England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COUNTY COURT AT CENTRAL LONDON
HIS HONOUR JUDGE BAILEY
2CL20028

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/03/2018

Mrs Justice Rose:

1. The Appellants are all long lessees of flats in a building in Neasden. On 18 June 2015 HHJ Bailey sitting in the County Court at Central London gave judgment in a long running dispute between them and the First Respondent, ('Strandview') which is the freeholder of the block and the Second Respondent ('Garpoint') which is a building construction company. Both the Respondents are controlled by Mr James Feeney. The Respondents had carried out substantial works to the block of flats in the course of 2010/2011. The works comprised partly maintenance works and partly the construction of additional flats at the top of the building. The maintenance works had been the subject of a determination by the Leasehold Valuation Tribunal which had approved the costs of the works, including 15% as a reasonable figure to be included in those costs for professional fees.
2. The proceedings issued by the Appellants were for negligence, nuisance, breach of covenant and breach of the Party Wall etc Act 1996. The claim was said in the claim form to be worth more than £550,000 and included special damages for the costs of repairing damage caused by ingress of water and general damages for temporary loss of enjoyment. It was also alleged that the Respondents had failed to carry out strengthening works to ensure that the building was safe to bear the weight of the additional flats. Strandview and Garpoint defended the claim and Strandview brought a counterclaim seeking payments of between about £8,000 and £10,000 from each of the Appellants for, amongst other things, unpaid service charges and contributions to the repair works as demanded in December 2011.
3. The Defence to Counterclaim served by the Appellants relied primarily on an assertion that the right to raise service charges was reserved to the block's residents' association and that the individuals purporting to request payment of the service charges "were not at all involved in the day to day maintenance of the building" and were not recognised by the residents. Further, they alleged that the invoices were incorrect or that the service charges were unreasonable and excessive although no particulars were given to support this allegation.
4. The first 72 paragraphs of HHJ Bailey's judgment dealt with the Appellants' claim. To put matters shortly, with one or two minor exceptions the claim failed completely. The final two paragraphs dealt with Strandview's counterclaim for service charges and section 20 repairs. The service charges were divided into three relevant periods. The first period, June 2001 to June 2007, was before Strandview appointed their managing agent, Mr Peppiatt, to manage the building. The second period was from December 2010 to March 2014 and the third period was from March 2014 to June 2014. The Judge resolved the issue raised in the Defence to Counterclaim about who was properly to be considered the managing agent in favour of Strandview. He resolved the rest of the Counterclaim in [73] and [74] of the judgment. He said that "Perfectly sensibly, the defendants have abandoned the claims for the first period, that is indeed before Mr Peppiatt was involved". But they maintained their claim to the second two periods about which, the Judge recorded, there was no dispute as to quantum. He awarded those service charges as pleaded. As to the section 20 repairs, he reduced the amount claimed in two respects:

"First, VAT is claimed but the second defendant, in respect of whose work the claim is made, is not registered for VAT. Secondly, it is claimed that a 15 percent fee by way of supervision fee should be paid to Martin Surveying Associates in addition to the second defendant's work. It is evident that no supervision fee was paid to Martin Surveying Associates. On the face of it, therefore, that does not look good from the defendants' point of view. Mr Gatty has explained to me that while no supervision fee as such was paid there were fees paid to Martin Surveying Associates, not for supervision but for other work in excess of the 15 percent claimed. So, things are not bad as they appeared at first sight. Be that as it may, because of the misdescription, the defendants very sensibly do not pursue that 15 percent element."

5. Immediately after the Judge had delivered his judgment there was discussion with counsel about costs. Mr Gatty, appearing for the Respondents before HHJ Bailey as he did before us, asked for an order for all his costs and confirmed there had been no Part 36 offers. The Judge asked Mr Patel, a solicitor-advocate then appearing for the Appellants, whether he had anything to say. Mr Patel made submissions which referred to earlier attempts to settle the case. The Judge concluded that there was no reason not to award the Respondents their costs and he confirmed that the costs liability was joint and several against all the claimants.
6. The order made by HHJ Bailey on 18 June 2015 ('the June 2015 Order') therefore dismissed the claims save for small amounts due to the Second and Sixth Appellants, gave judgment for Strandview against each of the Appellants in an amount of about £7,000 each and ordered that the Appellants pay the Respondents' costs of the claim and Strandview's costs of the counterclaim on the standard basis to be the subject of a detailed assessment if not agreed. There was no appeal lodged against the June 2015 Order at that time.
7. On 9 March 2016 the Respondents applied to the Judge for an interim payment because none of the costs had yet been paid. The Judge dealt with the matter on the papers and ordered the Appellants to pay £96,334.03 to the Respondents by way of interim payment for those costs by 29 April 2016 ('the first interim costs order').
8. The Appellants, as they were entitled to do, applied to the judge on 8 April 2016 to set that order aside. Their application sought not only to set aside the first interim costs order but also an order for permission to appeal against the costs element of the June 2015 order or for that order to be set aside.
9. After that application had been made but before it had been heard, there was a hearing before Deputy Master Keens, costs judge, on 9 May 2016. He adjourned any detailed assessment of the costs until the decision of the County Court on the application to appeal the costs element of the June 2015 order.
10. The hearing of the Appellants' application of 8 April 2016 took place before HHJ Bailey on 8 August 2016. I will describe what happened at that hearing in more detail below. At the hearing the judge concluded that he had no power to set aside the June 2015 order as it had long since been sealed. There was before him no proper application for permission to appeal against that order. The result of that hearing was the making of a further order which revised the first interim costs order by reducing the amount of the interim payment from £96,334.03 to £50,000 and extending time for payment ('the second interim costs order').
11. The matter then went back to the Senior Courts Costs Office and on 28 September 2016 Deputy Master Keens issued a final costs certificate in accordance with the June 2015 Order.
12. The Appellants issued applications for permission to appeal on 25 August 2016 in respect of all three orders made by HHJ Bailey. On 19 October 2016 Rupert Jackson LJ extended time to appeal against the June 2015 Order and granted permission limited to the provision in that order that the Appellants pay Strandview's costs of the counterclaim. He refused permission to appeal against any other aspect of the June 2015 order and against the first and second interim costs orders. When the Appellants renewed their application for permission to appeal, Rupert Jackson LJ directed that those oral renewal applications be heard at the same time as the limited appeal for which permission had been granted. Mr Steynor clarified at the end of the hearing before us that the relief that the Appellants were now seeking was, at its lowest, that there be no order as to the costs of the counterclaim, or an order that the Appellants were entitled to their costs of the counterclaim, or an order that the counterclaim in its entirety be remitted to the County Court or, at its highest, an order that the counterclaim be dismissed.
13. To understand the basis on which such an attack on the June 2015 order is made it is necessary to unpack the sentence in the judgment where the Judge referred to the abandonment of the claim for the first period of service charges. The Respondents' pre-trial disclosure had included a number of invoices in support of the service charges claim. On 10 December 2014, the Appellants' solicitors Legal Comfort, wrote to the Respondents' solicitors, Stenfield, querying some of the invoices relating to the first period of charges dating back to 2004 and earlier. They said that the invoices purporting to come from different sub-contractors had never been seen by the Appellants before and that they believed that the majority of them were forged documents that should be taken out of the trial bundle. The disputed invoices covered about £840 worth of work. They said further "Our clients will have no choice but to report Mr James Feeney for deception and forgery".
14. The Respondents refused to take the invoices out of the trial bundle. In his witness statement dated 9 April 2015 made for the trial, Mr Feeney said that he had asked the previous managing agent, Inalodge Property Management for copies of supporting documents for service charges incurred for the period before Mr Peppiatt was appointed and he exhibited what he said were the documents they had provided. He said "I can categorically say however that all of the costs incurred and claimed as service charges against the [Appellants] were incurred and paid for". He went on to say that the total costs of the remedial and decorative works carried out at the property were £48,875 including VAT and that fees payable to Martin Surveying Associates were charged at 15% plus VAT amounting to £7,144.
15. It emerged during the trial that that evidence was untrue. The Appellants were right in their suspicions that the first period service charge invoices were forged. In his opening at the trial, Mr Gatty told the Judge that Mr Feeney had himself done the work described in those invoices and then had fabricated the invoices to make it look as if the work had been done by independent contractors. Reliance on those invoices was not pursued. Mr Feeney was asked about this in examination in chief. His evidence was that he had done the work himself and never been paid for it. He said the reason he had put the costs down to the different named contractors was because he thought it looked bad if all the work had been done by him.
16. It also emerged at trial, as the Judge recorded in his judgment, that the claim for supervision fees was not justified. Strandview had indeed paid an invoice presented by Martin Surveying Associates but this must have related to some other work because Mr Martin wrote to say that he had not been engaged to supervise the building works. Finally Mr Feeney accepted that Garpoint was not registered for VAT so that the claim for VAT was incorrect also.
17. These were the matters that formed the basis of the application to HHJ Bailey at the hearing of 8 August 2016 to set aside the June 2015 order. A transcript of that hearing has been obtained. Neither Mr Steynor who appeared at that hearing for the Appellants nor Mr Skelly appearing for the Respondents had attended the trial in June 2015. Mr Steynor raised two issues, first the issue of whether the effect of Mr Feeney's conduct on costs was a matter that should be dealt with by the costs judge or by the trial judge and secondly whether or not conduct of the sort which was alleged against Mr Feeney was a good reason for refusing the Respondents all or part of their costs. Mr Steynor drew the Judge's attention to authorities which make clear that the matter ought to be raised with the trial judge when he is considering what order should be made as to costs. He said that Mr Patel had drawn Mr Feeney's underhand conduct to the Judge's attention at the end of the trial, but the Judge had not mentioned it when announcing his determination on costs. He also told the Judge that the Appellants felt sufficiently strongly to put in hand a private prosecution of Mr Feeney who denied dishonesty. The trial, before a jury, was due to take place in October 2016. Mr Skelly for the Respondents submitted that the Judge had been fully aware of the true position from the start of the trial.
18. The Judge recalled that the misconduct had not been explored at trial because the service charges for the first period, the VAT and the supervision fees were not pursued. Those elements were not impressed upon him when the discussion turned to costs. He also recalled something of the unsatisfactory way in which the claim had been presented at trial, expressing the view that in retrospect Mr Feeney's misconduct might have made no difference to the costs order he in fact made. The Judge said "it may well be that I should have but did not give more consideration to the question of impropriety in the presentation of the counterclaim". He commented to counsel that it had been up to Mr Patel, when asked at the end of the trial if he had anything to say about costs, to draw the misconduct forcefully to the judge's attention. Since Mr Patel did not do so, the judge said he was as confident as he could be that the misconduct played no part in his decision because he was not directing his mind to it.
19. At that point, counsel referred the Judge to a document that had been prepared for the trial by Mr Patel called "Submissions Arguments [18 June 2015]" which contained Mr Patel's written closing submissions for the Appellants on both the claim and the counterclaim. The Judge said that he could not remember having read it and that he would be astonished if he had read it, since he had not referred to it in his ruling.
20. The Judge concluded that it would be open to the costs judge to take the misconduct into account. He observed:

"But so far as if it open to the costs judge to say, well, presenting an invoice which you then withdraw because it is obviously a forgery, if it is open to the costs judge to take into account the fact that VAT is claimed but not pursued, it is open to the costs judge to take into account the fact that 15 per cent Martin Surveying Associates' fee for supervision was charged which ought never to have been, well then as far as I am concerned the costs judge is perfectly free to take that course."

21. In so saying the judge clearly had in mind the decision of this court in Ultraframe (UK) Ltd v Fielding [2006] EWCA Civ 1660, [2007] 2 All ER 983 (which had not in fact been cited to him but was referred to in an extract from Cook on Costs which had been cited to him). That case decided that in the ordinary way it is wrong in principle for a paying party to have to pay any part of the costs of a receiving party's unsuccessful defence to an allegation of dishonesty; but that arguments of that kind may be raised on the assessment of costs itself. This is because costs incurred in unsuccessfully defending dishonesty are not costs that are "reasonably incurred". By the same token incurring costs on issues that are abandoned will not have been reasonably incurred.
22. The Judge then invited submissions on the variation of the first interim costs order. In a short further judgment he confirmed that he had no power to revise the costs elements of the June 2015 Order made after trial and he reduced the interim payment.
23. For the purposes of this appeal Strandview have obtained a transcript of the last day of the trial in June 2015. Towards the end of his submissions that day, Mr Patel handed up his written closing submissions relating to the issues of liability that the Judge needed to resolve and invited the Judge to read them. The Judge then read the submissions before inviting the Respondents' counsel to address him. It is now therefore clear that the Judge's recollection at the August hearing of what had happened in June 2015 was wrong because in fact he had read Mr Patel's closing submissions by the end of the trial before he gave judgment and dealt with costs.
24. Nonetheless, prompted by the comments of the Judge at the August hearing, the Appellants issued the challenges to the disposal of the counterclaim. The notices of appeal against the three orders assert that:

i) at the August hearing, the Judge "admitted in the court" that he had failed to consider the Appellants' closing submissions and had not used them before forming his judgment;

ii) the Appellants believe that if the Judge had gone through the points highlighted in their submissions "he would have rejected the Defendants' counterclaim with costs";

iii) the Judge "failed to engage into considering and gathering evidence of forged invoices that are fraudulently used by the Defendants in order to obtain County Court Judgement against the Claimants";

iv) the Appellants believe that the judgment and the June 2015 order is unjust and should be set aside and listed for a rehearing of the counterclaim on the merits.

25. The composite grounds of appeal drafted by Mr Patel assert that at the August hearing the Judge admitted to counsel that he had failed to consider their closing submissions and that these submissions were "not even referred to or considered". The grounds claim that this discovery "came as a total shock to the Appellants" and assert that the fact that these submissions were totally ignored by the Judge has led to an injustice and amounts to a serious procedural irregularity.

Discussion

26. I start with the proposition in CPR 44.2 that the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party but that the court may make a different order having regard to all the circumstances including the conduct of all the parties. Strandview's counterclaim was largely successful and only a small proportion of the trial had been devoted to the counterclaim. An even smaller proportion of the trial had been devoted to the three elements of the counterclaim that were abandoned. Where a party advances a case which is partly dishonest (particularly where the dishonesty relates only to a minor part of the claim and is not persisted in at trial) there is no general rule that he should be deprived of all his costs other than those incurred in advancing the false claim: Bank of Tokyo-Mitsubishi UFJ, Ltd & others v Baskan Gida Sanayi Ve Pazarlama AS & others [2009] EWHC 1696 (Ch), [2010] 5 Costs LR 657. In Hutchinson v Neale [2012] EWCA Civ 345 Pitchford LJ put it this way at [28]:

"There is no general rule that a finding of dishonest conduct by the successful party will replace the usual starting point. What is required is an evaluation of the nature and degree of the misconduct, its relevance to and effect upon the issues arising in the trial, and its tendency to create an unwarranted increase in the costs of the action to either or both of the parties. As Briggs J observed at para 19 of his judgment in Bank of Tokyo the full range of measures is available to ensure that the dishonest but successful party does not gain, and the honest but unsuccessful party does not lose, in consequence of the wrongdoing established."

27. The Judge was clearly aware that Mr Feeney had fabricated invoices since that was explained to him as the reason why the services charges relating to the first period were not pursued. He was also aware that the claims for VAT and for supervision fees could not be supported and he commented on this in [73] of his judgment. Mr Steynor invited us to infer that Mr Feeney must have known that Garpoint was not registered for VAT and that Mr Martin had not in fact supervised the works. However, from the transcript of the cross-examination of Mr Feeney by Mr Patel it appears that Mr Feeney was not asked about the forged invoices and it was not put to Mr Feeney squarely that his behaviour in relation to the supervision fees or the VAT was dishonest rather than simply mistaken. Mr Steynor had to accept that the Judge did not make and could not have made any findings of dishonesty against Mr Feeney.
28. In my judgment, nothing happened at the trial that warranted any departure from the general rule. The Judge cannot be criticised for failing to take into account in the exercise of his discretion matters that were never raised before him. As Lloyd LJ (with whom Rix and Sullivan LJJ agreed) explained in Allen v Bloomsbury Publishing Ltd [2011] EWCA Civ 943:

"In our adversarial system of litigation, in a case where each party was professionally represented, with plenty of opportunity to formulate and put to the court all points considered to be relevant on a particular point, it seems to me questionable for a judge to be criticised for having failed to take into account a factor which, if relevant, was known or available to all parties and which no party invited him to consider as part of the process of exercising his discretion."

29. Mr Patel was invited by the Judge to make submissions on costs after judgment had been handed down. Mr Patel made oral submissions but did not refer to Mr Feeney's conduct. Further, the closing submissions which we now know the Judge read before giving judgment do not in terms invite the Judge to deprive Strandview of its costs if he upheld the counterclaim. The submissions focus on the merits of the claim and counterclaim that were pursued at the trial. They refer only briefly to Mr Feeney's evidence that he had himself carried out the work that was covered by the invoices, as part of the general attack on the credibility of his evidence. It is therefore not surprising that the Judge at the August hearing did not remember reading any written submissions on the repercussions of Mr Feeney's conduct for costs.
30. It is apparent from the transcript of the August hearing that the Appellants' grounds of appeal seriously overstate what the Judge said. Throughout that hearing the judge was at pains to stress that he had no real recollection of what had happened at a trial over a year earlier. He made the point, correctly, that Mr Patel should have drawn the alleged dishonesty to his attention when invited to make submissions on costs. It is thoroughly unfair to take the Judge's observations as an admission that the Appellants' complaints are justified. In his short judgment after the August hearing, he said that, if it had been brought to his attention, Mr Feeney's impropriety would have been a relevant consideration when determining costs. He certainly did not go so far as to say that he would have deprived Strandview of all its costs of the counterclaim.
31. Mr Steynor told us that at the hearing before the costs judge at the final assessment in October 2016 the costs relating to the abandoned issues had been allowed but no further submissions had been made that all the costs of the counterclaim should be disallowed. In my judgment the Appellants have had ample opportunity to raise these matters at the proper stage and in an appropriate forum and they failed to do so. These matters do not now provide any basis on which this court can interfere with the Judge's orders as to costs. I would dismiss the appeal.
32. Now that the final assessment of costs has been made, the two interim costs orders have been superseded. That is a further reason why I consider that permission to appeal other elements of the June 2015 Order and the two interim costs orders should be refused.

Lord Justice Lewison:

33. I agree.