England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL ( CIVIL DIVISION )
ON APPEAL FROM MANSFIELD COUNTY COURT
(MR RECORDER LOWE)

		Royal Courts of Justice Strand, London, WC2A 2LL
		17th January 2012

Lord Justice Davies:

1. The order for costs after a trial is pre-eminently a discretionary remedy. Appeals from such awards are not encouraged and the appellate court will ordinarily only interfere if there has been some error of principle or some significant matter wrongly left out of account or, conversely, wrongly taken into account or if the result is simply plainly unjust. In the present case, there is indeed a real argument to the effect that the award here was wrong, which is exemplified by the fact that Maurice Kay LJ granted leave to appeal on certain terms on 30 June of this year.
2. The order as to costs in question was made by Mr Recorder Lowe on 12 May 2011 at the conclusion of a trial lasting some one and a half days in the Mansfield County Court. As drawn up, the order provides as follows.

"1) There be Judgment for the claimant on the claim in the amount of 9,344.38 euros.

2) There be Judgment for the defendant on the counterclaim in the amount of 5,844.38 euros.

3) The Claimant shall pay two thirds of the Defendant's costs of the Claim and Counterclaim, such costs to be the subject of detailed assessment if not agreed. The Claimant shall make an interim payment in respect of those costs in the sum of £10,000.00."

Permission to appeal was refused.

3. That order was the culmination of proceedings commenced by the claimant on 12 January 2010. By its Particulars of Claim the claimant had claimed the sum of €18,000 said to be due as a monthly rental payment in respect of a luxury villa in the south of France rented out by the claimant to the defendant for the month of October 2009. Credit, however, was given in the claim for the sum of €8,000 paid by the defendant on 16 November 2009. At around the time of issue of proceedings a further sum of euros was paid by the defendant and the claimant in around €655 and the claimant also gave credit for that in its pleaded reply. In the result the total claim was for €9,344 plus interest.
4. In its pleaded defence the defendant did not dispute at all its liability in principle for the October rent. Indeed that was admitted in the defence. The defence was entirely by way of a proposed set-off of the amount claimed by way of counterclaim. It is a point of comment that the fact that the defence is one of set-off of the counterclaim shows the acknowledged nexus between the counterclaim and the claim. The counterclaim itself as quantified came to €9,344 plus interest, so the amount of the counterclaim corresponded to and if established would extinguish the amount claimed by the claimant as no doubt the defendant had calculated in making the two payments prior to the proceedings getting under way. At all events the defence denied that any sums at all were owed by it to the claimant.
5. The subject matter of the counterclaim can be shortly described for present purposes. It was said that the defendant had itself rented the same villa from the claimant for a period of time in August 2009 with a view to on-letting to other individuals. In the event that is what the defendant did, subletting or letting the villa out for a significantly enhanced rent to a Mr Echavarrias, who seems to have been a Canadian national, and his family.
6. Mr Echavarrias was to complain, and vigorously complain, that, during a heatwave, for the period of time he was staying in the villa in that August the air conditioning was not working and it took some days before it was mended. Mr Echavarrias was extremely displeased. He had understood that he and his family would be getting, at very considerable expense to him, a restful holiday in a luxury villa near St Tropez and in the event during this heatwave things had not turned at all as had been planned. In due course, so it was said, Mr Echavarrias claimed from the defendant the sum of €11,000 by way of compensation. It seems that he subsequently increased his claim for compensation. Ultimately indeed he threatened proceedings, but in the event the defendant eventually negotiated a settlement with Mr Echavarrias in the sum of €8,500.
7. It may be noted that the claimant himself had at an early stage had previously offered a rebate to the defendant in the sum of €5,000 in respect of the air conditioning problem, but that had not been accepted by the defendant. The counterclaim of the defendant at all events sought to recover, as payable by the claimant for breach of contract, the sum of €8,500 paid by it to Mr Echavarrias to settle Mr Echavarrias's asserted claims. In addition the defendant sought the sum of €844 as recoupment of the costs of air conditioning engineers whom the defendant had engaged in France to put right the cooling system problems.
8. In a result, and after hearing the evidence, the recorder noting that he received no evidence from Mr Echavarrias, the recorder decided that the defendant was entitled to reimbursement from the claimant but not in the amount of €8,500 as claimed but only for €5,000. The recorder went on to consider the claim for the €844 for the air conditioning engineer's costs. He found them to be reasonable and properly incurred and allowed that amount in favour of the defendant. So the counterclaim succeeded to the tune of €5,844 and the overall upshot was that that left a balance of €3,500 payable on the claim to the claimant.
9. Before the trial each side had made offers of settlement which were not accepted. Amongst other things, on 4 March 2010, the defendant had offered to the claimant by way of a Part 36 offer a drop hands settlement with each party bearing its own costs. That was rejected, repeated and rejected again. On 9 July 2010 the claimant in its turn made an offer under Part 36 offering to accept the amount of £5,000 plus costs in settlement of the proceedings, but that was rejected as an offer by the defendant. The defendant then made further drop hands proposals, ultimately on 4 April 2011 offering to accept a contribution of £15,000 towards its costs as a settlement of all the proceedings; but that was not acceptable to the claimant. In the event the trial took place, as I have indicated.
10. It may be noted that on 9 November 2009 the claimant had issued a statutory demand against the defendant. Shortly after that, the sum of €8,000 was paid by the defendant and then subsequently the further amount of €655 was paid by the defendant. At all events the statutory demand was withdrawn on 20 November 2009.
11. When it came to argument on costs before the recorder, it has to be said that each counsel then appearing on behalf of the claimant and the defendant respectively opened his mouth wide. Mr Healy, appearing for the defendant, got to his feet first. He submitted that the claim had never been in issue and that the case was "all about the set-off" and that the defendant should have all its costs of the proceedings. On behalf of the claimant Mr Brown, then appearing for the claimant, said that the claimant was the overall winner and that in the result money was being paid over to the claimant which it had had to take legal proceedings to recover and so, it was submitted, the claimant should have all of its costs of the proceedings. In the alternative, however, Mr Brown proposed that there be no order as to costs.
12. In giving judgment on costs, the recorder amongst other things said this. After some initial and understandable comments about the enormous pity that it was that so much money and effort had been spent on such relatively small amounts, he made these comments:

"I am satisfied that this case has been, and throughout the evidence has always been, about the counterclaim."

He then went on to say there had been no dispute that the claimants were entitled to €18,000 in relation to the October 2009 letting and he said:

"...the Defendants effectively took advantage of the fact that that money for one reason or another had not been paid at the time it should have been. Rather than suing for 9,344 euros, the [defendant] deducted it from the 18,000 euros. Had the Defendant paid the 18,00[0] euros and sued for 9,344 euros, they would have been entitled to all their costs but they had not."

Having made those remarks, the recorder then went on to deal with the Part 36 offers that had been made and then said this:

"Nevertheless substantially in relation to this claim and the issues that have arisen Kestrel Travel have in my judgment succeeded, and the way in which the Claimants could have protected themselves from such a finding of fact would have been to have made a Part 36 offer coincided with or exceeded that which I have ordered, and they failed to do so."

The recorder then went on to make the orders as to costs already indicated.

13. Before this court Mr Sisley on behalf of the claimant, who did not appear in court below, argues that the recorder erred in principle or reached a result on costs which is demonstrably unreasonable. It is in particular said by Mr Sisley that it simply was not right for the recorder to say that the case was "all about the counterclaim". That aspect may have occupied virtually all the time at the trial itself, but the reality was, submitted Mr Sisley, that the case was all about whether or not the defendant owed money to the claimant; and the proceedings had been necessary insofar as the claimant was concerned to establish that that was indeed so and the claimant made recovery in net terms of a not insignificant amount.
14. Mr Healy on behalf of the defendant, on the other hand, argues that this was a matter of discretion for the recorder who had had the conduct of the trial. It is submitted by Mr Healy that it was indeed important that the defendant had always accepted liability for the October letting in the total amount of €18,000. He stresses that the greater part of the trial bundle and of the evidence adduced at trial related to the letting in August when the problems with the air conditioning occurred. It is submitted that the recorder did not err in principle in his approach or in his award and that the Court of Appeal should not interfere. He further submitted that it is simplistic to identify the winner as being the party who ultimately receives a cheque; and here it was stressed that the defendant had succeeded on two-thirds of its counterclaim and the counterclaim is what the trial had been occupied with.
15. In their written arguments both parties had placed some reliance on the offers made before the litigation and during the litigation, but the recorder attached no great weight to that and nor would I. Neither side succeeded in making a pre-trial offer in an amount in excess of what the other side ultimately recovered. Indeed there may have been some dangers for the defendant in pursuing that approach given that the claimant had made an offer at an early stage of €5,000 by way of recompense for the air conditioning problem which is what they ultimately got.
16. To the extent that reliance on the offers made during the litigation is relied upon in the Respondent's Notice, I thus attach no weight to that. Also in the Respondent's Notice, although not pursued by Mr Healy in oral argument, some reliance was placed on the circumstances surrounding the statutory demand as being relevant on the issue of costs. In my view it is completely irrelevant on the issue of costs.
17. We were of course referred to the rules and in particular to rule 44.3 of the Civil Procedure Rules. By Rule 44.3(2) it is provided:

"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."

And then in sub paragraph (4):

"In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including –

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply."

By paragraph 6 of that rule there is provision as to the orders which the court may make.

18. It may be noted that in the notes to the Rules there is extensive citation from the judgment of Jackson J (as he then was) in the case of Multiplex Construction Limited v Cleveland Bridge UK Limited [2008] EWHC 2280. Jackson J there set out certain principles which are potentially relevant. The first of which was this:

"(i) In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action."

That is of course advanced as a general principle and may admit of exceptions: but nevertheless it clearly has potential relevance for the purposes of this particular case.

19. Mr Sisley referred us to the decision of a constitution of this court in the case of Naseem v Kang [2011] EWCA Civ 737. That was the case involving a building contract where claims were made and counterclaims were made. Obviously that was a case which had its differences on the facts from the present case, but Mr Sisley placed reliance on certain observations made by Jackson LJ, as he had by now become, in giving the first judgment. There the claimant had succeeded in establishing a net entitlement of over £10,000. In paragraph 38 Jackson LJ said this:

"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.

Jackson LJ then went on to acknowledge the force of the observations that the claimant had lost on a number of matters as well as the force of the observation that the claimant had been overall victor in the action: and concluded that the judge had erred in principle in that case in deciding that the circumstances warranted depriving the claimant altogether of his costs. Sir Anthony May, in giving his judgment, said this amongst other things:

"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."

In the circumstances of that particular case the Court of Appeal decided, reversing the decision of the judge below, that the claimant should get 50 per cent of his costs of the action.

20. For his part Mr Healey referred us to a decision of Mann J in the case of Square Mile Partnership Limited v  Fitzmaurice McCall Ltd [2006] EWHC 236 where, in it has to be said rather special circumstances and prior to the decision in Multiplex, the judge, exceptionally, decided to make no order as to costs notwithstanding that the claimant in net terms recovered over £100,000.
21. It is not necessary to refer to any of the other authorities cited to us. Indeed it is generally understood that the citation of authorities in questions of costs is to be discouraged.
22. Turning then to the position in this case, I am for my part in no doubt that the recorder erred in principle in what he did here. Indeed in my view he reached a conclusion on costs which was simply plainly wrong. The fact remains that the claimant had had to sue in order to recover anything. It may well be that there were two separate contracts, as Mr Healy stressed. But the reality is that this was one overall contractual situation and one overall dispute. As the recorder himself had pointed out in the course of his remarks, the defendant could have paid off the entirety of the outstanding amount of the October rent and then itself sued for recovery for what it was said was due to it in respect of the August letting. Indeed, had it done so, the recorder indicated that he would have awarded the defendant all of its costs. But the defendant for tactical reasons chose not to do that and it seems to me must take the risk in consequence.
23. It is, in my view, important to bear in mind that ultimately the claimant itself recovered the amount of some €3,500. So, as it seems to me, the starting point here is that overall the claimant was the successful party and therefore the starting point in terms of payment of costs likewise followed, albeit it is not necessarily the ending point. In my view the error of the judge was to categorise this case as "all about the counterclaim". It was not. It was in reality all about whether or not the defendant owed anything to the claimant; and it was established that the defendant did owe something, and a significant something, to the claimant. The trial itself may have involved detailed examination of the counterclaim but the overall winner, albeit by no means in terms of total success, was the claimant because it ended up by recovering €3,500. In my view it simply is not realistic to describe the defendant as the winner here in starting point terms and to take the view that the costs position favoured the defendant.
24. Mr Healy submitted that, had costs been ordered on an issues basis, then the costs attributable to the counterclaim would have greatly exceeded the costs attributable to the claim: and so the recorder's ruling can be upheld by that approach. But there are two answers to that, as it seems to me. First, the recorder was not asked to order costs on an issues basis. Indeed, for obvious reasons, courts are generally reluctant to do so and here the recorder was quite right not to go down that particular road. Second, that particular point cannot in my view be used to conceal the reality in this particular case that overall that in what was in substance a net entitlement form of proceedings the claimant had come out significantly ahead.
25. In such circumstances it is in my view for this court to exercise its discretion afresh, the recorder having erred in principle. Clearly, nevertheless, this court must respect the recorder's attitude and approach, that most of the trial itself had related to the counterclaim and in respect of that counter claim the defendant had had substantial (although by no means total) success. Clearly that must operate to reduce, and significantly so, the otherwise starting point entitlement of the claimant. At the same time, one has to respect the fact that the claimant did have overall success, albeit in an amount of less than it had claimed.
26. In that position unreality again unfortunately further crept into counsel's submissions before us. Mr Sisley went so far as to say that the claimant should get 70 per cent of the costs of the proceedings in the county court. Mr Healy submitted that there should still be an order for costs in favour of the defendant: even if not of two-thirds as the recorder had suggested then it should be in the order of one half to one third. That submission of Mr Healy, with all respect, I regard as completely devoid of all reality.
27. In my view, there should be some award of costs in favour of the claimant given that it was in net terms the successful party. But it should be very significantly discounted in view of the very substantial success, albeit not complete success, of the defendant on the counterclaim. In my view, exercising the discretion afresh, I think the right order here is that the defendant should pay 25 per cent of the claimant's costs of the proceedings below and the defendant itself must bear its own costs of the proceedings. I would allow the appeal accordingly.

Lord Justice McFarlane:

28. I agree.

Lord Justice Maurice Kay:

29. This case is a stark example of litigation about relatively modest sums of money fought out at a cost out of all proportion to the sums in dispute. The Recorder was told at the conclusion of the trial that the claimant's costs then stood at some £40,000. We have been told that the defendant's costs at trial were in the region of £34,000. Neither party had made an effective Part 36 offer. It is such circumstances which give rise to familiar problems about litigation costs. No doubt further substantial costs have been incurred in relation to this successful appeal. It is difficult to avoid the impression that this case went wrong in the county court when both counsel, not Mr Sisley who did not appear below, made unsustainable applications for full costs. First Mr Healy on behalf of the defendant and then counsel then appearing on behalf of the claimant, who referred to his application as "meeting fire with fire". Both applications were totally unrealistic and unhelpful to the Recorder. In the event, not having received reasonable and helpful submissions, he made an order which for the reasons given by Davis LJ was wrong in principle. I agree that the appeal must be allowed and I also agree as to the substituted order proposed by Davis LJ.

Order: Appeal allowed