England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		2nd November 2007

1. MR J GAUNT QC: Mr Upright and Mr Bradley were chartered accountants. From about 1980 they practised in partnership under the name of Patterson Brodie from offices at Providence House, Navigation Road in Burslem, and Clifton Chambers, Longton Place, Longton – both in Stoke-on Trent. Mr Upright died on 11^th August 2003. The proceedings arose as a result of a dispute as to how the assets of the partnership were to be dealt with after his death and the resultant dissolution of the partnership. Mr Bradley maintains that on 29^th August 2003, about a fortnight after Mr Upright's death, he met Mrs Healy-Upright, the claimant, at a public house called The Swan with Two Necks and that they reached a contractually binding agreement as to the disposal of the partnership assets ("the Swan Agreement"). Mrs Healy-Upright denies that any such agreement was made at all.
2. The present proceedings were commenced on 8^th September 2005 by Mrs Healy-Upright for a declaration that the partnership had been dissolved by the death of Mr Upright and an order that the affairs of the partnership be wound up. The proceedings seem to have been prompted by frustration at the lack of progress being made in the winding up of the partnership affairs by Mr Bradley's insistence on the terms of the Swan Agreement.
3. Indeed, Mr Bradley's Defence, signed by him personally and served on 19^th January 2006, set up the Swan Agreement in the following terms. It averred that there was a meeting on 29^th August 2003 at a pub called The Swan with Two Necks between the claimant and Mr Bradley. In paragraph 7 of the Defence it was pleaded:

"It is averred that

(a) for many years, despite sharing profits as partners, Mr Upright and Mr Bradley had run the separate offices of the partnership as distinct entities with inter alia separate clients;

(b) on the death of Mr Upright, Mr Bradley did not wish to take on the long term running of the Burslem office;

(c) accordingly, Mr Bradley suggested to the Claimant, and the Claimant agreed, that

(i) save for a small number of clients known personally to Mr Bradley, for which he would pay in three annual instalments, the assets (including goodwill and work in progress) of the Burslem office would be sold;

(ii) the price obtained for the assets of the Burslem office (together with the payment from Mr Bradley referred to in (i) above) would be paid to the Claimant in lieu of Mr Upright's share of all the assets (including goodwill) of the partnership;

(iii) on the sale of the freehold interest in the property used as the Burslem office of the partnership, Mr Bradley would pay to the Claimant Mr Upright's share (through his shareholding in PFM) of the sale proceeds thereof in lieu of Mr Upright's interest in the partnership property used as the Longton office; and

(iv) otherwise, the Claimant would receive the balance on Mr Upright's capital account as shown in a balance sheet drawn to the dissolution date by three annual instalments;

(d) the Claimant stated that she thought the said agreement was excellent and undertook to try to sell the assets of the Burslem office to one David Riley."

4. Shortly afterwards, i.e. after the Defence served on 19^th January, on 4^th April 2006 and just before the matter was due to come before the court for directions, Mr Bradley died. The proceedings were continued by his personal representatives. On 27^th November 2006 Master Price made an order substituting the personal representatives as defendants, declaring that the partnership had been dissolved on 11^th August 2003 by the death of Mr Upright, that Mr Upright and Mr Bradley were each entitled to half shares in the capital and the profits of the partnership, giving the claimant permission to amend the claim, and ordering the trial of the following issues, namely:

(1) whether the claimant and the defendant reached an agreement, as pleaded in paragraph 7(c) of the Defence (the Swan Agreement);

(2) whether that agreement, if in fact made, was enforceable as a contract and/or was binding on the parties;

(3) whether, as a result of the determination of those issues, a sale of the remaining assets of the business of Paterson Brodie should be ordered and, if so, by what means, or

whether the defendant should be given the option of purchasing any interest of the claimant and, if so, the terms of such option and how the price payable by the defendant should be ascertained, and that the counterclaim should proceed.

5. Subsequently, and relatively recently, the defendants decided to abandon their claim that there had been an agreement at The Swan with Two Necks. They stated in correspondence that they were doing so because they regarded the issue as academic and thought Mrs Healy-Upright might indeed be better off under the agreement than if the partnership were wound up under the Partnership Act and so saw no point in incurring the cost of further litigation.
6. I should say that I feel bound to treat that statement with some caution. It was made in the course of correspondence designed to persuade the claimant to agree to favourable terms as to costs and not in a witness statement. I think it likely that, in deciding to abandon reliance on the Swan Agreement, the defendants were also influenced (to some extent at any rate) by an appraisal of the merits of their case.
7. On 28^th October 2007 the parties agreed a consent order in the following terms:

"The Defendants having discontinued their claim that there was an agreement as pleaded in paragraph 7(c) of the (Re-Amended) Defence forming the subject matter of the Preliminary Issue ordered by Master Price on 23^rd September 2006 to be tried but there being disagreement between the parties as to:

(a) whether the Defendants should as they contend pay costs on the standard basis or as the Claimant contends on the indemnity basis; and

(b) the amount of a payment on account of those costs.

IT IS ORDERED that the trial ordered by Master Price for the preliminary issue be restricted to:

(i) the issues set out in (a) and (b) above,

(ii) further directions for the determination of the remaining issues."

8. So the only issues before me are, first, whether the defendants should pay the costs assessed on the standard or on the indemnity basis and, secondly, the amount of any payment to be made on account of such costs, it being agreed that an interim payment should be ordered.
9. There seems to be no very clear guidance either in the Civil Procedure Rules or in the authorities as to the criteria to be applied by a judge at first instance in deciding whether to award costs on the indemnity basis. Obviously there must be something unusual about the way in which the paying party has conducted itself or the case to justify a departure from the standard. It is also, in my judgment, worth bearing in mind the effect of such an order, which is to shift the burden of proof as to whether the amounts expended by the receiving party were reasonable or unreasonable from the receiving to the paying party, and to deprive the paying party of the protection of the rule that the court will only allow costs which are proportionate to the matter in issue – see Civil Procedure Rules Part 44 Rule 4(2) and 4(3).
10. I was helpfully referred by counsel to several authorities. In Reid Minty v Taylor [2002] 1 WLR 2800 at paragraph 27 May LJ stated that the court has a wide discretion under CPR 44.3 which is not constrained by pre-CPR authorities, and stated that "it is not correct that costs are only awarded on an indemnity basis if there has been some sort of moral lack of probity or conduct deserving moral condemnation on the part of the paying party".
11. In Kiam v MGN (No 2) [2002] 2 All ER 242 at paragraph 12 Simon Brown LJ said:

"To my mind, however, such conduct [of the paying party] would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order made under Pt 44 (unlike one made under Pt 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory. The indemnity costs order made on the principal appeal in McPhilemy's case was certainly of that character. We held ([2001] 4 All ER 361 at [29]) that the appeal involved an abuse of process on the footing that 'to have permitted the defendants to argue their case on perversity must inevitably have brought the administration of justice into disrepute among right–thinking people.'"

12. In the next paragraph the learned Lord Justice said:

"It is very important that the Reid Minty case should not be understood and applied for all the world as if under the CPR it is now generally appropriate to condemn in indemnity costs those who decline reasonable settlement offers."

13. However, in Excelsior Commercial v Industrial Holdings Limited v Salisbury Hammer Aspden & Johnson [2002] EWCA Civ 879 Waller LJ reminded practitioners that the guidance given by the Court of Appeal in recent cases about indemnity costs has always been by reference to the circumstances of the individual cases – paragraph 34 – and must, therefore, be read with that in mind. He said at paragraph 39:

"The question will always be: is there something in the conduct of the action or the circumstances of the case which takes the case out of the norm in a way which justifies an order for indemnity costs?"

14. In my judgment, an order for indemnity costs is not justified by the mere fact that the paying party has been found to be wrong, either in fact or in law or in both, or by the fact that, in hindsight, the result of the case now being known, the position adopted by that party may be thought to have been unreasonable.
15. Secondly, such an order is not justified by consideration of whether the litigation made commercial sense. Many cases in which parties seek to vindicate what they see as their rights and about which they feel strongly make no commercial sense at all in terms of the risks run and the costs involved. Boundary disputes are a classic example. But the party who loses such a dispute is not required to pay costs on an indemnity basis simply on that account.
16. Thirdly, it seems to me appropriate to bear in mind the desirability of parties resolving their differences before trial and without causing the other party to incur further expense or suffer further anxiety. While the bringing of hopeless claims is to be discouraged (as it is by an award of costs on the standard basis), the dropping of hopeless or pointless claims as a result of a reappraisal later in the litigation is not to be discouraged.
17. I also remind myself that I am not trying the case, either on the facts or the law. I am only called upon to decide on the basis of the assessment of costs and, for that purpose, I need to be convinced that there was something unusually or abnormally unreasonable or otherwise deserving of condemnation in the manner in which the litigation was conducted. I am concerned principally with the losing party's conduct rather than with the substantive merits.
18. What factors then does Mr Sisley submit take this case out of the norm? In summary, he says that Mr Bradley and, after him, his personal representatives, firstly pursued a case doomed to fail given the inconsistencies in the evidence; secondly, a case which was also doomed to fail because it was flawed in law. The case was pursued in disregard of these points being drawn to their attention in correspondence and in circumstances where, on their own admission, the point was academic and could only lead to the incurring of substantial legal costs. I will take what I think are in effect three points one by one.
19. As for the inconsistencies, Mr Sisley drew my attention to a number of matters. Firstly, the fact that on 6^th July Mrs Healy-Upright wrote to Mr Bradley suggesting that, prior to the sale of the goodwill of the Burslem practice, they should have an "'Agreement' as to what we are proposing to do with Don's 50% share of the property".
20. Secondly, he drew my attention to a file note made by Mrs Healy-Upright on 22^nd November 2004. This was a note of a telephone conversation with Mr Bradley on that date in which she recorded the conversation they had had. In the course of the note she wrote:

"Neil Bradley then said the strangest thing. He said, 'So you're breaking our agreement that you would have the Burslem office and I would have Longton.' I said that I would certainly not agree to something that differed markedly from Don's understanding of the situation, and reiterated that Don owned 50% of the Practice and that should be paid accordingly."

21. The point about those two documents was that they clearly show that Mrs Healy-Upright up to that date had no notion that she was supposed to have made an agreement at The Swan with Two Necks.
22. The third matter my attention was drawn to was the fact that in a letter dated 21^st December 2004 Mr Bradley's solicitors said:

"There were discussions between Mrs Healy-Upright and Mr Bradley which resulted in an overall agreement as regards what she would receive, as Personal Representative of Mr Upright, in full satisfaction of her husband's entitlement in Paterson Brodie. The agreement reached is being and will be fully honoured by Mr Bradley."

The point of drawing my attention to that is the reference to "discussions" in the plural.

23. In a letter dated 27^th January 2004 the same solicitors referred to "various discussions" (again plural) which led to the agreement, and in a letter dated 22^nd February 2005 said:

"Mr Bradley tells us that initial discussions with your client took place at the 'Swan with Two Necks' on Friday 29^th August 2003."

Implying that there were further discussions before an agreement was concluded.

24. Fourthly, Mr Sisley also drew my attention to the fact that in response to a request for further and better particulars, Mr Bradley instructed his solicitors in a letter dated 11^th April 2005 as follows. He set out what he said he had told Mrs Healy-Upright at The Swan with Two Necks, which included the following:

"In my view the Burslem property should be sold and whilst it was worth more than Longton (being considerably bigger) she should receive the entire sale proceeds along with the proceeds of the goodwill which together with his capital account as adjusted to reflect the above would settle his entitlement. I would retain the Longton premises and goodwill."

I note "worth more than Longton".

25. Notwithstanding that, although in that letter Mr Bradley had said that he told Mrs Healy-Upright that the Burslem property was worth more than Longton, it was apparently only worth slightly more – I was shown valuations referred to in a letter of 6^th February 2004 from Mr Bradley to Mrs Healy-Upright in which the Burslem property was valued at £10,000 more than Longton. It was also pointed out to me that in conversation with his solicitor (of which a note had been taken), Mr Bradley had said that he had told Mrs Healy-Upright at the Swan meeting that the two offices were about equal and that in Further and Better Particulars of the Defence Mr Bradley also said that he had told her that "the freeholds of the two offices were of equal value".
26. So Mr Sisley submits that there were glaring inconsistencies in Mr Bradley's account of what was agreed at the Swan: namely (a) as to the number of meetings or discussions he had had with Mrs Healy-Upright which culminated in the alleged agreement, and (b) what he told her as to the value of the Burslem practice, and that these were such that Mr Bradley, his advisors and personal representatives should have realised that his claim was bound to fail on the facts.
27. I have to say that, in my judgment, the inconsistencies in question do not seem to be very great. Rather, they are the kind of inconsistencies often found in litigation between correspondence, pleadings and witness statements. The reference to "discussions", "various discussions" and "initial discussions" may exhibit no more than a looseness of terminology. No doubt that could have been explored in cross-examination, had Mr Bradley lived, and/or been made the subject of comment and submission at trial. But I am not trying the case. There was indeed an inconsistency in whether Mr Bradley said that the Burslem property was worth more or that the two were about equal; neither of which statements would have been particularly accurate, but that is not enough to discredit Mr Bradley, in my judgment, before his evidence even started.
28. I am not persuaded that these discrepancies were such as to take this case out of the norm or that they should have caused the defendants to recognise that their claim was hopeless on that account.
29. In addition to the above points, Mr Sisley drew my attention to certain features of the subsequent conduct of the parties and the correspondence which he suggested were inconsistent with there having been a Swan Agreement, or at least consistent with there not having been one. I do not propose to rehearse these. Mr Jelf also tried to make the same point but to the opposite effect from the correspondence.
30. It seemed to me that most of the points each counsel drew to my attention were neutral. At best, they were points that could have been deployed at trial, but, as I say, I am not trying the case. That is not to say that I regard Mr Bradley's case as having been at all promising. It seems to me inherently unlikely that Mrs Healy-Upright and Mr Bradley would have made an agreement about the disposal of the partnership assets a fortnight after Mr Upright's death in the public house car park without either recording anything in writing and intending it to be legally binding. But I accept that, rightly or wrongly, Mr Bradley appears to have believed quite strongly that such an agreement had been made and to have advanced his case in good faith. I have not been shown anything that convinces me that either he or his personal representatives took the position they did out of malice or malevolence or with any ulterior motive.
31. I now turn to Mr Sisley's second point that Mr Bradley's case was fundamentally flawed in law. I found that more difficult and more telling. Mr Sisley submits that the alleged Swan Agreement involved, for its performance, the transfer of the legal estate and the beneficial interest in the Longton property from the partners or their personal representatives to Mr Bradley, and that such an agreement was required to be in writing by Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 and/or Section 53(1)(c) of the Law of Property Act 1925.
32. Mr Jelf's response was that (a) the nature of a partnership share is an interest in money and not in land, and (b) that both sections exclude interests in land arising under a constructive, implied or resulting trust.
33. I doubt whether Mr Sisley is right about Section 53 since the Swan Agreement was not and did not purport to be a disposition of an equitable interest in land. But I am inclined to think that he is right about Section 2 of the 1989 Act, at least in regard to Mr Upright's beneficial interest in the Langton property, albeit that the alleged agreement, as pleaded, did not expressly refer to the transfer of any interest in land between the parties to it. I am not persuaded by Mr Jelf's reliance on Section 43 of the Partnership Act, which only applies in the absence of agreement. Mr Jelf's case, of course, had been that here there was an agreement.
34. The question is not, however, which side is right or wrong in law – the defendants have abandoned their position and agreed to pay the costs – but whether the defendant's conduct in taking a position which suffered from a serious legal difficulty was such as to justify a departure from the normal basis for assessing costs. I bear in mind that the point was taken by the claimant at the very outset of proceedings in the original Particulars of Claim and that the defendants have, therefore, always been aware of it. I do not, however, know what advice they were receiving at various stages. Getting the law wrong is no more a justification for the order sought than being found to be wrong in fact. Moreover, one can see why it may not have been obvious at the outset or subsequently that the alleged agreement would be caught by Section 2.
35. Mr Sisley's third point was that the defendants had abandoned their position because they appreciated that it was academic (their word). If so, they could have appreciated that at an earlier stage and not wasted everybody's time and money. That appeared a potentially telling point, but Mr Jelf answered it by pointing out, first, that there had been considerable advantages for both parties in sticking to the Swan Agreement as opposed to having a general account both in time and costs. Secondly, that it was only recent calculations by the personal representatives that had convinced them that the benefit of promoting the Swan Agreement did not justify the cost of doing so.
36. As I said earlier, I do not consider that the court should discourage a change of heart or a reappraisal of his prospects and position by a party at a late stage in litigation but before trial by penalising him by an adverse award of indemnity costs. Early accurate appraisal of the merits is, of course, desirable and is promoted by the risk of an adverse award of standard costs.
37. For the reasons given, I therefore order that the defendant should pay the claimant's costs of the preliminary issue on the standard basis and not on an indemnity basis.
38. That leaves the question of payment on account. It is agreed that such an order should be made. The question is for how much. I have been shown a summary of the claimant's costs of the preliminary issue which amounts to about £95,000 including VAT. A summary of the defendant's costs shows expenditure of only £12,000. The discrepancy is startling. It emerged in the course of discussion that a part of the claimant's bill is attributable to the proposal to go to mediation, which resulted in the defendant supplying the claimant with a large quantity of documentation. That may account for the very substantial time said to have been spent by the claimants' solicitors in attendance on documents (120 hours) and attendance on client (59 hours), which cannot possibly all be attributable to the preliminary issue. Those two items account for over £50,000 of the bill. That puts me in a difficulty. I do not know how much of the £95,000 is properly attributable to the preliminary issue, let alone how much of the cost was reasonably incurred. In the circumstances, n my judgment, the court should be very conservative so as not to order the defendants to pay more than the amount eventually assessed.
39. Moreover, in view of my decision on the application for indemnity costs, the total of £95,000 will need to be reduced, since it includes the claimant's costs of the application, and there would also need to be a set off in respect of any order I may make in favour of the defendants in respect of the present application.
40. So the next step is therefore for me to hear submissions as to the incidence of the costs of the applications before me.
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