England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		19th June 2006

Introduction

1. Having handed down two judgments, one in the mortgage proceedings on 12th April 2006, and one in the guarantee proceedings on 22nd May 2006, it remains for me to deal with the issue of costs. There are five separate heads of costs I have to consider. They are as follows:

(i) the costs of the mortgage proceedings;

(ii) the costs reserved by previous tribunals, which involve (a) the costs of

a hearing before Master Braggs on 2rd February 2005, (b) the costs of

a further hearing before Master Braggs on 25th April 2005, and (c) the

costs of four hearings before Mr Justice Pumfrey on 31st, 6th and 27th

May and 1st July 2005; and

(iii) finally, and most importantly, the costs of the guarantee proceedings.

2. I shall take these in turn. There is no dispute that Mr and Mrs Kotonou should have their costs of the mortgage proceedings paid by the Bank. The only dispute is that Mr Wormington, on behalf of the Kotonous, submits that these costs should be on the indemnity basis. The grounds for this submission are founded on a part of the factual history of this case which is relied upon by Mr Wormington in relation to many of the submissions as to costs in both sets of proceedings and it is as well, therefore, that I should set out this factual history immediately.

Relevant factual history

3. Mr Kotonou had acted as a litigant in person since the start of the guarantee proceedings. In April 2005 the firm of solicitors Hugh Cartwright & Amin came on to the record for Mr Kotonou and they raised for the first time an argument that, as a matter of construction, the Bank's mortgage was subject to a maximum limit of £425,000 plus interest from the date of demand and that demand had not yet been made under the mortgage. The Bank had throughout adopted the position, without demur from Mr Kotonou, that the costs of the guarantee proceedings were covered by the security in addition to the maximum of £425,000 and that demand had been made under the mortgage as early as 30th October 2002.
4. Mr Kotonou had been in difficulties throughout in relation to funding a proper legal representation in the guarantee proceedings because, although he and his wife had a considerable equity in the matrimonial home (valued at £1.75 — 2 million and encumbered only by a first charge of some £230,000 and, of course, the Bank's second charge), he could not effectively use that equity because of the (claimed) indeterminate extent of the Bank's security (which, as will be seen from the judgment in the mortgage proceedings, ultimately nearly doubled the maximum amount of £425,000). Mr Kotonou was thus in an unfortunate predicament and the bank had before April 2005, when solicitors for Mr Kotonou came on to the record, rejected Mr Kotonou's proposals that it should agree to postpone its security to a newly created first charge which would raise enough to discharge the existing first charge and enable him to fund a legal representation in the proceedings. The Bank, being perfectly within its rights to do so, had refused to weaken its security in this way. When Hugh Cartwright & Amin came on to the record, Mr Kotonou modified his proposals in relation to re-mortgaging the property and the postponement of the Bank's charge, and although the Bank indicated a willingness to consider allowing, by way of priority to its charge, an additional sum of £150,000 to enable Mr Kotonou to fund his representation in these proceedings, the parties could not come to terms in this respect.

5. In the result, Mr Kotonou applied to Pumfrey J (having foreshadowed this in advance before the Master) to adjourn the impending trial date in the guarantee proceedings and to substitute for that trial a determination of the issue between the parties concerning the interpretation of the maximum amount for which the mortgage was security. There were four hearings before Pumfrey J. They resulted in an agreed compromise which enabled Mr and Mrs Kotonou to raise £1 million on the matrimonial home, to pay off the first mortgage of £230,000 and to pay £425,000 into court to abide the outcome of the guarantee proceedings. This compromise, which represented an improvement for the Kotonous on what the Bank had been prepared to offer earlier, left the Bank with the benefit of its charge in respect of any excess entitlement over the maximum sum of £425,000, but it was postponed in terms of priority to a newly created mortgage for £1 million. By then the mortgage proceeding had been issued raising the construction questions under the mortgage and Pumfrey J ordered both sets of proceedings to be heard together. As is now known, of course, those proceedings were heard before me and Mr and Mrs Kotonou succeeded in the mortgage proceedings and Mr Kotonou succeeded in the guarantee proceedings.

Costs of the mortgage proceedings

5. Mr Wormington deploys the above factual history in many ways in the applications for costs which are before me. Relevant to this first head of claim, namely the costs of the mortgage proceedings, he points out that Pumfrey J was told by counsel for the Bank that the mortgage proceedings would take up to two days and that the outcome would depend upon the matrix of facts surrounding it which would only be available after the evidence was led in the guarantee proceedings. In the event, he points out, the mortgage proceedings were disposed of before me in about an hour of court time. If the Bank had recognised that the mortgage proceedings would be discrete and short and not dependent on factual evidence beyond the documents themselves, much saving in time and costs would have been achieved and Mr Kotonou would have procured his legal representation at a much earlier point in time. His application is that the costs of the proceedings should be paid by the Bank on the indemnity basis.
6. I reject Mr Wormington's application for costs on the indemnity basis. The submission that the mortgage proceedings would take two days and would require the court to consider the background matrix of fact was a perfectly proper submission to make. Looked at from the vantage point of the judgment, matters inevitably look different to and simpler than the picture at the start of the process. As it happens the answers were not as easy as they might appear from the judgment and I would have welcomed more time being taken in oral submissions to assist me. In the event, although not referred to in the judgment, I had the benefit of the entire context as a result of the evidence led in the guarantee proceedings. The Bank acted perfectly properly in its conduct of its litigation. It lost the mortgage proceedings and in consequence must pay Mr and Mrs Kotonou their costs but the claim for indemnity costs is in my judgment hopeless, and I did not trouble Mr Gourgey to reply on this point.

The costs of 23rd February 2005

7. The Bank had asked that judgment be entered on the guarantee claim due to the failure of Mr Kotonou to serve his list of documents by 14th January 2005 as required by a consent order on "unless" terms dated ~ January 2005. The Master acknowledged that the Bank was entitled to judgment but treated the hearing as an application for relief from sanctions and granted such relief. It appears from a note taken of his judgment that he reserved the costs because he ran out of time to deal with them. Mr Wormington points out that the Master accepted that Mr Kotonou's ill health had caused problems in his compliance with the consent order. I take that into account, having read the various letters concerning this, but I still conclude that I can see no sufficient reason to deprive the Bank of what would be the usual order in the circumstances of that hearing and that is that the Bank should have its costs of that hearing in any event.

The costs of 25th April 2005

8. This hearing was initially in respect of the Bank's application, dated 18th April 2005, that Mr Kotonou be debarred from calling evidence at trial, and for directions concerning the service of the Bank's witness statements, because Mr Kotonou failed to comply with an order providing for exchange of witness statements on 15th April 2005. Mr Kotonou applied on 2nd April 2005 for relief from sanctions and also applied for a stay of the guarantee proceedings pending determination of the mortgage proceedings (as yet un-issued). The Master ordered the costs to be paid by Mr Kotonou save that if he restored his application for a stay before the Judge the costs of the hearing be reserved to the Judge. That is, of course, what happened, but the Judge did not deal with those costs at all.
9. In my judgment those costs should plainly be borne by Mr Kotonou. The Bank had to make its application owing to Mr Kotonou's failure to serve his witness statements or an application for relief from sanctions (which came later). This was not the only procedural non-compliance of which Mr Kotonou was guilty. The Bank was successful in its application for directions for service of its witness statements. As to Mr Kotonou's application, the Master could not hear it because it necessitated vacation of the trial date which could only be heard by a Judge. Mr Kotonou's application was thus wrongly made before the Master. The costs of 25th April 2005 should, in my judgment, have been the Bank's in any event and I now order those costs to be paid by Mr Kotonou.

The hearings of 3rd, 6th and 27th May and 1st July 2005

10. On 3rd May, the Judge heard Mr Kotonou's application to adjourn the guarantee proceedings and to substitute for them a hearing of the relief asked for in the mortgage proceedings. This was Mr Kotonou's application dated 22nd April. In the alternative to that relief, Mr Kotonou asked for the trial of the action to be adjourned. The hearing went over 3rd May to 6th May and at the end of it the Judge adjourned the trial, but he did not grant the primary relief Mr Kotonou was seeking. In his judgment, the Judge said that neither side had won. He then adjourned the hearing to enable Mr Kotonou to produce concrete proposals in relation to a new mortgage to secure funding for his representation and in relation to the question of priority of that new mortgage over the Bank's existing charge. Costs of those two hearings were not dealt with by the Judge and were in effect simply left to be dealt with at the next hearing, which was on 27th May. At that hearing there were proposals and counter-proposals put forward and in the end the Judge sent the parties off to discuss the matter further, and all the costs were, in effect, left to be dealt with at the next hearing, which took place on 1st July 2005. The parties eventually came to terms in relation to further funding and its priority over the Bank's charge, and that agreement was incorporated into the order of the court of 1st July 2005. That order included an order that the two sets of proceedings should be heard together, not because the Judge had so ruled but because the parties had agreed to such a direction. However, Mr and Mrs Kotonou specifically reserved the right to apply for summary judgment in the mortgage proceedings, a right which, in the event, they did not pursue. As to costs the Judge said that the proper order was to adjourn all questions of costs to the trial Judge.
11. In my judgment, the costs of the 3rd and 6th May should lie where they fall. As to those hearings, the Judge himself expressly said that nobody had won. Mr Kotonou did not get his primary relief but he did obtain his alternative relief, namely, that of an adjournment (which would normally carry with it the price of having to pay the costs). Mr Gourgey accepts that the statement that "nobody won" could imply that there should be no order as to costs. At any rate, it seems to me pretty clear that no order as to costs is the right decision with regard to the costs of those hearings.
12. The hearings on 27th May and 11th July were about negotiations between the parties which resulted ultimately in an agreed order which did not provide for costs. There was no question of either side winning or losing and in those circumstances it seems to me that the fairest, if not the only possible, order should be no order as to costs. The Judge made it clear that he did not regard the costs of the hearing before him as costs associated with the mortgage proceedings themselves. Indeed, he regarded the mortgage proceedings as wholly ancillary to the guarantee proceedings. It is unclear what, if anything, he had in mind might happen afterwards that would put the trial Judge in a better position than he was in to judge where the costs before him should fall. Certainly, it was not the actual outcome of mortgage proceedings. If anything, it was the outcome of the guarantee proceedings, but I do not think that he had that in mind either. Essentially, the hearings before the Judge resulted in a settlement as a matter of agreement between the parties, an agreement which the court had no power to impose upon them. In my judgment, the costs of those hearings, in the absence of agreement between the parties, is that they should lie where they fall. Accordingly there will be no orders to costs as to the hearings on those four days. Each side will have to bear its own.

Costs of the guarantee proceedings

13. Mr Kotonou won and my starting point must be the normal rule that the unsuccessful party will be ordered to pay the costs of the successful party:

CPR 44.3(2). These proceedings were brought for the purposes of enforcement of the guarantee and they have failed because I have held that the guarantee was obtained as a result of misrepresentation and should be set aside.

14. Having said that, however, I am in no doubt that an order that the Bank should pay the costs of Mr Kotonou would be grossly unjust to the Bank. This is a classic case justifying departure from the normal rule. Mr Kotonou fought this case on a number of distinct bases on which he has lost. Leaving aside a number of defences (such as that there was no consideration) which never survived into Mr Wormington's final submissions, Mr Kotonou's original defence was, basically, that the Bank was at fault in failing to call the standby letter of credit (or procure its extension) and that, as a result, Olympic Resources and Services Plc was left with a debt which could not be serviced and he personally suffered damage as a 98% shareholder.
15. This defence went nowhere because there was no cross-claim for loss or pleaded set off and, so far as any company claim was concerned, no pleaded assignment to himself of the benefit of any such claim. This was characteristic of much of the original defence, which was long on complaints against the Bank but short on any logical analysis showing how those complaints added up to a defence to the Bank's claim.
16. Once counsel was brought in (as I remember, some two weeks or so before trial), sense was made of all these complaints which were then deployed into a vastly increased draft amended defence, some only of which survived an application to amend. Relevant, however, to this application before me for costs is that the jumble of allegations in the original defence survived as a coherent pleading which, in short, defended the claim on the basis that the guarantee was procured by five separate fraudulent misrepresentations (which are fully set out in the judgment handed down in the guarantee proceedings). The first involved a misrepresentation to do with the lapsed standby letter of credit; the second to fourth with representations as to the state of mind of the Bank's relationship manager as to his intention to grant further facilities; and the last, on which Mr Kotonou won (but on the basis of negligent misrepresentation rather than fraud), being a representation by that manager that his intention was to continue to manage the group account and that it was not his intention to transfer it to the Special Lending Services department of the Bank.
17. Having regard to the outcome of the case, it was in the event wholly unnecessary to plead fraud and to make the many allegations concerning the Bank's intention to grant further facilities up to £3 million. Mr Kotonou lost on all of these issues. As I have held in the judgment, I found those allegations to have been extravagant and untrue and it was clearly wrong for Mr Kotonou to assert, as he did, that the misrepresentations were made fraudulently. All of this put the Bank to considerable additional and unnecessary expense. The trial would have been much shorter if the only defence had been that based on the representation concerning transfer to the Special Lending Services department of the Bank. As to the further representation concerning the standby letter of credit, namely, that it was the Bank's intention to launch an investigation into the circumstances of its loss and that if it were shown to be at fault it would release the replacement security, that claim too was rejected by me as untrue and it lengthened the trial considerably because it prompted a vast excursion into the history of the standby letter of credit. I indicated in my judgment that the time devoted to that history was out of all proportion to its significance. It would have been quite sufficient to deal with the standby letter of credit by indicating that the Bank made some sort of internal mistake and lost the benefit of that security and that the embarrassment of that event caused it to be over eager to plug the gap caused by its own mistake, and that this led it to misrepresent the position to Mr Kotonou. Instead, to the end, Mr Kotonou fought on the basis that the Bank was in some way responsible to him and his companies for failing to extend the standby letter of credit. This, again, considerably increased the size of the case. These separate issues on which Mr Kotonou lost amply justify a departure from the normal rule that winner takes all. But it is not only the fact of separate issues which justifies such a departure. In my judgment, Mr Kotonou unreasonably and improperly raised those further allegations, which turned out to be untrue, and the allegation of fraud against upright Bank officials was wholly unjustified.
18. Even under the old practice a split costs order would have been justified. Nowadays it is no longer necessary for a successful party to have acted unreasonably or improperly before he can be required to pay the costs of a particular issue on which he has failed: see Summit Property Limited v Pitmans [2001] Civ EWCA 2020.
19. I have considered the alternative (which would of course be better for Mr Kotonou) of making an order simply depriving him, as the successful party, of a proportion of his costs. However, standing back from the analysis for a while, I am clear that this would not meet the justice of the case. Mr Wormington has tried very hard to persuade me against a split costs order and he deploys in this context Mr Kotonou's funding difficulties outlined in the factual history that I set out at the start of this judgment. If Mr Kotonou had been able to have proper representation from the start, he points out, the case would have taken a much more economical course. He relies also on the fact that the Bank knew that Mr Wilson had changed his mind about continuing to manage the group account by the time the guarantee was given and that Mr Kotonou only discovered this when the proceedings were well underway and disclosure had been made by the Bank of the Bank's internal email timed at 12.15 pm on 12th July 2001. It will be seen below that I have taken these factors into account in Mr Kotonou's favour in justifying what may be regarded as a departure from the normal rule that a successful party on an issue raised for the first time by amendment at the start of trial should pay the costs incurred down to that time. I do not think it would be just for these factors to have the additional impact of dissuading me from what I regard as the just disposition of the costs issue in this case, which is a split costs order, i.e. an issue based order,
20. I recognise, however, that in this case, despite the fact that there are distinct issues which Mr Kotonou has lost, it will be very difficult, if not impossible, to accurately identify the separate costs occasioned by the separate issues. The reason is that much of the story would have had to have been told in dealing with the representation concerning transfer to the Special Lending Services department. Much of the documentation would have had to have been disclosed in any event, including all the correspondence over the critical six weeks or so ending with 12th July 2001. The history of the standby letter of credit would also have had to have been gone into because it played an important part in explaining the Bank's eagerness to obtain the replacement security. The real point is that all of this could have been done much more economically than it was done as a result of the addition to the pleadings of the many allegations on which Mr Kotonou lost. A lesser number of witnesses would have been called and, certainly, the cross-examination of them would have been considerably shorter.
21. I have, in the circumstances, decided to make a split order but to translate that split into simple percentages of the overall costs. This will obviate the need for a detailed assessment of the separate costs of every issue. I think that I am well placed to translate the contribution of the issues on which Mr Kotonou lost and that on which he succeeded into broad percentages. But, before I do that, I must raise another major costs issue that was debated before me. That issue is whether all the costs down to the end of the second day of the trial, when I allowed the amendment raising the representation concerning transfer to the Special Lending Services department, should be the Bank's in any event.
22. While I think that would be the normal order in a situation where the winning issue was only pleaded on the second day of a trial, I am not disposed to make such an order in this case. My reasons are as follows:

(i) Mr Kotonou was a litigant in person.

(ii) He was attempting to plead what in the end needed to be pleaded as a misrepresentation of a state of mind.

(iii) That is not something that a layman could easily grasp, and certainly not something a layman would have thought about, untutored by a lawyer;

(iv) In fact some of the foundations of the new case were there, buried in his original defence, In paragraphs (P) to (T) of paragraph 19 of that defence he pleaded that he was led to believe that his company was going to get new facilities. That alone is part and parcel of what ultimately became the successful allegation concerning transfer to the Special Lending Services department because one reason why he expected to get new facilities was because he assumed that Mr Wilson, the relationship manager with whom he had built up such a good rapport, would be the Bank official who would, at least in the first instance, evaluate his forthcoming application for new facilities.

(v) In paragraph 19 (T) of his defence he incorporated by reference the whole of his lengthy letter of complaint of 14th December 2001. On page 10 of that letter he mentioned Mr Wilson's "deep desire to want to help the Group, again reaffirming his enthusiasm for the Group's activities but with a veiled warning that if he could not immediately resolve this issue, it would be taken out of his hands and put in the hands of a recovery team, at which point he could do no more for the Group and that [Mr Kotonou] would find them more difficult to deal with."

(vi) Mr Kotonou could not in any event have specifically pleaded the representation concerning transfer to the Special Lending Services department before disclosure and inspection of documents which took place sometime in the spring of 2005 because it was not until then that he could have known that the state of Mr Wilson's mind at the critical point of time when he gave the guarantee was that the group account was going to be transferred to the Special Lending Services department whether or not the guarantee was given. That only appeared from an email (mentioned above) timed 12.15 pm on 12th July 2001. Mr Gourgey submits that this may go to explain and justify a late amendment but that it does not go to costs incurred prior to disclosure. I do not agree. It seems to me at least a relevant factor in relation to both questions. It is particularly relevant in a case like this where the Bank was claiming against a litigant in person who was plainly having difficulty in funding a proper representation and who, in the end, succeeded in showing that the Bank was wrong in asserting that the security it held secured, over and above the sum of £425,000, a substantial and indeterminate amount of costs and interest.

(vii) All these points lead me to forgive Mr Kotonou for the shortcomings in his original defence and to interpret that defence as broadly and liberally as possible for the purposes of deciding the issue as to costs.

(viii) It might be said by the Bank that that takes care of the costs of issue of proceedings down to disclosure, but not afterwards, down to trial. However, I think that a generous amount of time should be allowed after disclosure for the significance of the email to emerge and, in any event, professional help was plainly required to identify and articulate a sustainable defence based upon it. The appropriate professional help came very late in the day. I do not think in all the circumstances that I should distinguish any particular part of the pre-trial period from any other part and I have decided to stand back and look at the overall costs on each side and make an appropriate order to reflect the success or failure of the parties on the various issues. For this purpose I ignore, of course, all those costs which have been separately dealt with in this judgment or otherwise (including, inter alia, the costs of the four days before Mr Justice Pumfrey and the costs thrown away by the amendments allowed by me on the second day of the trial).

23. Giving it the best consideration that I can I have decided that the split should be 50:50. In my assessment at least half of the time and costs incurred from the beginning of the proceedings to the end was wasted by the additional unsuccessful issues raised and pursued by Mr Kotonou, and I include in this assessment the time and costs incurred in the period before trial. With the generous approach to Mr Kotonou's own original pleading, which I have mentioned above, I do not think it would be just to attribute all those pre-trial costs to the issues on which Mr Kotonou was unsuccessful. Implicit in Mr Kotonou's pre-trial position was the germ of the case he finally won: namely, his expectation of further facilities based in part on his faith in Mr Wilson's support. My 50:50 assessment is the result of a broad assessment of the contribution of the various issues to the overall costs of the proceedings and of the extent to which those costs would have been lessened had Mr Kotonou not litigated the issues on which he lost. As I have said, I think at least half the overall costs were wasted by such issues. To the extent to which the wasted costs were in fact greater than 50%, I have given Mr Kotonou the benefit of the inevitable doubt and uncertainly in this respect in the light of the inescapable fact that, after all, he was the successful party.
24. Accordingly, the Bank will be ordered to pay 50% of Mr Kotonou' s costs and Mr Kotonou 50% of the Bank's costs. I am conscious of the fact (having regard to the estimated costs I have been given) that on a detailed assessment this will mean that there will be a net payment by Mr Kotonou, because the Bank's costs are likely to be greater than his. If that is the consequence on a detailed assessment, so be it. I have thought long and hard about this and, as I have indicated, I have taken into account the fact that, at the end of the day, Mr Kotonou has won (and, indeed, won on an issue which, if it had been conceded at the start of the trial, would have meant that the extravagant allegations on which he lost would not have been needed to have been investigated at all). Standing back and taking everything I have mentioned into account, my judgment is that the appropriate order is as I have stated above.
25. I should add one further point. After a long day on costs on 22nd May 2006, when I was left no time to deliver a judgment, I received last week by email further extensive submissions from Mr Wormington based on interlocutory affidavits that had come into possession of Mr Kotonou's solicitors since 22nd May, following a hearing in the DTI proceedings before Mr Justice Park on 2nd June 2006. Mr Gourgey urges me not to entertain such further material or submissions on the grounds that the material was available, one way or another, to Mr Kotonou before 22nd May. In the alternative he submits that the new material and additional submissions add nothing to what was before me on 22nd May.
26. I have read all the new material and the new submissions and I can say that they made no difference at all to the outcome of this judgment on costs. They really added nothing new to what was already before me on 22nd May. There is little point therefore in saying anything more about the new material or the additional submissions.