England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		31/07/2009

Mr Justice Mann :

Introduction

1. This is an appeal from a decision of Master Gordon-Saker given on 16^th March 2009. It raises the following interesting point. Where a claimant has picked up one or more costs orders in its favour on the way to a trial, but fails very badly at the trial (for example due to exaggeration), can the costs judge assess those costs at nil on the footing that they were not, as it turned out, reasonably incurred because they had been incurred in an action that sought an exaggerated sum which should never have been claimed?

The facts

2. The defendant ("Deanwater") was formerly the tenant of premises at 7 Bow Lane, London EC4. Deanwater was subject to various repairing obligations. The lease was terminated with effect from 25^th December 2004 by a break clause. In April 2005 the landlord's interest was acquired by the claimant ("Business Environment"), and it took an assignment of such claims as there were under the repairing obligations. No schedule of dilapidations had been served on the termination of the tenancy but in due course one was served on 14^th April 2005, valued at £416,000 odd. In due course that led to proceedings. Deanwater considered that it had a complete defence based on a previous collateral contract and/or promissory estoppel. It was ordered that the existence or otherwise of that defence be tried as a preliminary issue, and on 5^th December 2006 Briggs J found in favour of Deanwater and dismissed the action. However, on 27^th June 2007 that decision was reversed by the Court of Appeal. On the occasion of that reversal the Court of Appeal made an order that Deanwater pay Business Environment's costs of the appeal and of the hearing of the issue below.
3. In September 2005 Deanwater engaged a surveyor (Mr Copley) to act for them in relation to the dilapidations claim. On 29^th September 2005 he wrote to his opposite number (Mr Estrop) recording that he had recently inspected the property and raising various points. At paragraph 5 he said:

"I am not sure if you have recently re-visited the property or whether or not Donaldsons are overseeing the current work contract. However it is clear that your Clients are fully refurbishing the property (a point that you openly acknowledge in our conversation and within your letter of 12 September). These actions clearly nullify the entirety of your claim for alleged internal breaches (toilets, circulation doors, light fittings, perimeter skirting, trunking and radiators, etc etc, have been stripped out).

6. Clearly the external condition must be similar to that at the commencement of the lease in 2002, accordingly I am unclear of the basis for alleging such extensive breaches of clause 2(5)(a) requiring remedies that would restore the premises to a far better condition. In addition I could find very little evidence of external 'disrepair'…"

The significance of that letter and those quotations is that Mr Copley plainly expressed the view that the claim was bad for the reasons stated. I am not aware of any retraction of that view. In due course, when the matter came to be pleaded, the claimant pleaded that it had done the repair works, and verified that pleading with a statement of truth signed by the solicitors. As one would expect, Deanwater made no admission as to that in its defence. I mention that because from time to time in arguing the appeal Mr Jonathan Ferris, who appeared for Deanwater, suggested that somehow his client believed that the claim was "good" in such a way as to suggest that their belief was that, subject to the preliminary issue point, the landlord had a good claim. The attitude demonstrated in the papers that I have seen was something different, and indeed what one would expect – it was firmly disputing the claim on the grounds that Mr Copley entirely properly suggested. Mr Ferris said that his clients were "misled" into thinking the claim was good. That submission was never made good, and it would have been very surprising if, on facts such as this, it were true.

4. Having decided to go down the preliminary issue route, Deanwater did not take any further steps on the surveyor front until the issue was finally resolved against it. That was doubtless a very sensible course. However, once the preliminary issue was out of the way, and the action was revived, it took up the point again. The matter was transferred to the Technology and Construction Court which gave directions for inspections, meetings of experts and Scott Schedules. The net result of this was that a Scott Schedule was prepared, in relation to which Deanwater disputed every item except two items amounting in aggregate to the sum of £1,073.50. In the interim period the claim had increased a little to about £460,000 and then come down to about £115,000.
5. There were then negotiations between the parties. At a pre-trial review on 14^th March 2008 the parties agreed that judgment should be entered against the defendant in the sum of £1,073.50 in full and final settlement of the action apart from costs. HHJ Toulmin Q.C. agreed to deal with the costs in a separate issue and set out a timetable for the hearing. That hearing took place on 9^th and 10^th June 2008 and he delivered judgment on 31^st July 2008 ([2007] EWHC 2003 (TCC)).
6. In his judgment he considered the history and noted that, as a result of Mr Copley's letter of 29^th September 2005:

"In my view, nothing could be clearer. The Claimant was maintaining its large claim for dilapidations. The Defendant was saying in unequivocal terms that the Claimant was not entitled effectively to any substantial part of its claim."

At paragraph 87 he notes that:

"It was clear that the claim had been grossly exaggerated when the matter came before me on 16 November 2007. It was also clear that the Claimant was in a state of considerable confusion. In fact, the claim was reduced to a fraction of its former sum, namely £107,506.34, in the new Schedule of Dilapidations which was served on 7 December 2007.

88. It appears that when the experts Mr Copley and Mr Estrop finally met 'without prejudice' all that was left of the claim was a small sum which was in the event agreed at £1,073.50."

7. He went on to record that Deanwater contended that in the circumstances it should have the costs of the action, and should have them on an indemnity basis. Judge Toulmin went on to consider that point and awarded the defendant its costs on an indemnity basis. In the course of advancing its argument, Deanwater argued that Business Environment was at best reckless in its presentation of its claim, and at worst unscrupulous. The result was that the claim was presented and persisted in on a wholly misleading basis. The judge acceded to the application. At paragraph 109 he said:

"109. In my view the Claimant both before and after the institution of proceedings acted in a way which took this case out of the norm. It represented to the Defendant both before and after the start of the litigation that it had a very substantial dilapidations claim. The Claimant knew what work it intended to carry out at the time when it made its initial claim for £500,000 for dilapidations. The scope of the work was no doubt refined in the summer of 2005 and during the tendering stage. This claim was persisted in at the time of the service of the Particulars of Claim. The Statement of Truth made on its behalf on the claim form and in the Statement of Claim attested to the fact that this was a genuine claim for dilapidations and that the work claimed for had been carried out. Any proper investigation of this claim both before the Particulars of Claim were served and afterwards, would have revealed (a) that the external works had not been carried out, and (b) that this was not indeed a genuine claim for dilapidations. Even in the Schedule of Dilapidations served on 7 December 2007 the Claimant persisted in a substantial claim which it knew or ought to have known was unsustainable. In these circumstances the appropriate order is that the Claimant pay the Defendant's costs other than those subject of the order of the Court of Appeal on an indemnity basis."

8. The assessment of the costs of the preliminary issue had, by this time, been under way for some little time. Deanwater took the view that it had won the dilapidations claim once the very small judgment was entered against it. It therefore took the view that it was entitled to challenge whether it should pay anything under the order made by the Court of Appeal that Deanwater should pay the costs of the preliminary issue. To that end it filed points of dispute in the costs assessment. Once the judgment had been entered into for just over £1,000 Deanwater filed supplemental points of dispute, taking the point that all the costs of the preliminary issue should be disallowed because the small sum involved, and the history of the matter, made all those costs disproportionate. Once Judge Toulmin's reasoned judgment on costs had been delivered, those supplemental points of dispute were amended to include a reference to Judge Toulmin's findings. Thus Deanwater sought to bolster its case to the effect that the costs of the preliminary issue should be assessed at nil.
9. In parallel with those efforts to avoid paying the costs of the preliminary issue, Deanwater sought to reopen the costs point on the appeal pursuant to CPR 52.17. On 21^st November 2008 it applied to the Court of Appeal to reopen its appeal. That matter was dealt with by the Chancellor (who had presided at the original Court of Appeal hearing) in a written decision dated 3^rd March 2009. He refused the application to reopen the appeal. His reasons were as follows:

"Reasons

The jurisdiction to reopen a final appeal depends on the presence of the three conditions set out in CPR Rule 52.17. They are:

(a) It is necessary to do so in order to avoid real injustice;

(b) The circumstances are exceptional and make it appropriate to reopen the appeal; and

(c) There is no alternative effective remedy.

Deanwater claims that all those conditions are satisfied because:

(i) It was induced by Business Environment into believing that the value of the claim against it was greatly in excess of what it in fact was;

(ii) Had it known how small it was it would not have sought or pursued the preliminary issue;

(iii) In that event, it would not have been liable to Business Environment in respect of its costs in the sum of £62,986.82.

The documents show that by 1^st October 2005:

(i) Deanwater believed that it had a good defence to the whole of the claim based on collateral contract or promissory estoppel.

(ii) Deanwater had been advised by its own surveyor that the claim against it was excessive because the refurbishment of the property by Business Environment nullified the internal dilapidations claim.

Deanwater elected to seek an order for the trial of the preliminary issue on its alleged collateral contract defence. The order was made on 12^th June 2006. In June 2007 the preliminary issue was determined against Deanwater.

It was not suggested that the processes of the trial of the preliminary issue at first instance or on appeal were in any way 'corrupted', see Re Uddin [2005] 1 WLR 2398 paras 17-22. Nor is it suggested that the costs order made by the Court of Appeal was in any way wrong at the time it was made. Deanwater seeks to reopen the appeal in order to avoid the consequence of its own tactical decision.

The public interest in the finality of litigation is not to be overborne save in cases of real injustice and exceptional circumstances. In my view this is not such a case."

It should be noted that the Chancellor records that one of the requirements is that "there is no alternative effective remedy". The witness statement and written submissions in support of the application averred that that was the case. I confess to finding that averment surprising when Deanwater was taking its points in the assessment – presumably it thought that its arguments (which have been advanced with vigour) were at least arguable, even if success would be a partial remedy only. Disclosure ought to have been made.

The decision appealed from

10. Within two weeks of the decision of the Chancellor, Master Gordon-Saker heard the assessment of costs of the preliminary issue and delivered his judgment. The point in issue was that referred to in the supplemental notes of objections, that is to say whether or not the manner in which the dilapidations proceedings were finally resolved should lead to the costs which Deanwater was liable to pay under the Court of Appeal judgment being assessed at zero. He started his judgment by setting out the background and quoting extensively from the significant paragraphs of Judge Toulmin's judgment. At paragraph 19 he observed:

"19. It seems to me that it is simply not open to me, even if I were minded to, to reach different conclusions of fact. The most significant finding of fact is that the claim has been grossly exaggerated. It seems to me that finding is not nullified or affected in any way by the reasons of the learned Chancellor in refusing the defendant permission to reopen the appeal…

20. On the basis that the claim was grossly exaggerated and that the course of the claim would probably have taken a different route if it had not been exaggerated, what should the court do on the assessment of the costs of the parties guilty of exaggeration?"

11. Master Gordon-Saker then went on to consider a decision of the Court of Appeal in Booth v Britannia Hotels Limited [2002] EWCA Civ 579. He quoted extensively from the case and observed:

"24. That is relevant because the claimant in this case contends that the defendant should have pressed its case in relation to quantum insofar as a view was taken at the outset that the claim was misconceived or exaggerated, and should not have pressed for a trial of the preliminary issues which were only relevant to liability.

25. As I say, it seems to me that I am bound by the view of HHJ Toulmin that the defendant's course was reasonable, but in any event, it seems to me, having regard to the comments of Jonathan Parker LJ in Booth, that a lenient view should be taken of the defendant's approach in circumstances where the claimant is pursuing an exaggerated claim.

26. If the claimant had not exaggerated its claim, it seems to me likely that the parties would have been able to resolve the dispute between them, a dispute involving a very modest sum, without a trial of the preliminary issue, without an appeal to the Court of Appeal, and quite possibly without any proceedings at all. On that basis, applying paragraph 25 of Kennedy LJ's judgment in Booth, I have to disallow all those items which I consider to be unjustified. It seems to me that the unjustified items would, in the unusual circumstances of this case, be all of the costs of the preliminary issue and all of the costs in the Court of Appeal. None of those costs would have been incurred had the claim not been exaggerated.

27. In may appear on the face of it that in reaching that conclusion I am undermining the order of the Court of Appeal. I would say at the outset that that is not my intention. An unusual factor in this case is that the costs of the claim flow in the opposite way from the costs of the preliminary issue. Had it been the case that the claimant, whether by agreement or by order of the court, was entitled to its costs of the claim, the disallowance of the costs of the preliminary issue and the appeal flowing from it, on the basis that I have indicated, would not like quite so stark. However, because of the very careful consideration given by HHJ Toulmin, the claimant did not get its costs of the claim, so my disallowance of all the costs ordered by the Court of Appeal appeals all the more stark."

12. Thus Deanwater succeeded in getting its liability under the Court of Appeal's cost order reduced to nil. It is from that decision that Business Environment appeals.

The basis of the appeal

13. Mr Alex Hutton appeared for Deanwater on the appeal. He submitted that what the Master had done wrongly undermined the decision of the Court of Appeal. Business Environment had got its costs order, and it was entitled to have it enforced fully. It was wrong to infect the assessment of that order with the final findings of Judge Toulmin as to the exaggeration of the claim. In effect, the judgment of the Court of Appeal was a self-contained order. Matters that were germane to the assessment of the costs of the main action, pursuant to order of Judge Toulmin, and which led to an order for indemnity costs being made, were not germane to the assessment of the separate, and self-contained, costs of the preliminary issue, which had already been determined by the Court of Appeal to be payable by Deanwater to Business Environment. What the costs judge had done was wrong because it set at naught the order of the Court of Appeal, even if it did not actually reverse it.
14. Mr Ferris sought to sustain the Master's order. He relied very heavily on the merits, which, he said, demonstrated that his client had been misled into believing that there was a good claim, and he stressed how outrageously Business Environment had behaved. The material was therefore there, on the merits, to justify the Master's order. Furthermore, the Master's order was entirely correct because he was obliged to consider such matters on his assessment exercise under CPR 44.5, which requires him to consider the conduct of the parties (among other things). The Master's order was said by him to be entirely correct, not least because it would be unfair to leave his client subject to the costs of the preliminary issue when it won so resoundingly in the action, and the claim, if properly considered and presented at the outset, would never have been brought, so that his clients would never have had to consider, and argue, a preliminary issue. In part his case was a causation issue – the preliminary issue costs would never have been incurred but for the exaggerated claim – though that was not the entirety of his case because he relied on what was said to be the strikingly bad nature of the claimant's case.

The relevant legal provisions

15. The relevant provisions of the CPR are Rules 44.3 and 44.5. Rule 44.3 deals with the initial making of a costs order by a tribunal. 44.3(1) provides:

"44.3(1) The court has a discretion as to –

(a) where the costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

(2) If the court decides to make an order about costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b) the court may make a different order.

…..

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

(a) the conduct of all the parties…."

16. CPR 44.5 deals with the assessment exercise:

"Factors to be taken into account in deciding the amount of costs

44.5(1) The court is to have regard to all the circumstances in deciding whether costs were:

(a) if it is assessing costs on a standard basis –

(i) proportionately and reasonably incurred; or

(ii) were proportionate and reasonable in amount.

(2) In particular the court must give effect to any orders which have already been made.

(3) The Court must also have regard to –

(a) the conduct of all the parties, including in particular –

(i) conduct before, as well as during, the proceedings; and

(ii) the effort made, if any, before and during the proceedings in order to try to resolve the dispute;

(b) the amount or value of any money or property involved;

(c) the importance of the matter to all the parties."

17. Mr Ferris laid particular emphasis on rule 44.5(3) and the word "must" – the costs judge is obliged to consider the conduct in relation to all periods.

The far-reaching nature of the defendant's case

18. The effect of the defendant's case, if correct, is potentially far-reaching. There will be many other cases to which it could apply, and in which it would lead to an investigation of the conduct of the parties in a manner which they might not expect. There will be many cases in which a party ultimately fails badly, but in which they have picked up costs orders on the way. If the defendant is right in the present case those interim costs orders will fall to be reinvestigated on the assessment in the same was as has happened in the present case. Take the case of a claim in fraud, in which the defendant succeeds on a disclosure application and gets an order for costs in his favour before failing in the main action. Does that failure lead to the costs judge being able to revisit the costs order on the disclosure application and hold that the whole action was necessitated only by the conduct of the defendant, with the effect that the recoverable costs of the disclosure application should be reduced to zero because they were unreasonably incurred? That is at first sight a surprising conclusion. One could create similar surprising examples.
19. This analysis does not necessarily mean that Mr Ferris is wrong, but in my view they do mean that his submissions have to be treated very carefully. Although he is not the appellant, I will consider his arguments first.

The defendant's submissions

20. Mr Ferris's starting point on the authorities was the decision in Northstar Systems v Fielding [2006] EWCA Civ 1660. He relied on this as demonstrating that conduct could be taken into account both at the stage of making the costs order and at the subsequent assessment stage as long as there was no "double jeopardy". That does indeed seem to be the effect of that decision. The trial judge in that case had made a 20% deduction from the costs of a successful party, who had themselves been guilty of running a partly dishonest case. The question arose as to whether, on the assessment, the paying party could still challenge the costs of running the dishonest case as being unreasonably incurred. In the appeal the receiving party conceded that such a challenge could be mounted, so the point was not actually decided in that case, though the Court of Appeal thought that the concession was rightly made (see paragraph 35). However, in the course of considering Aaron v Shelton [2004] EWHC 1162 Waller LJ said:

"33… What then is the position if a paying party has a finding of dishonesty of the winning party in his favour, and raises that factor as a ground for a reduction of the costs at the end of the trial? Clearly there is no problem if the judge's order makes "no order as to costs", but if the judge orders a reduction by say 20% without more, what would be the natural construction of that order? My view is that the natural construction of such an order, unless the contrary is expressly stated, is that the party guilty of dishonesty should not be entitled to say on assessment, "my costs incurred in seeking to make a dishonest case can be taken as reasonably incurred because the judge has made a reduction". If the dishonest party was entitled to succeed on such an argument, he will hardly suffer any penalty at all.

34. It seems to me that a consideration of a party's conduct should normally take place both at the stage when the judge is considering what order for costs he should make, and then during assessment. But the court will want to ensure that dishonesty is penalised but that the party is not placed in double jeopardy. Ultimately, the question is one of the proper construction of the order made by the judge…"

21. Thus Mr Ferris is entitled to say that the costs judge can look at conduct, and disallow costs which the paying party has unreasonably incurred, bearing in mind the nature of the latter's case, provided that the construction of the original order allows for it. It is the construction of that original order that is all important.
22. Mr Ferris then relies on Lahey v Pirelli Tyres Ltd [2007] EWCA Civ 91 as demonstrating that the costs judge is entitled to go so far as to disallow the whole of the costs. In that case a claimant made a large claim for personal injury, but settled for a very small amount, and his costs. The costs judge rejected a submission that he could start by deciding that only 25% of the costs ultimately assessed as being payable. The Court of Appeal held that that was rejection was correct. Dyson LJ said:

" 19. There is a real distinction between (a) carrying out an assessment and deciding as part of the assessment to reduce the bill by a percentage and (b) deciding in advance of the assessment that the receiving party will only receive a percentage of the assessed costs. The figure that results from (b) represents less than 100% of the assessed costs … In deciding in advance of the assessment that the receiving party will only receive a percentage of the assessed costs, the costs judge is not giving effect to an order that the party is entitled to his costs, to be assessed if not agreed.

20. Rule 44.3 gives a judge a jurisdiction to make a type (b) order. There is no doubt that at the end of a hearing, a judge may make an order of the kind sought from the district judge in the present case. In such a case, the judge is not purporting to vary an order if he disallows the successful party a proportion of his costs. He is making the order. He does not have the advantage accorded to the costs judge of having a detailed bill of costs. He cannot, therefore, carry out a detailed assessment. But he usually has the benefit, denied to the costs judge, of knowing a good deal about the case, and is often in a good position to form a view about the reasonableness of the parties' conduct. When carrying out a detailed assessment, the costs judge is not making an order for costs. His position is quite different from that of a judge exercising the jurisdiction given by rule 44.3.

…

23. It is, in fact, quite unnecessary to give the costs judge the jurisdiction for which Miss Ayling contends. The premise on which her argument is based is that, without such a power, the costs judge cannot arrive at a fair result in certain situations. Mr Roussak concedes (rightly) that in an appropriate case, the costs judge can disallow entire sections of a bill of costs. If the costs judge considers that the claimant acted unreasonably in refusing an offer to settle made before proceedings were issued, he is entitled to disallow all the costs post-issue on the footing that they were costs "unreasonably incurred": rule 44.4(1). Similarly, where he decides that a party was unreasonable to raise and pursue an issue, the costs judge is entitled to disallow the costs relating to that issue on the grounds that they were unreasonably incurred."

23. It is principally on paragraph 23 that Mr Ferris relies. He says that it gives the costs judge the power to disallow the entirety of the costs of the preliminary issue, as he in fact did. He is obviously right in what he says about the power of the costs judge to disallow the entirety of some costs, and its exercise is demonstrated by the next case he cites, but as will appear the important question is whether or not that power can be properly exercised on relation to the costs of the preliminary issue on the facts of this case.
24. In Booth v Brittania Hotels Ltd [2002] EWCA Civ 579 a claimant had again made a large personal injury claim (£617,000) but was forced to reduce it to all but nothing when video evidence was provided shortly before trial. She accepted a payment in of £2,500 and other benefits worth a bit over £20,000. The defendants agreed to pay her costs on the standard basis. On assessment the district judge ordered that the defendants pay all the costs relating to liability and 60% of the costs relating to quantum. She then examined all the separate items, allowed the assessed costs of the liability items and 60% of the assessed costs of the quantum items. The defendants appealed, saying that the deduction was arbitrary and gave insufficient weight to what had happened. The judge upheld the decision on appeal and the point then went to the Court of Appeal.
25. The Court of Appeal held that the district judge assessing the costs had gone about it the wrong way. She should have assessed the various items first, allowing them or disallowing them as appropriate, and after that she could and should have allowed a percentage award having regard to the damages actually obtained.

"24. She had to ask herself what costs (ie what items of expenditure) were reasonably incurred and what would be a reasonable amount to allow in respect of each of those items in order to establish quantum against the background that, at the end of the day, the son accepted was £2500 and repayment of benefit to the CRU.

25. In the context of this case that, to my mind, means that the district judge should have started by going through the bill of costs and ruling out all of those items she considered to be unjustified (for example, almost all of the medical fees, cost of retaining leading counsel, etc). That would, no doubt, have left some items which were plainly reasonable as items, even if questionable in amount, and other items where it would be difficult if not impossible to disentangle what was reasonable from what was unreasonable even having regard to the way in which rule 12(1) required that doubts be resolved. At that stage, but not any earlier stage, it would, in my judgment, be appropriate for the discreet judge to consider awarding a percentage of the sum claimed, but the percentage awarded would have to be such that at the end of the exercise the total amount awarded by way of costs could be regarded as reasonable having regard to the amount of damages obtained. In other words, the district judge must give herself an opportunity to look at the result in the round before concluding her arithmetic. In the present case her approach was wrong because in particular it deprived her of that opportunity and resulted in a conclusion that it was reasonable for the claimant to expend about £57,000 in order to recover £2,500 and to require the defendants to pay 60 per cent of the sum expended. That, in my judgment, must be nonsense.

26. I accept of course that the district judge must work within the ambit of the order made in relation to costs, whether it be a consent order or an order made after a contested hearing…."

26. Jonathan Parker LJ agreed and added:

"32…. In my judgment, a claimant who pursues an exaggerated and inflated claim for damages must expect to bear the consequences when his costs come to be assessed."

27. These were passages cited by Master Gordon-Saker in the decision under appeal in this case. That case was in fact under the old rules, but it was submitted that the same principles still apply. That was not disputed by Mr Hutton. Mr Ferris supports the Master's decision to apply that case in holding that the exaggeration of the claimant's claim meant that the case did not settle at an early stage without the need to try the preliminary issue and that therefore the costs of that issue were unjustified items which should be disallowed.

The appellant's submissions

28. The appellant accepts those authorities and the propositions derived from them, but says that they have no application to this case. Its main point was that the effect of the Master's decision was to undermine the order of the Court of Appeal, and indeed of the Chancellor when he ruled against reopening the appeal. The defendants were seriously overstating their case when they said (which they did) that they were somehow misled by the claimant into thinking that this was a substantial claim which was genuinely bought; their own surveyor, in the letter of 29^th September 2005 had challenged the claim on the very bases which succeeded at the end of the day. Whatever else Judge Toulmin found, he did not actually find dishonesty. So the case was not as bad on the facts as Mr Ferris had sought to paint it. The key exercise to be performed in this case is the implementation of the Court of Appeal's order. That order, on its true construction and as it was intended to be, was a self-contained order which had to be implemented without reference to the sort of facts which led the Master to disallow all the costs as being unreasonably incurred. He relied on what as said in Cope v United Dairies [1963] 2 QB 33:

"Mr Hames agreed that the taxing master could not properly refuse to carry out an order for taxation, in whole or in part, because he considered it to be wrong or ultra vires, and the same applies to a court on review. With that proposition, I agree." (per Megaw LJ)

Booth was to be distinguished, because in that case the court was not considering a previous, self-contained order. Mr Hutton relied on various cases which held that costs orders could not normally be varied or reviewed, even if they are interim costs orders. That is what is said to have happened here. I shall refer below to one of those cases; the others do not assist because they deal with actual applications to vary orders, which is not what sought here.

The resolution of this appeal

29. So far as the facts are concerned, I content myself with the findings of Judge Toulmin, as did the costs judge. They show an exaggerated case, which effectively fell apart at the end. To that extent it is unusual. But the extent of the unusualness is not where the answer to this case lies. Mr Ferris sought to magnify the effect of what happened. Some of that was misplaced, but none of it helped. In my view the key to this appeal lies in giving proper effect to the order of the Court of Appeal, which involves construing it in its proper context. That is the proposition which underlies Mr Hutton's constant refrain to the effect that that order is self-contained (my expression, not his, but which he accepted was the gist of what he was saying). The citations from the modern Court of Appeal cases extracted above, and Cope, make it clear that the important thing to do is to construe the order. If the effect of the order is that it was intended to take effect whatever the outcome of the action, then the Master's order was wrong. He should have assessed the costs of the issue, by reference to their reasonableness and propriety within the issue, but not by reference to the ultimate fate of the action, no matter how misconceived it might have been. It is the duty of the assessing tribunal to carry out the assessment which the previous court has directed it to carry out.
30. I consider that that was indeed the effect of the Court of Appeal's order in this case. It was, in my view, intending to deal with the costs of the preliminary issue as a discrete set of costs, which were to be paid by the defendant to the claimant irrespective of the fate of the action. The concept of their being irrespective of that fate covers two things – first, whether the identification of the paying and receiving parties can be affected by that fate, and second, whether the assessment of them should be affected by what transpires in the rest of action. So they are assessed by reference to their reasonableness within the issue. They cannot be characterised as unreasonable on the footing that this action was misconceived and failed.
31. This seems to be right for the following reasons (which tend to be related to each other).

i) The modern practice is to be much more willing to make adverse orders for costs in interim matters as the case progresses rather than leaving them to be made later. The purpose of this is to fix liabilities and to allocate costs to the activities to which they relate. Summary assessments of those costs by the court making them, leading to immediate payment, are now common. It is consistent with this that such orders for assessment should be dealt with on a self-contained basis. Otherwise part of the purpose of the orders is lost.

ii) If the court wishes to make an order which is affected by the fate of the action, or by what subsequently transpires, then it has the weapons available to it in the form of orders for costs in the case, or costs reserved. If the Court of Appeal had wanted to make orders which catered for the fact that the claim might be lost (whether lost badly or not) it could have made one of those orders. But it did not, and indeed was not asked to (as I understand it).

iii) It would not be open to the defendant to run its present argument if the Court of Appeal had summarily assessed the costs. The ability to take the points that the defendant has taken ought not to depend on a slightly arbitrary matter such as that.

iv) My analysis is to some extent supported by the Costs Practice Direction paragraph 8.5 when it describes orders for "Costs" or "Costs in any event":

'The party in whose favour the order is made is entitled to the costs in respect of the part of the proceedings to which the order relates, whatever other costs orders are made in the proceedings.'

The thrust of this tends to support the claimant's case. I accept that this is not a strong point, because to some extent it does not address the point that has arisen in this case. The defendant's case is not that the prior order is affected by subsequent costs orders; it is that its assessment should be affected by what has subsequently transpired about the action and its genesis. But I still consider that the idea behind the practice direction is properly reflected by the "self-containment" for which Mr Hutton argues.

32. Policy and practicality point in the same direction. If the defendant were right it would lead to a lot more uncertainty in relation to costs, and it is difficult to contain its logic satisfactorily. The defendant seeks to have all the previously ordered costs assessed at nil because the claim has turned out to be exaggerated. It is said that if it had not been exaggerated the action would not have been brought or would have been settled without having to fight the preliminary issue. However, on analysis this is a causation point and the exaggeration makes no difference. It can always be said that if a case which has failed had not been brought then costs orders made on the way would not have been made because their respective applications would not have been necessary. Yet it cannot seriously be argued that where, for example, a defendant has to pay the costs of a disclosure application and then wins the case, he is entitled to have the costs of the disclosure application assessed at nil on the footing that they were unreasonably incurred because without the case there would have been no need for any disclosure. Yet that is the logical consequence of the defendant's argument in this case. The defendant would doubtless say that the present case can be distinguished because the claimant lost so badly, as is reflected in the indemnity costs order. But in my view that is no reason for distinguishing this case. The underlying factor is that the receiving party lost the action. I do not see why it makes a difference how badly they lost it. The fact remains that the defendant took the preliminary issue point, fought it and lost it. That attracts costs consequences. The Master observed:

"An unusual factor in this case is that the costs of the claim follow in the opposite way to the costs of the preliminary issue"

I disagree. It is not unusual at all. It happens all the time that a party who is successful in the action, and who ends up getting his costs, has to pay some interim costs orders picked up along the way. If he says that they would not have happened if the unsuccessful action had not been brought, or if the unsuccessful defence had not been run, the answer is that they would not have happened if the interim application had not been fought (or defended, as the case may be) either, so it is right that the costs liability, in a real sense, should remain.

33. The Master observed that it might be thought that he was undermining the order of the Court of Appeal, and said that that was not his intention. But to allow him to take his course would, in a real sense, undermine that court's decision, or at least its ability to determine its own costs incidence. Any court asked to make an order in relation to an interim application before it, is in the best position to understand the merits and demerits of the cases on the application that it has heard, and to make an order for costs accordingly. If it makes an order that those costs be borne by one party or the other irrespective of the outcome of the case, that may well be because it has formed a positive view that, come what may, those costs ought to be paid, and "come what may" in this example includes the possibility that the other side wins the trial and wins handsomely. Where that possibility exists, it becomes almost presumptuous of a later court to carry out what is in effect (albeit not in form) a serious adjustment of that order by making the sort of order that the Master made in this case. It could well be undermining the unexpressed rationale of the court which made the order. Of course, usually one will not know, because decisions on costs are not usually expressed in terms which will enable one to know just how positively the previous judge had felt about it, but that is actually a reason for not allowing a subsequent tribunal (other than an appellate tribunal) to interfere in that sort of manner.
34. This conclusion is strengthened by the reasoning in Koshy v Deg-Deutsche Investitions [2003] EWCA Civ 1718. There a party had been ordered to pay the costs of an unsuccessful attempt to discharge injunctions and strike out the action. The applications failed (badly) and the costs were ordered to be taxed and paid forthwith. Later there was a trial, and the previously unsuccessful party succeeded. That party then sought to appeal the original costs judgment out of time. The application failed. It was, of course, an application which differs from the procedural background to the present case, but Mummery LJ made various observations which are applicable to the present case. At paragraph 10 of his judgment he observed:

" The unusual feature of the case is that a successful defendant seeks, after final judgment in the action, to set aside and reverse on appeal an interlocutory order made before trial. I do not say that this is impossible in principle, but it is certainly a most unusual form of appeal in practice. In most cases interlocutory orders made in the course of proceedings cease to have any independent practical significance after the proceedings have been tried and final judgment entered. A court would not normally entertain an appeal after final judgment, attempting to reopen a costs order made inter partes at an interlocutory stage on the ground that the facts as found by the trial judge were different from what they were alleged to be at the date of the interlocutory order."

35. Although that is not the procedural background to the present case, the same remarks apply. The effect of what the defendant proposes is to re-open a costs order on the basis that the facts (whether there was a valuable cause of action or not) were different from what they were supposed to be at the date of the interlocutory order. One does not do that. Mummery LJ went on:

" 18. I have reached the conclusion that the appeal should be dismissed, though with some hesitation, as I do not regard the result as entirely fair or satisfactory.

19. I start from the position that this is in substance an attempt, after the trial is over and in the light of the results of the trial and the findings made at it, to re-litigate an interlocutory costs order. No court, whether on an application to set aside at first instance or by way of appeal, is receptive to such an application. It is bound to be a difficult exercise for the court to review the exercise of a discretion made at an early stage where not all the evidence is available or all the facts known or even all the issues identified. As for the parties, more time will be taken up and additional costs incurred.

… 21. … Harman J had exercised his discretion on the costs of the hearing to set aside the freezing orders by taking into account all the circumstances of the applications. The court would not normally interfere with his discretion on costs unless it could be demonstrated that he had taken a wrong approach to the exercise of his discretion or had made an order which was plainly wrong.

22. This court is being asked to interfere with the exercise of his discretion on a very different basis. It is not being asked to look at all the circumstances in which he exercised his discretion or at his approach or at the result at the time of the order, but at one circumstance only: namely a comparison between (a) the affidavit evidence placed before Harman J. on the ex parte application for the freezing orders and the applications to set them aside on the issue of DEG obtaining knowledge about the profits made by Lasco and Mr Koshy; and (b) the findings of Rimer J. on that issue at the trial.

23 … What this court is being asked to do is to cancel an order for costs, which was made in the exercise of the discretion by having regard to all the circumstances at that time, solely on the basis of what has transpired at the trial on an issue of disputed fact. … in my judgment, it would be wrong and potentially unfair to DEG in these circumstances for the court to set aside the costs order made by Harman J. If the exercise of discretion is to be reviewed in circumstances of an alleged material non-disclosure with a view to making a different order for costs, it can only be fairly and satisfactorily done in this case by an application at first instance, in which the issues of fact are defined and on which evidence can be adduced by both sides about the circumstances in which the orders were made, including orders for costs."

36. Much of that applies to the present case. What the defendant invites the costs judge to do is, of course, not in terms to set aside, or undo, the costs order, but it amounts to the same thing. That cannot be sensibly done by the subsequent tribunal any more than it could be sensibly done by an appellate court in Koshy. There may have been discretionary factors at play in the preliminary issue of which the subsequent tribunal is unaware. No attempt was made to address such matters before the Master. The only point really made was the causation one referred to above, and that is not sufficient, in my view.
37. The cases relied on by Mr Ferris do not, in the end, assist him. None of them were cases in which there was an assessment of a costs order made by a judge after due consideration. Lahey was an automatic costs order following acceptance of a payment in, and Booth was an agreed order for costs. The same process of construction was in play, but with different results because of the circumstances of the orders for costs. They were both orders made on the final disposition of the action, during which no judge had previously made a determination as to the costs. So the whole of the propriety of all the costs was open for determination. Where a judge has made an order in the exercise of judicial discretion the picture changes. One must work out what that judge's order means, and different factors (those identified above) come into play.
38. In some ways this might be thought to be an unsatisfactory result, but that is not in fact the case. The result is entirely logical, and is consistent with a scheme of litigation in which the costs of applications are dealt with according to the fate of the application. It does not necessarily produce unfairness to the paying party. It was the defendant's choice in this case to take the collateral contract point, and it accepted that it should be dealt with as a preliminary issue. It lost that point. There is no inherent unfairness in its having to pay for that. (If one wants to turn the causation point against it, then it caused those costs to be incurred.) And at the end of the day, if there really is a harsh case which needs addressing, there is a potential mechanism through which it can be done. In the present matter the defendant sought to reopen the appeal. The test for doing that is a stringent one, and Deanwater failed. However, there is another potential route open to it in the form of CPR 3.1(7):

"A power of the court under these Rules to make an order includes a power to vary or revoke the order."

39. The scope of this rule is very limited but it may be that it is capable of applying to a strong case. In Lloyds Investments (Scandinavia) Ltd v Ager-Hanssen [2003] EWHC 1740 Patten J said:

"It seems to me that, for the High Court to revisit one of its earlier orders, the Applicant must either show some material change of circumstances or that the judge who made the earlier order was misled in some way, whether innocently or otherwise, as to the correct factual position before him. The latter type of case would include, for example, a case of material non-disclosure on an application for an injunction." (para 7)

40. In Collier v Williams [2006] EWCA Civ 20 the Court of Appeal endorsed this approach. So if there really is a genuine change of circumstances, or some entirely false basis for something having been done, this route may be open, although I make no positive determination on the point (not least because the point was not argued before me). (I was shown the decision of Neuberger J in Commissioners of Customs & Excise v Anchor Foods Ltd, unreported, 8^th July 1999, in which the judge seemed to limit the jurisdiction of the court to revisit its own orders to exceptional cases such as fraud or slips, but he does not seem to have had this particular provision before him.) This route would have the attraction of being an application which addresses what is really the right question – should the costs order have been made in the first place knowing what is now known – rather than approaching it more obliquely. If the facts are not sufficient to induce a court at the same level as that which made the previous order to say that the order was the wrong one, then they ought not to be sufficient to allow a Master to achieve much the same result by a different route, on different evidence and on a different inquiry.

Conclusions

41. In the circumstances I think that the Master erred in his approach. He was not entitled to consider that the claimant's costs of the preliminary issue were unjustified because the claim turned out to be exaggerated and they would not have been incurred if it had not been. That is saying no more than the action was ultimately lost. He should have determined the costs of the preliminary issue by looking at the reasonableness of their being incurred, and the conduct of the parties under CPR 44.5(a), in relation to that issue, and not by reference to what happened in the action at the end of the day.
42. Accordingly this appeal will be allowed and the Master's determination on the point will be set aside. The matter will be referred back to the Master to carry out the assessment on the correct basis.