England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS COUNTY COURT (CHANCERY DIVISION)
(MR RECORDER KLEIN)

		Royal Courts of Justice Strand London, WC2A 2LL
		26 November 2014

1. LORD JUSTICE LEWISON: This is a depressing appeal about costs. It is depressing because the costs incurred in the dispute are likely to be more than the substantive amounts now at stake, so there can in economic terms be no winners but the lawyers; and it is all the more depressing because the parties are, or were, related by blood or marriage.
2. The background is as follows. Mrs Ma'har and Mrs O'Keefe are sisters. Mr O'Keefe was married to Mrs O'Keefe but they have either divorced or are in the process of divorcing. Together they bought a country hotel in Skipton called the Eldon Country House Hotel in 2000. It is now agreed that they held the hotel as tenants in common in unequal shares. In addition to their joint ownership of the hotel shortly afterwards they entered into a partnership at will under which they were to be equally entitled to profits and equally liable for losses. The hotel itself was not partnership property but remained owned by the partners in the same unequal shares. The two sisters fell out in 2003 and Mrs Ma'har left the hotel. It is agreed that the partnership was dissolved in 2003. Mr and Mrs O'Keefe continued to run the hotel until Mr O'Keefe left in 2007 leaving Mrs O'Keefe as a sole trader. Mrs Ma'har and Mr O'Keefe, not unnaturally, wished to realise their investment in the hotel. Mrs O'Keefe was opposed. In 2008 Mrs Ma'har began proceedings against Mr and Mrs O'Keefe asking for an order for sale of the hotel and for an accounts and enquiries in relation to the partnership. Mr O'Keefe did not resist either claim but Mrs O'Keefe did.
3. In October 2008, Judge Langan QC made an order for sale, the sale to take place not before April 2009. He also ordered Mrs O'Keefe to pay Mrs Ma'har's costs.
4. The next stage in the proceedings was to determine the parties' beneficial interests in the property and that was done by His Honour Judge Kaye QC in January 2009. He ordered Mrs O'Keefe to pay Mrs Ma'har's costs and adjourned the account and enquiry to a District Judge. The hotel was sold in April 2011 and Mrs Ma'har's solicitors held the net proceeds of sale pending agreement about their distribution or further order.
5. On 2 August 2011, Mrs Ma'har applied for an order for payment in her favour of £83,998.06 out of the net proceeds sale of the hotel and a further £6,599.41 in favour of HSBC.
6. On 14 September 2011, Judge Langan ordered an interim payment of £20,000 out of the net proceeds of sale in favour of Mrs Ma'har together with further sums out of Mrs O'Keefe's beneficial share of those proceeds representing costs liabilities incurred by Mrs O'Keefe. The balance of Mrs Ma'har's claim was thus about £70,500.
7. His Honour Judge Kaye gave directions for the outstanding account and enquiry on 14 November 2011. In due course the parties prepared a Scott Schedule of the various points that were in dispute on the account and Recorder Klein gave judgment on a number of points of principle on 25 February 2013. The result of his judgment and its subsequent working out is that Mrs Ma'har became entitled to a further £8,989.80 on top of the £20,000 interim payment she had already received. Thus she recovered just over twelve and a half per cent of the balance of her claim.
8. The case then came back to Recorder Klein on 14 February 2014 to deal with costs. It is in relation to the costs order that he made that this appeal is brought.
9. While the case was proceeding solicitors for Mrs Ma'har and solicitors for Mr O'Keefe made a number of offers to settle. The offers were all made without prejudice save as to costs. Mrs O'Keefe steadfastly refused to have anything to do with them and it is largely because of her intransigence that the case came to trial.
10. On 24 October 2011, Mrs Ma'har offered to settle for a further payment of £20,000 plus her costs, then estimated at £9,000. There does not appear to have been a substantive reply to that offer. On 22 November 2011, she offered to settle for £18,000 plus her costs, then estimated at £12,000, or £30,000 all in.
11. On 8 December 2011, Mr O'Keefe's solicitors set out his position. He would be prepared to agree that Mrs Ma'har should receive £18,000 out of the net proceeds of sale but was unwilling to pay any costs. However, they said that his offer was conditional on Mrs O'Keefe agreeing to it as well. As an alternative they proposed mediation. A copy of that letter was sent to Mrs O'Keefe in January but she did not reply to it.
12. On 18 January 2011, Mrs Ma'har's solicitors wrote to Mr O'Keefe's solicitors and to Mrs O'Keefe. They explained that an agreement had been reached in principle between them and Mr O'Keefe's solicitors for Mrs Ma'har to receive a further £20,000 inclusive of costs from the net proceeds of sale. They invited Mrs O'Keefe's agreement to the deal but despite many reminders there was no reply until 11 March 2012 when she, or perhaps a Mr Thomson acting on her behalf, wrote to say that Mrs O'Keefe would consider a settlement if Mr O'Keefe accepted liability for certain items in the Scott Schedule. However, she was asked again whether she would agree to the deal reached between Mrs Ma'har and Mr O'Keefe but again did not reply.
13. On 13 December 2012, Mrs Ma'har's solicitors wrote to both Mr and Mrs O'Keefe offering to accept a further £11,000 out of the net proceeds of sale plus their costs from 1 August 2011.
14. On 20 December, Mr O'Keefe's solicitors wrote to say they would agree to Mrs Ma'har receiving a further £11,000 but they said that the division of the proceeds was "a three-way process". So far as costs were concerned they said that they did not agree to Mrs Ma'har's costs being paid out of the net proceeds of sale "without further determination as to liability for those costs". They repeated their position in a letter of 29 January 2013. The final offer was only made by Mrs Ma'har's solicitors on 5 March 2013; that is to say after the Recorder had already decided the points of principle. In that letter they offered to accept a further sum of £6,500 inclusive of interest plus her costs from 1 August 2011, to be the subject of detailed assessment if not agreed. Mr O'Keefe rejected this offer and once again Mrs O'Keefe did not reply.
15. It was against that background that the judge had to make his decision about costs. He decided, and it is not challenged on this appeal in the grounds of appeal, that in the case of the taking of a dissolution account between partners the starting point is no order as to costs. This starting point derives from the practice described by Sir George Jessel MR in Hamer v Giles (1879) 11 Ch D 942:

"It appears to me that where there is no fault on either side, but the partnership accounts have to be taken in this Court, the costs of the action for taking the accounts from the beginning ought to be dealt with as all other costs of necessary administration, that is, they must come out of the partnership assets. Of course, where an action for dissolution is rendered necessary by the misconduct of a partner - as, for instance, where a partner whose duty it is to keep the accounts has neglected to do so - the Court not only has jurisdiction, but is bound to exercise it, by making that partner pay so much of the costs as are occasioned by his misconduct."

16. As Park J explained in Sahota v Sohi [2006] EWHC 344 (Ch) at paragraph 16:

"If and to the extent that the principle applies to costs incurred in connection with a partnership action the effect strictly depends on whether in the first instance costs are met out of the partnership funds or are met by the separate partners individually. If they are met out of the partnership funds they are simply left to lie where they fall, and reduce the fund falling to be divided between the partners. The effect is much the same as 'No order as to costs'. If costs have been met by the partners separately but are fairly to be regarded as going to the sorts of matters covered by Hamer v Giles, each partner should strictly be required to contribute to an aliquot share of the costs incurred by the other partners."

17. This, in my judgment, is a critical point because it makes this kind of litigation different from the more familiar adversarial litigation such as money claims in contract or in tort where one can easily see who is the winner and who is the loser.
18. The judge in our case turned to consider whether he should depart from that starting point. He began by reminding himself that he was only dealing with costs incurred since 4 August 2011, that is to say costs incurred after the order for the interim payment. In other words, what was in issue was whether Mrs Ma'har was entitled to more than £20,000 and, if so, how much more. He began by considering whether it could be said that of the disputed items one party was more successful than the others. In fact, he had already given some consideration to that question because his order of 25 February 2013, against which there has also been no appeal, contained what are in effect declarations about the relative success or failure on the contested issues on that occasion. Overall, he considered that Mr O'Keefe was the more successful party.
19. He then reminded himself that he should consider the conduct of the parties and any admissible offers. He asked himself what benefit Mrs Ma'har had achieved by continuing with the proceedings. He did that by measuring the eventual outcome against the offers to settle. He said that Mrs Ma'har had achieved a further payment of £10,026.02. It is now common ground that that was an error and that the correct figure should have been £8,989.80. He then compared that with the offers to settle that Mrs Ma'har had made. Until the last offer made on 5 March 2013 she was unwilling to accept a sum less than that to which she was ultimately held to be entitled. But he did recognise that she had shown a willingness to settle.
20. He then turned to consider Mr O'Keefe's offers and said that he had beaten his offer of 8 December 2011, when he offered to allow £18,000.
21. The judge was also critical of Mrs O'Keefe. Although he was prepared to accord her some latitude because she was a litigant in person, he considered that but for her demand that the issue should be tried many of the issues could have been resolved. But that, he thought, was only a small factor in his overall assessment.
22. He also considered whether there was any distinct part of the proceedings that could attract a separate costs order and decided that there was not.
23. What therefore he decided was: (1) Mrs Ma'har should pay 35 per cent of Mr O'Keefe's costs of the proceedings between 1 January 2013 and 26 November 2013 and Mrs O'Keefe should pay 15 per cent of those costs; (2) that Mrs O'Keefe should pay half Mrs Ma'har's costs of the period between 28 March 2013 and 26 November 2013; (3) all the costs covered by those orders were to be assessed on the standard basis if not agreed.
24. The judge subsequently explained that the dates of 1 January 2012 and 28 March 2013 had been calculated as 21 days plus 2 days following the relevant offers; that is to say Mr O'Keefe's of 18 December 2011 and Mrs Ma'har's of 5 March 2013. He also explained that the end date of 26 November 2013 was chosen because after that date the only remaining matter in issue was a liability for costs and no party had been wholly successful on that issue.
25. Mrs Ma'har now appeals on four grounds: (1) The judge was wrong in thinking that Mr O'Keefe's offer of 18 December 2011 was capable of acceptance; (2) the judge failed to consider the fact that Mr O'Keefe's offer of 8 December 2011 was revised upwards to £20,000 within a short time and Mrs Ma'har accepted that offer; (3) the apportionment of liability for Mr O'Keefe's costs as between Mrs Ma'har and Mrs O'Keefe was beyond the bounds of reasonable or coherent rationalisation or logic; and (4) the judge was wrong not to require Mr O'Keefe to pay Mrs Ma'har's costs after 28 March 2013 when he failed to accept her offer of 5 March which she subsequently beat.
26. The appellant's notice seeks an order that Mr O'Keefe should pay 33.3 per cent and Mrs O'Keefe 66.6 per cent of Mrs Ma'har's costs from 4 August 2011 to 28 March 2013 and thereafter 50 per cent each of Mrs Ma'har's costs from 28 March 2013 to 14 February 2013.
27. The starting point for an appeal against a costs order made after trial is that the making of the order is an exercise of judicial discretion. CPR Part 44.2(4) requires the court to have regard to "all the circumstances" and then lists a number of considerations for the court to take into account. These include:

"(a) the conduct of all the parties; (b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and (c) any payment into court 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."

44.2(5) then goes on to expand on the meaning of conduct and in particular it says in subparagraph (b) "whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue".

28. The question we have to decide is not whether we would have made the same order as the judge but whether his order was within the broad ambit of the discretion given to him by the Rules. It is well settled that on an appeal against a judge's exercise of discretion a successful appellant must show either that the judge took into account matters he should not have or failed to take into account matters that he should have or reached a decision that was wrong in principle. The latter category will also include cases in which a judge has made a material error of law (for a recent restatement see F & C Alternative Investments (Holdings) Ltd & Ors v Barthelemy & Anor [2012] EWCA Civ 84,3, [2013] 1 WLR 548 at 42). As Davis LJ also said in that case:

"Further, it is particularly important to bear in mind that a trial judge – especially after a trial such as this one – will have a knowledge of and feel for a case which an appellate court cannot begin to replicate."

29. That observation has particular resonance in this case as Mr Pennock, appearing on behalf of Mrs Ma'har, sought to take us through some of the facts underlying the disputes which the Recorder had to resolve. A partial exposition of facts in that way is precisely the reason why an appeal court should be very wary of interfering with the trial judge's exercise of discretion.
30. Turning then to the first ground of appeal, the judge did not say in his judgment that Mr O'Keefe's offer of 18 December was one that if accepted would have produced a concluded contract, although it is true to say that he did make an observation to that effect in the post judgment discussion about permission to appeal. Plainly, Mr O'Keefe's offer could not have been accepted so as to conclude a binding contract because it was, among other things, conditional on Mrs O'Keefe's agreement.
31. I do not think that the judge thought that it was capable of acceptance in that sense. For him its significance was that it "reflects reasonable conduct and a desire to settle". It may be said that it had further significance too. First, because it showed that Mrs Ma'har was unwilling to settle for that figure at that point and, second, because her rejection of the figure of £18,000 meant that there was little point in putting pressure on Mrs O'Keefe either to agree or indeed to pursue the alternative suggestion of mediation. In addition, it was an offer to settle albeit conditional and it was admissible, so that the judge was required by Part 44.2(4)(c) to take it into account, which is precisely what he did. How much weight he gave it was a matter for him. I would therefore reject the first ground of appeal.
32. So far as the second ground of appeal is concerned, Mr Pennock argues that by accepting the revised offer of £20,000 the claim was compromised as between Mrs Ma'har and Mr O'Keefe. In the first place, that argument is quite inconsistent with his argument that the first offer should have been ignored as incapable of acceptance as it too was subject to the agreement of Mrs O'Keefe. Second, any acceptance of that offer is belied by Mrs Ma'har's own conduct in continuing the proceedings in which she continued to claim a much higher amount and her failing to achieve anything like that second offer. Moreover, even if correct, it could not possibly justify an order that Mr O'Keefe should pay any part of Mrs Ma'har's costs. I would therefore reject the second ground of appeal.
33. The third ground of appeal attacks the judge's apportionment of costs as between Mrs Ma'har and Mrs O'Keefe. Here, as it seems to me, the real question is whether the judge's order that Mrs Ma'har should pay 35 per cent of Mr O'Keefe's costs was within his discretion even if he had not made any order against Mrs O'Keefe.
34. Bearing in mind that (a) the judge considered that Mr O'Keefe had been more successful on the contested issues than Mrs Ma'har; (b) that Mr O'Keefe had attempted to settle at a figure higher than that to which Mrs Ma'har was ultimately entitled; (c) until her offer of 5 March 2013 Mrs Ma'har had been unwilling to settle except for a sum in excess of her true entitlement; and (d) the order for costs was a percentage of Mr O'Keefe's assessed costs rather than all of them, I consider that the order was within the ambit of the judge's discretion.
35. Had I been the first instance judge exercising my own discretion I might have required Mrs O'Keefe to pay more. But that merely reflects the commonplace that the exercise of discretion by a different decision maker might produce a different result. It does not show that the first decision maker's actual exercise of discretion was wrong in the sense in which that word is used in CPR Part 52. I would therefore reject the third ground of appeal.
36. The fourth ground of appeal focuses on Mrs Ma'har's offer of 5 March 2013. It is critical to remember that by this time the Recorder had already determined the issues of principle between the parties and that Mr O'Keefe had been largely successful on the substantial issues in relation to which the judge had given his judgment on 25 February.
37. It is also critical to remember that the offer was an offer to accept £6,500 plus costs back to 1 August 2011 even though Mr O'Keefe had been largely successful on the contested issues. Although it is true that Mrs Ma'har recovered more than £6,500, she did not recover her costs, nor was there any real likelihood that she would do so back to August 2011 when (a) the agreed starting point was no order as to costs; (b) she had rejected the offer of 8 December 2012; and (c) the contested issues had already been decided mostly in Mr O'Keefe's favour.
38. There is also a logical inconsistency in the submission because it only seeks Mrs Ma'har's costs going forward from 5 March, whereas the offer itself required payment of her costs going back to 1 August 2011. Thus, it cannot, in my judgment, be said that Mrs Ma'har had beaten her offer of 5 March. Consequently, it cannot be said that the judge was wrong not to award her costs from 28 March 2013.
39. It is also asserted in the fourth ground of appeal that the litigation was prolonged by a false accusation made by Mr O'Keefe about monies paid out of the business to Mrs Ma'har. This is not, with respect, a correct characterisation of the allegation that Mr O'Keefe had made. Mr O'Keefe pointed out what the accounts showed. He said that the accounts showed that Mrs Ma'har's capital account was in deficit, and indeed it is, as I understand it, accepted that the accounts showed exactly that. Mr O'Keefe went on to say that the position was unclear and an account was necessary in order to ascertain what the true position was. The Recorder, in his judgment in February, agreed with that.
40. It is true that the issue was ultimately compromised when Mr O'Keefe said that the value of the Shogun car should be credited to the partnership and written down against the parties' respective capital accounts. Mr Pennock submitted that that was conduct on the part of Mr O'Keefe, it was unreasonable for him to pursue the issue and that the judge ought to have taken into account both the fact that the allegation was pursued and also that it was abandoned at a very late stage. In paragraph 11 of his judgment, the judge said this:

"As to the conduct of the First Defendant I should say that I am mildly concerned that the question of the Shogun motor car as a partnership asset became an issue, apparently, so late in the day. The First Defendant, in my view, could have alerted the other parties to its significance earlier."

41. He did therefore take it into account but the fact that he was only mildly concerned betokens that he did not think it was unreasonable conduct and, in my judgment, it cannot therefore be said that the judge failed to take into account a matter which he ought to have taken into account. He took into account all the relevant matters, he did not take into account irrelevant matters and, in my judgment, his eventual order was within the broad ambit of his discretion.
42. I therefore would dismiss the appeal.
43. LORD JUSTICE BURNETT: I agree.
44. LORD JUSTICE LONGMORE: I also agree.