document, which is undated. They include provision of doors, frames, skirting boards, removal of old floor and joists, fitting a new ceiling in the shop, demolition of chimney stacks and brick walls for steelwork, supplying steel beams, rewiring and certain other matters.  

7.	There were problems in relation to refrigeration units which were being installed at the rear of the premises.  The refrigeration units were noisy and these gave rise to complaints from neighbours.  In due course it was decided that the solution was to relocate the refrigeration units in the roof of the premises.  This operation would entail, and indeed did entail, the raising of the roof, the construction of a platform and the placing of the refrigeration units on that platform.  These works are shown on drawings MK 03A and MK 04, which were prepared in September of 2005.  Those drawings were approved by the council in December of 2005.  It was agreed between the parties that the claimant would carry out these further roof works pursuant to drawings MK 03A and MK 04, and the claimant duly did so.  The claimant carried out these works during 2005.  Although the issue does not fall for resolution in the present proceedings it appears that the contract sum agreed for the roof works was in the region of £24,000.  It appears that the defendant paid approximately £21,000 for those roof works; and we are told by counsel that the claimant did not pursue the balance of the sum due in respect of the roof works because it was accepted that certain parts of those works were incomplete or unsatisfactory.  Be that as it may, although the details of the third contract do not fall for resolution in these proceedings, there clearly was such a third contract and it forms a highly material part of the background to the dispute between the parties.

8.	Unfortunately the claimant and the defendant were unable to agree what sums were due from the defendant to the claimant in respect of work carried out pursuant to the first two contracts, nor were the claimant and the defendant able to agree what deductions or adjustments should be made in order to reflect defects in the works under the first two contracts.  The parties were unable to reach any amicable resolution of their differences.  In those circumstances the claimant commenced the present proceedings.

Part 3. The present proceedings
9.	By a claim form issued in the Huddersfield County Court on 20 May 2008 the claimant claimed a sum of £22,214.73 against the defendant as the outstanding balance due in respect of works carried out.  The defendant served a very brief defence which reads as follows:

"I had already paid over even he did not give receipt by cheque and cash 2/3/07."

10.	Clearly that initial exchange of pleadings did not do justice to the issues between the parties.  Accordingly the district judge in Huddersfield ordered the claimant to serve an amended particulars of claim and the defendant to serve a defence to such a pleading.  The claimant served an amended particulars of claim (somewhat confusingly headed “particulars of claim”) on a date which is not apparent from the pleadings.  The claimant in the amended particulars of claim set out the brief details of the first and second contracts.  The claimant set out the sums which had been paid and the sums which had been received and claimed the balance of £22,214.  The brief details of works done and payments made are contained in two letters from the claimant to the defendant, which formed an annex to the amended particulars of claim.  The defendant served a defence and counterclaim on 23 January 2009.  The defendant took issue with the assertion that any outstanding balance was due to the claimant.  The defendant further asserted a counterclaim under two limbs.  The first limb of the counterclaim was that the claimant had failed correctly to level the floor of the property, which error necessitated substantial remedial works. The second limb of the counterclaim was that there were various defects in the works which would be particularised in a Scott schedule.  

11.	On 5 March 2009 the claimant served a re-amended particulars of claim, which set out in much fuller detail the works which the claimant asserted had been carried out pursuant to the first and second contracts.  The claimant also set out a number of additional items of work or variations for which the claimant was seeking additional payment.  There is quite a full account of these works in the re‑amended particulars of claim and there is also a set of schedules annexed to the re‑amended particulars of claim describing the contract works and the additional or varied works in greater detail.

12.	There has been some debate this morning as to whether the re‑amended particulars of claim included works which in fact fell within the third contract.  Attention has been drawn to paragraph 10B of the re‑amended particulars of claim, which sets out: 

"Reroofing the main front elevation of the existing roof elevation at an agreed price of £3000."

13.	It was suggested at one point that this might be a reference to the works under the third contract.  However, that cannot be right because it can be seen that in paragraph 11A of the re-amended particulars of claim it is asserted that the only works carried out in respect of the reroofing was the erection of scaffolding and the supply of new roof trusses, and under paragraph 13C of the re-amended particulars of claim the cost of the roofing is excluded from the sums which are claimed.

14.	The defendant did not serve any amended defence and counterclaim.  It was, however, the defendant's position that he maintained a defence to the re-amended particulars of claim along the lines apparent from his original defence and counterclaim.  

15.	When the claimant's solicitors served the re-amended particulars of claim they sent a covering letter to the defendant's solicitors which referred to drawings MK 03A and MK 04.  The claimant's solicitors enclosed copies of those two drawings, and the suggestion in their covering letter was that the works in those drawings formed part of the claimant's claim.  

16.	In due course, very sensibly it was ordered by the court that a joint expert witness should be instructed by the parties.  Mr Colin France, a chartered surveyor, was selected for that role, and he was instructed to assist the court as joint expert witness.  Unfortunately Mr France was not informed about the existence of the third contract.  Nevertheless, the claimant's solicitors did send to Mr France copies of drawings MK 03A and MK 04.  Unsurprisingly Mr France assumed that these drawings had been sent to him because they showed at least some of the work forming the subject matter of dispute between the parties.  Mr France delivered his first report on 18 December 2009.  In a letter to the parties he made it clear that he was assuming that drawings MK 03A and MK 04 related to the work upon which he was being asked to express his expert opinion.  There was various correspondence between the parties and Mr France in which neither party corrected Mr France's misapprehension about drawings MK 03A and MK 04.  On 9 March 2010 there was a site meeting attended by the parties and their solicitors.  It appears that Mr France's misapprehension was not corrected on that occasion, because no such correction appeared in his subsequent final report.  

17.	The claimant's solicitors first informed Mr France about the third contract by letter dated 12 May 2010.  In that letter the solicitors state that drawing MK 03A and MK 04 relate to the third contract; the third contract did not form part of the claimant's claim or the defendant's defence, and those two drawings were therefore irrelevant to the proceedings.  Mr France then delivered a further report on Wednesday 19 May 2010, doing the best he could with the material provided to him.  Unfortunately a great deal of material was passed to Mr France at the last moment.  It was only a few days I think before the trial (possibly a couple of days) that the witness statements were exchanged and passed to Mr France.  

18.	The trial of the action commenced at Huddersfield County Court on Thursday 20 May 2010 and lasted for two days.  The judge heard oral evidence from the claimant, the defendant and the defendant's son, Sansar Kang.  The judge also asked that the joint expert witness, Mr France, should attend the trial.  He duly did so, and the judge heard oral evidence from him and he was cross-examined by both parties.

19.	The defendant's counsel at the commencement of the trial made clear that he was abandoning the first limb of his counterclaim, namely the claim for damages in respect of incorrect flooring.  The defendant's counsel did however pursue the second limb of the counterclaim, namely a claim for damages in respect of a variety of defects set out in a Scott schedule.  This Scott schedule was not the conventional kind of Scott schedule in which the claiming party sets out the allegations and the sums claimed, the responding party then sets out his case and a column is left for the judge.  Instead, the so called Scott Schedule is actually an annex to Mr France's report in which he very helpfully set out the defects claims advanced by the defendant for consideration by the court.  That schedule comes to a total of approximately £5,200.  

20.	The trial was hard fought on a number of issues, some of which were not foreshadowed by the pleadings.  There was argument about what were the correct contract sums under the first contract. There were arguments about the quality of work and arguments about the variations.  There was a debate about whether or not there had been a third contract.  That debate was relevant to whether or not certain payments made by the defendant were referable to the first and second contracts or, alternatively, referable to a third contract.  There was also debate about what sums had actually been paid by the defendant to the claimant, which were referable to the first and second contracts.  At the end of the trial the judge invited written submissions on all issues, including costs. The judge indicated that he had it in mind to depart from the normal approach of awarding costs to the winning party.  Counsel on both sides lodged full closing written submissions which the judge considered.  

21.	On 9 June 2010 the judge sent out his written judgment to the parties.  On 10 June the judge handed down his judgment subject to one manuscript amendment, which he made during the hearing in the light of submissions made by counsel.

22.	The judge's findings may be summarised as follows.  The judge held that the contract price on the first contract was £48,000 plus VAT.  He rejected the defendant's assertion that VAT was included in the contract price of £48,000. In relation to the second contract the judge held that the contract price was £15,500 plus VAT.  He rejected the defendant's submission that the price was £15,000 inclusive of VAT.  The judge held that there was indeed a third contract; that contract embraced the work shown on drawings MK 03A and MK 04.  However, the pleadings did not include any claim for payment due under the third contract.  

23.	The judge held that the total sum which was due to the claimant on contracts 1 and 2, after taking into account the variations and additional work, was £78,957 plus VAT.  The judge then turned to the counterclaim.  He held that some of the defects alleged by the defendant were proved: these related to skirting boards, doors and ironmongery, electrical installation, various making good items, repair following damp, balustrade and handrail.  The judge awarded £2,100 plus VAT in respect of that element of the counterclaim.  

24.	The judge then set off sums due between the parties.  He concluded that the total sum due to the claimant inclusive of VAT was £90,307.  After deducting the payments which had been made, and after deducting the sums due to the defendant on the counterclaim, the judge held that the final balance due to the claimant was £8,907 plus interest, which totalled in all £10,243.  The judge gave judgment for the claimant in the sum of £10,243.  However, the judge made no order for costs.  The judge explained his reasons for making no order for costs as follows in paragraph 26 of the judgment: 

"On the question of costs, I have to say that this was one of the worst prepared cases that I have seen. I was presented with 4 lever arch files. The first file was so badly copied as to be illegible, and had to be changed. The fourth file was never opened once during the trial. Less than half a dozen pages from the third file were used. The documents in the two main files were jumbled and in no particularly sensible order. Overall no more than 50 documents were referred to at trial. The task of trying the case was made far more difficult than it needed to have been. Such matters would normally result in a modest deduction from the Claimant's costs. However, a far more serious matter arises. The Claimant has succeeded only because his true case emerged one week before the trial, when his witness statement containing his evidence about the third contract was served. He had failed to inform Mr France, the expert about this, before 12 May 2010 although he had every opportunity to correct the misapprehension under which he was labouring. He or his solicitors have been less than frank with their opposite numbers, and at times have misled them, for example with their letter of 5 March 2009 enclosing the re-amended Particulars of claim and referring to plans MK03A and 04.  This sort of behaviour is not what is expected of solicitors or their clients under the CPR. While a successful Claimant is normally entitled to his costs, in this case, as a result of his misconduct of the litigation, I shall not award him any costs at all. I do not consider that I can go further and award costs to the Defendant."

25.	On 10 June 2010 at the hand-down hearing the judge made clear that, although he was annoyed about the presentation of the documents, that aspect played a very small part in relation to his decision on costs.  The judge also heard certain further submissions made by the claimant's counsel in an unsuccessful attempt to deflect the judge from the costs order set out in his written judgment.  It must be said that the judge indicated a certain lack of enthusiasm for hearing those further submissions, but hear them he did.  

26.	The claimant was aggrieved by the fact that the judge made no order for costs.  Accordingly he appeals to the Court of Appeal. 

Part 4. The appeal to the Court of Appeal
27.	By a notice of appeal filed on 16 July 2010 the claimant appealed against the judge's order on two grounds.  The first ground was that the judge had erred in holding that a payment of £5,000 made by the defendant to the claimant was referable to the first and second contracts.  The second ground of appeal was that the judge had erred in failing to award costs to the claimant.  Etherton LJ considered this matter on the papers.  He refused permission to appeal on the first ground, that being a question of fact which the judge had decided on oral evidence he had heard.  Etherton LJ granted permission to appeal on the second ground, because he regarded it as arguable that the judge had erred in principle in failing to make any award of costs.  

28.	The costs appeal has been argued this morning by Mr Stuart Roberts on behalf of the claimant/appellant and by Mr Ian Pennock on behalf of the defendant/respondent.  

29.	The competing arguments of the parties, as deployed this morning, may be summarised as follows.  Mr Roberts has essentially three main points.  First, he says that although the claimant lost on a number of issues, nevertheless the claimant was the overall victor on the litigation.  After setting off claim and counterclaim, the claimant ends up recovering £10,243.  There was no offer of any sum in settlement made by the defendant to the claimant.

30.	Secondly, Mr Roberts says that there is no basis for the judge's finding, if the judge did so find, that there was any deliberate misleading of the court or of the expert by the claimant and his solicitors.  Both parties were well aware of the existence of the third contract; both parties were aware that the works under the third contract had been done and paid for; both parties were aware that those matters did not feature in the litigation.  Therefore it is wrong to say that the claimant alone is responsible or that the claimant was deliberately misleading in that respect.  Thirdly, Mr Roberts points out that the defendant failed substantially on his counterclaim.  

31.	On behalf of the defendant Mr Ian Pennock very candidly accepts in his skeleton argument that the claimant was the overall victor in the litigation, because money ended up passing from the defendant to the claimant under the judgment.  However, says Mr Pennock, the claimant was only the victor because he changed his position at a late stage and asserted the existence of a third contract.  If the third contract had not been asserted and proved, and if payments referable to the third contract had not been properly allocated, when one looks at the expert report of Mr France it can be seen that the defendant would end up recovering money from the claimants.  As Mr Roberts vividly put it, he thought when he looked at the expert report that this was a “slam dunk case”.

32.	The second argument here advanced by Mr Pennock is that the claimant was responsible for the confusion about the third contract; he failed to correct the misunderstanding, and the judge was correct to pin the blame for this on the claimant. 

33.	The third argument advanced by Mr Pennock is that he was realistic in dropping the first limb of the counterclaim and, when one comes to the second limb of the counterclaim, it can be seen that he did quite well: he recovered almost half of the sums claimed in the defects Scott schedule.  Mr Pennock also points out that he succeeded in knocking off about £14,000 from the claimant's total claim.  Mr Pennock reminds us that the judge was well aware of all the evidence, having spent two days listening to the parties and having studied extensive documentation.  This court should not interfere with the judge's findings and this court should not interfere with the judge's discretion in relation to costs.

34.	I have carefully considered the powerful competing arguments of counsel.  It seems to me that, of all the matters debated this morning, the central issue which has emerged is whether the claimant was deliberately misleading the joint expert in relation to drawings MK 03A and MK 04 as well as the third contract.  Allied to that is the question whether the claimant deliberately changed tack and abandoned such a deception when he realised that the strategy would backfire and result in a favourable outcome for the defendant.

35.	In relation to this, I have been able to consider the primary facts as found by the judge together with relevant documents furnished to this court both before the hearing and during the course of the hearing of today's appeal.  The judge was undoubtedly entitled to find that there was confusion and incompetence within the claimant's camp and that the material supplied to Mr France did, as a matter of fact, mislead him; but in my view there is no basis for the conclusion (if the judge did indeed conclude) that the claimant was deliberately misleading the joint expert witness or the defendant’s solicitors.  I say this for two reasons: 

(i)	On the judge's findings of fact (viz that there was a third contract, the work was done and the work was paid for by the defendant), the defendant must have been aware of the third contract and of the work done under it.  The defendant must have been aware that he agreed to pay a substantial sum for works to be done in the roof of the premises, that this sum was additional to the sums due on contracts 1 and 2, and the defendant must have been aware that he paid that sum.  Whether it is precisely £21,000 or some slightly different sum is not material to the present issue.  Therefore the defendant has some responsibility for the confusion which was engendered in this case.  Furthermore, since the defendant must have been aware of the third contract, the claimant can hardly have expected to proceed the whole way through the trial without the existence of the third contract being made plain.  

(ii)	 The particulars of claim make it clear that the roof works are not part of the works for which the claimant was claiming payment.  The works for which the claimant was seeking payment are set out in some detail in the re-amended particulars of claim and the accompanying schedules.  Furthermore, although there is a brief reference to reroofing in the re-amended particulars of claim, as explained in Part 2 above, the pleading goes on to set out that no works were done under the second contract in respect of re-roofing and no claim is made for payment in that regard.

36.	I therefore conclude that there is no basis for a finding of deliberate deception or dishonesty on the part of the claimant in relation to drawings MK 03A and MK 04 or in relation to the third contract.  Nevertheless, the judge was fully entitled to find that the claimant and his solicitors carried greater responsibility for the confusion which was engendered than the defendant.  It was the claimant's solicitors who sent out plans MK 03A and MK 04 together with the particulars of claim, suggesting that the plans went with that pleading.  The claimant's solicitors sent the two drawings MK 03A and MK 04 to Mr France, the joint expert witness, clearly inviting him to take those plans into account.  The claimant's solicitors did not correct the misapprehension, when it was plain from Mr France's report that he was treating those two drawings as being referable to the works in issue in the action. Furthermore, the claimant's solicitors did not take the opportunity at the site meeting to correct the misunderstanding which they had engendered.

37. Let me now stand back from the competing arguments of counsel and consider the correct approach to costs in this case.  Rule 44.3 of the Civil Procedure Rules 1998 as amended provides that the court has discretion as to the award of costs.  Rule 44.3(2) provides: 

"If the court decides to make an order about costs –
(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but
(b) the court may make a different order.."

38.	In my view the claimant must clearly be regarded as the successful party in this case because he has ended up recovering a sum of £10,243 after setting off the sums due on claim and counterclaim.  There is no defendant's offer, therefore the only way the claimant could recover the sums due to him was by pressing on to trial.  Accordingly, by reference to rule 44.3(2)(a) the starting point is that the claimant should be entitled to recover the costs of the action.  Nevertheless, Part 44 of the Civil Procedure Rules goes on to make clear that the court has a discretion and must take into account all the circumstances of the case, the conduct of the parties, their success on different issues and so forth.  It is undoubtedly the case that the courts have adopted a more flexible approach to costs since the introduction of the Civil Procedure Rules than was formerly the case.

39.	I see considerable force in Mr Pennock's submission that the claimant has lost on a number of issues concerning the valuation of the works for which he was claiming.  The claimant has also lost and the defendant has succeeded on almost half of the second limb of the counterclaim.   Furthermore, the claimant engendered (albeit not by means of deliberate deception) substantial confusion in relation to drawings MK 03A and MK 04 and the third contract.  All these are matters which properly merit some deduction from the normal order for costs, the claimant having won the action. 

40.	On the other hand, I see force in the claimant's submissions that because he is the overall victor in the action he should recover on any view a significant part of his costs.  Also I see force in the proposition that the defendant must have been aware of the works being done under the third contract.  It was abundantly plain from the pleadings that the works under the third contract were not the subject of the present litigation, and the defendant must bear some responsibility for the confusion which arose.  In my view, the judge did err in principle in concluding that the circumstances of this case warranted depriving the claimant altogether of his costs.  Such a conclusion cannot be justified against the background which I have outlined.  

41.	In those circumstances it falls to this court to re‑exercise the discretion of the court of first instance in relation to costs.  I have carefully considered the conduct of both parties, the confused circumstances of this case, the success of both parties on different issues in the claim and counterclaim.  Having weighed up all of these circumstances, in the light of the guidance given by rule 44.3 of the Civil Procedure Rules, I come to the conclusion that the circumstances of this case warrant a deduction of 50 per cent from the normal order for costs.  I would therefore allow this appeal and substitute an order that the claimant is entitled to recover against the defendant 50 per cent of the claimant's costs of the action.

Lord Justice Tomlinson: 

42.	I agree.

Sir Anthony May: 

1.	I agree that this appeal should be allowed to the extent indicated by Jackson LJ for the reasons he has given.  I do not think that the Recorder's disinclination from hearing submissions about costs which he nevertheless did entertain when he delivered judgment carries any material weight on this appeal.  The question is whether the costs order is sustainable.  

2.	I think that the essence of the matter is this.  The appellant's claim was clearly and competently pleaded in the re-amended Particulars of Claim and this did not in substance include the third contract.  That remained the position throughout.  A joint expert was instructed; the appellant's solicitors mistakenly sent the expert two drawings referable to the third contract, and when the expert first reported they did not abuse him of his explicit misunderstanding that he was to take account of the third contract works in his report.  There was at least one site visit when this misunderstanding was not corrected by either party as it should have been.  The expert's eventual report drawn on this misunderstanding found a balance in favour of the appellant of about £5000 which would have reduced to about £2500 if findings by the Recorder against the appellant as to a payment of £5000 and against the respondent as to some items of the Scot schedule of defects are taken into account.

3.	The appellant eventually, according to the Recorder's finding, put right the very serious muddle which he or his solicitors had engendered about the third contract and succeeded in excluding those works and the payments in respect of them from the proceedings.

4.	The appellant thus recovered £10,243 including interest on a claim which he had put at rather over £20,000 after setting off the £2,467, being the extent to which the counterclaim for defects had succeeded.  The appellant is therefore in my judgment to be regarded as the winning party for the purposes of an order for costs and that should be the starting point.  Apart from the very serious muddle about the third contract the appellant had failed on some parts of his claim and the respondents had withdrawn or failed on the major part of his counterclaim.

5.	The Recorder made no order as to costs, finding that the appellant or his solicitors had mislead their opposite number and the expert about the third contract and that the appellants' eventual success in the proceedings was only because his true claim about the third contract on which he succeeded was unravelled only a week before the trial.  The Recorder said that this was not what is expected of solicitors or their clients under the Civil Procedure Rules.  The Recorder thus took a poor view of the appellant's conduct, but I do not read that as a finding of deliberate or dishonest misleading.  If it should be so read, I do not think that such a severe finding would have been justified.  On the Recorder's findings there was a serious muddle promoted by the appellants but the respondent also must have known the true position about the third contract and the appellants' pleaded case remained clear at all times.  Deliberate misleading is not, I think, consistent with the clear and consistent case made on the pleadings.

6.	The other criticisms on which the Recorder based his costs order, which he acknowledged would result only in a modest deduction from a full costs order, are to be taken into account but do not carry the matter very far.

7.	In these circumstances I consider that the Recorder's order disallowing the whole of the winning party's costs is unsustainable.  The right discretionary order, in my judgment, in agreement with Jackson LJ, is that which he has determined; that is that the appellant should have 50 per cent of his costs of the action to be assessed if not agreed.  The court will order accordingly.

Order:  Appeal allowed