England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		22 July 2013

HH Judge Anthony Thornton QC:

Introduction

1. This is an appeal from a costs decision of Master Fontaine on 6 February 2012 that is brought with the permission of the Master. Both her decision and her extempore judgment were given at the second stage of a two-stage decision-making process in the application made by the West Midland Fire & Civil Defence Authority ("the Authority") that the three members of the Patel family, Ravindra Patel, Ganshyam Patel and Parul Patel ("the Patels") should be subject to a non-party costs order ("NPC order"). The underlying claim, the second to have been started, had been brought by the Patels' company, AP UK Ltd ("the company"), and the Master had struck that claim out as being both subject to cause of action estoppel and, hence, res judicata, and an abuse of process. The company went into administration between the hearing of the application to strike out the claim and the handing down of the Master's judgment and was therefore unable to meet the costs order that was made in favour of the Authority, being an order that the company should pay the Authority's costs of the action which were to be subject to a detailed assessment if not agreed. The Master dealt with the application for a NPC order in two stages. She first decided in principle that the Patels should be made subject to a NPC order and her judgment that reached that decision was handed down on 6 February 2012. She had left over the issue of the costs order that should be made in the light of that decision in principle. In her second decision, the Master decided that the Patels should be liable for 80% of the Authority's assessed costs and it is that part of the second decision that is the subject of this appeal. The Master also decided that the Patels should be jointly and severely liable to meet that costs order but that part of her order is no longer the subject of this appeal.
2. The appeal raises the short but difficult issue of whether the Master should have considered a proportionate order and, if she was entitled to, whether her decision that the proportion should be 80% or some much smaller percentage was challengeably erroneous.
3. The relevant chronology of the proceedings was as follows. The litigation was a very heavy and complex fire case brought by the company against the Authority who was the fire authority whose men and tenders fought a fire which destroyed the company's paper making and processing business which was located in Wolverhampton. The fire giving rise to this litigation occurred on 7 February 1999 and the first claim was issued in December 1999. The first action was dismissed on 16 March 2001 as a result of failures to comply with two unless orders to provide security for the Authority's costs in the sum of £135,000. The appeal from that order was dismissed by the Court of Appeal on 16 November 2001. The second claim form was issued three days before the limitation period expired on 4 February 2005 and was served just in time on 31 May 2005. The particulars of claim were served on 7 June 2005, two days out of time. The claimant's solicitors issued an application on 8 June 2005 seeking permission to extend time for service of the particulars of claim. An application to strike out the claim as being an abuse of process was issued on 5 July 2005 and the claimants also issued a third application seeking permission to amend the particulars of claim on 1 November 2005. The three applications were heard together on 14 and 15 November 2005 and judgment was sent out in draft in early March 2006. The company went into administration on 24 March 2006 and the handing down hearing took place on, and the Master's order dismissing the claim was dated, 30 March 2006. The order struck out the second claim form and particulars of claim pursuant to CPR 3.4(2) and dismissed the claimants' two applications.
4. The Master's striking out decision was set out in a lengthy judgment and it was reached on two bases. The first was that the first action had been dismissed, and not merely struck out. As a result, the cause of action advanced was now subject to the doctrine of res judicata or cause of action estoppel so that a second action based on the same cause of action was no longer possible. Her second basis for striking out the first action was that it was an abuse of process
5. The company's administrator confirmed to the Authority's solicitors on 25 May 2006 that there was no prospect of the company paying the Authority's costs which have not yet been assessed but which the Master's first NPC order stated were now estimated by the Authority's solicitors to be in the region of £140,000. The company was dissolved on 26 January 2008 and, on 9 April 2008, the Authority's solicitors obtained an order pursuant to section 51 of what was then still known as the Supreme Courts Act 1981 but is now known as the Senior Courts Act 1981 and CPR 48.2 joining each of the Patels as parties to the proceedings. There then followed a long series of applications and hearings concerned with the Authority's attempts to obtain answers to questions about the company's decision to initiate the second claim, its solvency at the time that claim was issued and the Patels' current solvency and the financial support that they had given to the company and to question the Patels in relation to their assets. Those procedural steps and the preparation of the evidence for the NPC order hearing led to the hearing of the application which was heard over two days in September and November 2011 and the Master reserved judgment.
6. The parties had filed detailed evidence for the first hearing and also relied on many of the witness statements that had been used in the two-day striking out hearing some five years earlier. In all, the Authority relied on seven witness statements and the Patels relied on seventeen. In addition, the first of the two hearing days was given over to the cross-examination of the respondents and the solicitor who acted for them during the second action. This evidence was transcribed and the written and transcribed evidence were used by counsel in support of their detailed submissions on the second day of the hearing which was held seven weeks later. The Master gave a clear and thorough judgment and neither party challenged its contents. This dealt with whether a non-party costs order should be made at all and the Master decided that there should be such an order which "should be against all the respondents". She left over for a second hearing the issue of "how the court's order should be formulated against each respondent". This second hearing was clearly intended to deal with CPR Part 44 issues including whether the order should be a joint and several order or a several order, whether it should be for the whole or a proportion of the Authority's costs, and if for a proportion, what that proportion should be for each of the Patels.
7. The Master held a further hearing on 6 February2012 when she handed down her detailed first stage NPC judgment and then heard argument on the second stage concerned with the terms of the costs order she should make against the Patels. Having given an extempore judgment on that issue, she made her detailed order dealing with her non-party costs order, the costs of the application, interest, an interim payment and permission to appeal.
8. The Master reached her NPC order decision in two stages and it was the subject of two separate judgments albeit that the decision was then set out in one order. The first stage was concerned with the question of whether a NPC order should be made at all and it might loosely be called the liability stage. The hearing took place over two separate days, took place on 26 September and 18 November 2011 and the reserved, lengthy judgment was sent out to the parties in draft in early February 2012. It was handed down on, and is dated, 6 February 2012. It decided that, in principle, a NPC order should be made against all three Patels. Her judgment concluded with a direction that:

"I conclude that the order should be against all the [Patels]. As to how the court's order should be formulated against each respondent, I will leave that for submissions at the hearing."

9. That hearing took place at or immediately following the handing down of the first judgment and was what might loosely be called the quantum stage. At that second hearing, having heard oral submissions, the Master ruled as follows:

"5. In my judgment the court does have a wide discretion in respect of costs orders, and although there is no direct authority on the issue the court does have the power in the exercise of that discretion to make an order for payment of costs of lesser proportion than the full amount."

10. The Master then made an order which covered both decisions and the relevant orders were as follows:

"(1) The respondents shall pay 80 per cent of the applicant's costs of the action.

(2) The costs payable under paragraph (1) of this order shall be subject to detailed assessment on the standard basis if not agreed and, pursuant to CPR 40.8((2), shall carry interest from the date of that the judgment striking out the action was handed down, save that the applicant may not recover one year's interest on such costs, representing the period between September 2006 and September 2007.

(3) The respondents shall pay the applicant's costs of this application, to be subject to detailed assessment if not agreed, on the indemnity basis to 17 January 2011, and thereafter on the standard basis. The applicant is to give credit in such assessment(s) for all costs already encompassed by interim costs orders in the applicant's favour, which for the avoidance of doubt, remain unvaried by this order.

…

(5) The respondents shall make an interim payment to the applicant in the sum of £150,000 on account of costs and interest due under this order by 4 pm on 5 March 2012.

…

(7) The liability of the respondents under paragraphs (1) to (3) and (5) of this order is, for the avoidance of doubt, joint and several.

(8) Both the applicant and the respondents have permission to appeal the court's 80 per cent apportionment of costs under paragraph (1) of this order, and the respondents in addition have permission to appeal paragraph (7) of this order.

(9) Save as stated in paragraph (8) of this order, the respondents' application for permission to appeal is refused. For the avoidance of doubt, the permission to appeal granted to the respondents by paragraph (8) does not encompass any appeal against the making of a costs order against them in principle."

11. The present appeal and cross-appeal has followed no fewer than 5 procedural hearings concerned with unsuccessful applications relating to the Patels' attempts to seek permission to appeal the first stage judgment and to the terms of the stay of the Master's order pending the hearing of this appeal. As a result of those hearings and a subsequent withdrawal of one of the issues originally to be appealed, the issue of the Patels' adjudged joint and several liability for the NPC order, the following matters remain for me to determine in this appeal:

(1) How the court should approach the issue of proportioning the costs of a party that a non-party should be required to pay and how those principles should be applied in this case.

(2) Whether the Master erred in principle in considering whether there should be any proportioning of the costs and, if she did, whether it is right that there should nonetheless be no apportionment.

(3) Whether the Master's apportionment of 80% was in all the circumstances both erroneous and reviewable and, if so, whether that figure should be 20% or some other figure more than 20% but less than 80%.

(4) What order the court should make as to the costs of both the application before the Master and of this appeal.

This appeal

12. This appeal is concerned with a small but significant part of the costs determination in this case. This particular costs determination is one involving three non-parties so that it has had to be undertaken in four stages:

(1) The application to join the Patel's as parties;

(2) The hearing of the application for a NCP to be made against each in principle;

(3) The terms of the costs order to make against each; and

(4) The detailed assessment of such costs as is to be the subject of detailed assessment.

Obviously, the fourth stage has not yet been embarked upon.

13. This an appeal against part of the Master's decision in the third of those stages. Following the limited basis on which permission to appeal has been granted and the subsequent abandonment by the Patels of part of the matters for which they have permission to appeal, I am concerned and only concerned with whether the Master's decision that the appropriate costs order for her to make in the exercise of her discretion was that the joint and several liability that the Patels have to pay the Authority's costs should be limited to 80% of the Authority's recoverable costs or should be another percentage within thf e bracket of 25% to 100% of those costs. I am bound by the Master's findings in the striking out application and in both the first and second stages of the NPC order process and by her finding that the Patels should be jointly and severally liable for such costs as are ordered to be non-party costs. Moreover, since the part of her decision that is under appeal represents her exercise of discretion in a costs decision in a case in which she had been the case manager and decision-maker throughout and had held two substantial hearings and a third significant hearing already, during which she heard each of the three Patels being cross-examined, there is only a very limited basis on which the appeal court may interfere with her discretionary decision under appeal. If I decide that that discretion may be interfered with so that I can conclude that her costs-reduction decision was within the wide margin of discretion available to her, I must then re-determine that decision myself or, exceptionally, return it to her to enable her retake it in the light of this judgment.
14. Since the Authority has cross-appealed the Master's decision on the basis that she had no remaining discretion and had to award it all of its assessed costs, I will be deciding the issues in this order:

(1) The legal and procedural basis of a NPC order;

(2) Whether the Master's decision was decided on an erroneous basis;

(3) Whether the Master's decision is reviewable;

(4) If the Master's decision is set aside, what NPC order should be made; and

(5) What the costs order in relation to the application should be.

In discussing these issues, I will refer to the Patels as non-parties and the Authority as a party.

The legal and procedural basis of a NPC order

15. I will first set out the relevant provisions of the Senior Courts Act, the CPR and the Practice Direction concerned with pre-action conduct.

(1) The Senior Courts Act

51(3) The court shall have full power to determine by whom and to what extent the costs are to be paid.

(2) CPR

1. The Overriding Objective

1.1(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.

(2) Dealing with a case justly includes, so far as is practicable-

…

(b) saving expense;

(c) dealing with the case in ways which are proportionate-

(i) to the amount of money involved;

(ii) to the importance of the case;

(iii) to the complexity of the issues: and

(iv) to the financial position of each party;

(d) ensuring that it is dealt with expeditiously and fairly; and

(e) allotting to it an appropriate share of the court's resources, while taking into account the need to allot resources to other cases.

48. Costs orders in favour of or against non-parties

48.2(1) Where the court is considering whether to exercise its power under section 51 of the Senior Courts Act 1981 (costs are in the discretion of the court) to make a costs order in favour of or against a person who is not a party to the proceedings-

(a) that person must be added as a party to the proceedings for the purposes of costs only; and

(b) he must be given a reasonable opportunity to attend a hearing at which the court will consider the matter further.

44. Court's discretion and circumstances to be taken into account when exercising its discretion as to costs

44.3(1) The court has discretion as to-

(a) whether 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; …

(5) The conduct of the parties includes-

(a) conduct before, as well as during, the proceedings, and in particular the extent to which the parties followed the Practice Direction (Pre-Action Conduct) or any relevant pre-action protocol;

(b) whether it was reasonable for a party to raise, pursue or control a particular allegation or issue:

(c) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(d) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.

(6) The orders which the court may make under this rule include an order that the party must pay-

(a) a proportion of another party's costs;

(b) a stated amount in respect of another party's costs;

(c) costs from or until a certain date only;

(d) costs incurred before proceedings have begun;

(e) costs relating to particular steps taken in the proceedings;

(f) costs relating only to a distinct part of the proceedings;

(g) interest on costs from or until a certain date, including a date before judgment.

(3) The Practice Direction-Pre-Action Conduct

Aims

1.1 The aims of this Practice Direction are to-

(1) enable parties to settle the issue between them without the need to start proceedings (that is a court claim); and

(2) support the efficient management by the court and the parties of proceedings that cannot be avoided.

1.2 These aims are to be achieved by encouraging the parties to-

(1) exchange information about the issue; and

(2) consider using a form of Alternative Dispute Resolution ("ADR").

…

Exchanging Information Before Starting Proceedings

7.1 Before starting proceedings-

(1) the claimant should set out the details of the matter in writing by sending a letter before claim to the defendant. This letter before claim is not the start of proceedings; and

(2) the defendant should give a full written response within a reasonable period, preceded if appropriate, by a written acknowledgment of the letter before claim. …

9.5 Limitation periods

9.6 In certain instances compliance [with the exchanging of information before starting proceedings] may not be possible before the expiry of the limitation period. If, for any reason, proceedings are started before the parties have complied, they should seek to agree to apply to the court for an order to stay (i.e. to suspend) the proceedings while the parties take steps to comply. …

Annex A - Guidance on pre-action procedure where no pre-action protocol or other formal pre-action procedure applies

The Annex sets out a detailed list of the matters that should be set out in the claimants' letter before claim, the defendant's acknowledgment of the letter before claim and its full response and the claimants' reply. The Annex then continues:

6. Taking Stock

6.1 In following the above procedure, the parties will have a genuine opportunity to resolve the matter without needing to start proceedings. At the very least, it should be possible to establish what issues remain outstanding so as to narrow the scope of the proceedings and therefore to limit proceedings.

6.2 If having completed the procedure, the matter has not been resolved then the parties should undertake a further review of their respective positions to see if proceedings can still be avoided.

16. It can be seen that the statutory basis for making a non-party costs order is section 51 of the Senior Courts Act 1981. This provides that the court may order that someone other than a party to a claim or other piece of litigation should pay all or any part of a party's costs. The usual but not invariable situation where a party such as the Authority in this case seeks an order that a non-party should make payment towards, or the payment of, its recoverable costs, is when the party liable to pay those costs in any event is insolvent. In order to obtain a payment order against the non-party, the claiming party has to proceed through a detailed procedure which involves up to four separate stages and court orders depending on the procedure that is followed in any particular case.
17. These stages are:

(1) Preliminary stage. The claiming party must apply to add the intended non-party to the proceedings as a party for the purposes of costs only. That stage is often applied for at the handing down hearing when the costs of the action are being dealt with. Alternatively, this stage is achieved by the claiming party issuing a without notice application to join the intended non-parties. This application should be made as soon as possible after the judgment has been entered to the trial judge. The application is sometimes referred to as a show cause application since the claiming party must provide some grounds for showing that the non-party has a case to answer. In this case, the application was made by a notice dated 6 August 2007 and the Master made an order dated 9 April 2008 joining the Patels as parties for the purposes of costs only. When the court makes an order joining non-parties in this way, it often gives directions for the service of evidence but this was not done in this case.

(2) First stage. The court at the first stage of the hearing of an application for a NPC order must decide whether an order should be made in principle. This is a decision made under CPR 48.

(3) Second stage. If the court decides in principle that an order should be made, it must then decide on the form and content of that order. This is a conventional costs decision that is made under CPR 44.3. The hearing will normally decide both the first and second stages together and give a rolled-up decision. However, there is no requirement for the application to be heard in that way, it is permissible to hear the two stages separately and in successive hearings as was done in this case.

(4) Third stage. Finally, the court must undertake a detailed assessment of the costs that are to be paid by the non-party unless it has ordered that the costs will be quantified summarily or by way of a lump sum or other basis of quantification that does not involve a detailed assessment.

18. A decision that rolls together the second and third stages is usually made if the case is relatively straightforward. This will usually be the case where there is only one non-party against whom the receiving party is seeking an order or where the second stage decision is not reliant on the detailed findings of fact that are to be made at the second stage. However, some cases require the decision-making process to take place in two successive stages. There may for example be more than one non-party each of whose potential basis of liability to pay costs is different or there may be conduct issues to consider. These issues can, of course, be dealt with as part of the first stage hearing concerned with principle but often it will help the court and the parties to know the basis upon which the court has decided the first stage of the application before it decides on the form and content of the costs order since these points of detail may be very fact-sensitive and involve an application of the first stage findings to the menu of costs orders that is provided for in CPR 44.3(6).
19. Once a non-party has been joined for the purposes of costs only, that individual or company is a party to the proceedings and is one of those referred to as "the parties" in CPR 44. It follows that the court has the same discretion in a NPC order consideration as it has when considering whether a party should pay another party's costs. At the second stage, therefore, the court must consider the various applicable options including the type of costs order to be made and when those costs are to be paid. The court must, in reaching decisions on those matters, decide whether to take account of the matters listed in CPR 44 including the conduct of both the paying and the receiving parties and, if it considers that the conduct of any party or non-party is relevant, it must then decide to what extent and by what means it should reflect its findings about conduct in the costs order that it makes.

Whether the Master's decision was decided on an erroneous basis

20. In this case, the Master conducted the hearing of the Authority's application for a NPC on the basis that she would first decide the question of principle and, having reached and handed down that decision, she would then turn to the consideration of the CPR 44.3 matters that I have just summarised. She also made it perfectly clear in her first stage decision that that was what she was going to do when stating at the end of her judgment that she would leave to submissions at the handing down hearing of that judgment as to how she should formulate the court's order against each respondent.
21. The Authority's counsel, Mr Benjamin Williams, commented that the Patels' then counsel had raised the issue of the proportioning of the Authority's costs at the handing down hearing without any prior warning. He did not object to this being done at the time or raise it as a ground of his cross-appeal. However, the Authority had full notice of the issues that would arise at the handing down hearing. The Master was bound to consider the various factors provided for in CPR 44.3 at that hearing since she had not done so at the first stage hearing in the structured manner required by CPR 44.3. Instead, she had conducted the first stage hearing on the basis that these detailed considerations would await the handing down hearing, she had notified the parties in her judgment, which they had seen in draft prior to the second hearing, that that was what she was going to do and, at the handing down hearing she considered the appropriate order to be made in the light of her first stage judgment and, having done so, made an order proportioning the costs as provided for in CPR 44.3(6)(a).
22. Parties' submissions. On behalf of the Authority, it was contended the Master had no discretion to abate the NPC order against the Patels because the only basis on which a NPC order could be made at all was that they, as non-parties, had caused the claiming party's costs to be incurred.
23. In the alternative, it was contended that the Master had erred in not giving effect to her findings of fact in her stage one judgment because the only conclusion that could reasonably be drawn from those findings was that the Patels had caused the entirety of the Authority's recoverable costs to be incurred and it would be unjust not to give effect to those findings. Either the Patels should pay all of the Authority's assessed costs or they should pay none of them, no middle ground was possible. This stark dichotomy was said to arise because it was contended that the Master had found that it was just for the Authority to recover the costs that the Patels had caused the Authority to have incurred. In those circumstances, it could not then be just that those costs should be abated by 20% so that the Authority should only recover 80% of its assessed costs. The Master's error in acting in this way was said to have been highlighted by there being no reported decision in which the court had proportioned a non-party's NPC order liability to pay a party's costs. On behalf of the Patels, it was contended that there was no obvious authority or guidance as to how to craft a costs order and that the only guiding principle was whether it is just to make such an order.
24. Discussion. Both counsel approached the issue of principle of whether a proportioning order could be made without reference to CPR 44.3, thereby suggesting by their silence that orders made pursuant to CPR 48 were ones that did not engage the provisions of CPR 44.3. Once it is realised that the two provisions must be read and applied together, no further point of principle arises. Clearly, in an appropriate NPC order case, the Master can make a proportioning order in relation to the non-party's payment of the receiving party's costs since that is one of the costs options open to a court when applying CPR 44.3. However, that proportioning decision must be reached having taken all relevant factors into account. Those factors should include all those set out in CPR 44.3 including, in particular, the conduct of both the non-parties and the receiving party. that is the Patels and the Authority.
25. Once the Master had decided that a NPC order should be made against each of the Patels, as non-parties save as to costs only, the basis upon which that order should be made was identical to the basis of any other costs decision, namely the provisions of CPR 44 read against the overriding objective and the principle of proportionality. It is therefore no surprise that there are no reported decisions as to when it is appropriate to make a proportioning order and how the percentage or other method of proportioning should be determined since there were no reported decisions that were brought to my attention or that are referred to in the White Book on the use of this power in costs decisions that only involve full parties. The reason for this lack of authority is simple. Costs decisions are always fact-sensitive, they involve an exercise of discretion by the trial judge who had the best feel of the case and they rarely gives rise to a point of principle. The discretionary decision to proportion and as to the proportions to be used must be arrived at by taking account of all relevant circumstances and the need to give effect to the overriding objective and to arrive at a proportionate, fair and just conclusion.
26. The Master followed the correct procedure in splitting the hearing into two stages and in deciding the principle of whether to make a NPC order against the Patels first before working out how that decision in principle should be given effect to. She also decided the first stage by reference to Section 51 of the Senior Courts Act 1981 and CPR 48 and there is no appeal from that decision since the Patels were refused permission to appeal it. The Master, as can be seen from her second stage judgment, also clearly had in mind and structured her second stage decision around the provisions of CPR 44.3. She therefore exercised her discretion, which she clearly had, to award costs against the Patels on a proportioning basis and then decided that the proportion should be 80% on a joint and several basis.
27. It was therefore open to the Master to decide that that proportioning order should be made. The Patel's appeal and the Authority's cross-appeal are, on analysis, concerned with whether the Master's exercise of her discretion is reviewable and, if it is, what detailed costs order should be put in its place.

Whether the Master's decision should be reviewed

28. This appeal seeks a review of the costs decision and, in particular, the decision to proportion the Patels' NPC orders liability on a joint and several basis so as to pay 80% of the Authority's costs. The Master has a wide margin of appreciation in arriving at her decision since it is a discretionary costs decision made in a situation where she was the trial judge and the decision as to costs is particularly one for her to take. It follows that her decision is only capable of being reviewable if she has failed to take into account matters that she should have taken into account which are fundamental to her decision and it can be seen from a careful consideration of her costs judgments taken with her original striking out judgment that that failure led to a significantly erroneous decision.
29. It is therefore necessary to summarise the salient parts of the Master's three judgments save for the operative passage of her second stage NPC order judgment which I have already been set out.

(1) The striking out judgment dated 30 March 2006

30. The claim was, of course, brought by the company against the Authority. The principal application decided by the judgment was the Authority's application to strike out the claim as an abuse of process under both CPR 3.4(2)(b) and (c). These provisions entitle a court to strike out a statement of case where it is an abuse of the court's process or is otherwise likely to obstruct the just disposal of the proceedings or there has been a failure to comply with a rule, practice direction or court order. The Master struck out the claim because she found that it was res judicata, that is that it had already been finally decided by the previous claim that had been dismissed. She also struck it out on a second basis, namely that it was an abuse of process. The judgment is both full and detailed and its conclusion that the proceedings were an abuse of process are summarised in paragraph 120. These conclusions provide an unanswerable and incontrovertible set of reasons in support of her conclusions that the claim should be struck out and even if the company had not then entered administration, it is inconceivable that the company would have attempted to appeal the judgment let alone succeed in an appeal had one been attempted and had permission been granted for it to proceed.
31. The conclusions include these particularly relevant passages:

"120. I have come to the conclusion that these proceedings are an abuse of the process and that there is no special reason or exceptional circumstances (as explained in the authorities), why this action should nevertheless be permitted to proceed. I have taken account of all of the following in coming to that conclusion:

i) The failure to comply with the pre-action protocol to give proper notice of the proceedings, in particular as the proceedings were brought right at the end of the limitation period and served at the end of the time for expiry of the Claim Form. This failure is the more reprehensible in that it echoes the conduct of the Claimant in the first action, where proceedings were issued less than two weeks after a letter before action, and over the Christmas period, which thus gave the minimum time to deal with the claim and the notice that demolition of the premises was to occur immediately after the New Year holiday, all of which inevitably caused maximum inconvenience to the Defendant and their advisors. There seems no good reason why the Defendant was not given reasonable notice of the intention to bring the second action, particularly as they were clearly contemplating such action in 2004 and early 2005 when discussions with Dr Dennett occurred.

ii) The issue of the Claim Form right at the end of the limitation period, and its service at the end of its period of validity compounded the lack of notice. This echoes the Claimant's conduct in the first action, where it was criticised in the Court of Appeal for making an application "once again … at the eleventh hour."

iii) The failure to provide a satisfactory explanation as to why Dr Dennett's tests could not have been carried out at an earlier stage, to allow the Claim Form and Particulars of Claim to be served preferably within a reasonable time after the Defendant's costs were paid in the first action (allowing for time for the Claimant to gather the necessary resources together) but in any event within the limitation period. …

x) The unsatisfactory nature of the offer in respect of security for the Defendant's cost, namely that a third party will provide security, without giving the identity of such third party or the nature of the security proffered. Such lack of information caused criticism of the Claimant in the first action and I therefore find it surprising that it should be repeated. The fact that an unspecified third party is now offering security in an unspecified form is not, in my view, satisfactory when HHJ Alton and the Court of Appeal declined to allow security in the form of a charge over property in the first action. …

Special Reason

122. I have to consider whether the Claimants have provided any special reason why the claim should nevertheless be permitted to proceed. …

123. The only reason given for the failure to pursue the claim before April 2005 is the lack of financial resources. …

124. … In other words, the losses have increased and the net assets have decreased over the period in question, which explains the Claimant's concerns about funding the litigation, but does not explain why there was a delay, as the accounts show a decline rather than an improvement in the financial position between 2003 and 2005. Mr Slade [the company's solicitor] gives evidence that at the end of the limitation period, the Claimant had to choose either to issue these proceedings or lose the claim. …

126. The main difficulty in the Claimant's position is that the reason put forward by it, namely inadequate financial resources, is the very same reason why the first action was dismissed. It seems to me that it would be difficult to classify such reason as a special circumstance, when this would effectively negate the Orders of HHJ Alton and the Court of Appeal."

(2) First stage costs judgment dated 6 February 2012

32. The first stage costs judgment summarised the evidence and submissions received and made at the two-day hearing in paragraphs 11 – 71. It then considered and rejected the submission made on behalf of the Patels that there had been inadequate warning of the intention to seek a NPC order. The judgment then considered whether it was just to make the order that was sought. The Master first reminded herself that it is only in exceptional circumstances that a director of a company should be personally liable to a party for the costs payable to that party by the company. The Master then turned to Mr Ganshyam Patel who, although only a shadow director, was the decision-maker and driving force within the company. The Master concluded:

"78. I do not consider that a non party costs order would have been appropriate had the costs of the first action remained unpaid and a second action had not been brought, although many of the ingredients that make such an order appropriate were also present, such as the insolvency of [the company], the control of the litigation by Mr G. Patel, the provision of funding for the litigation and the benefit to the [Patels] if the litigation had succeeded. That action was brought, in my view, bona fide for the benefit of [the company], with expert evidence to support it, and although some doubts had been expressed to HHJ Alton as to its chances of success, I understand that the action survived a summary judgment application, and in any event the fact that it may ultimately have been unsuccessful does not make it a speculative action. The claim was not struck out after a decision on the merits, but because, despite a number of extensions and an application for relief from sanction that was pursued to the Court of Appeal, [the company] had been unable to comply with a security for costs order. It was the bringing of the second action, and the circumstances surrounding that, which in my judgment, makes the circumstances exceptional and tips the balance to make it just that there be a non party costs order."

33. The Master then set out the matters she relied upon in reaching that conclusion. These were, in summary:

(1) Security for costs. The Master concluded that there had been no impropriety by the Patels but, nonetheless, the second action was speculative. This was because no arrangements had been put in place to provide security for costs before the action was launched, it having been apparent from the circumstances of the dismissal of the first action that it would be crucial for the action's survival for the court to be satisfied that there were firm arrangements in place for security for costs. The Master continued:

"Although it was suggested by Mr Mann [the Patels' counsel at the hearing before the Master] in submissions that the [Authority] could have applied for security for costs before the strike out application, I do not consider that this changes the conclusion that I have reached. There would have been likely to have been costs incurred in any event, as although [the company] would have conceded the principle of security, they were not in any position to provide any details as to how the security would be provided at the hearing on 14 November 2005. There would therefore have been likely to have been a hearing at which an 'unless' order was made in respect of security. The [Authority] may also have been concerned that by seeking security for the claim continuing they were compromising their principal case that the second action was an abuse of process and/or res judicata."

(2) Counsel's advice. Written advice from counsel was taken before issuing the claim but it was only sought in time for it to be provided on the afternoon that the claim was issued and fuller advice was not received in the period before the claim was served. By the time that fuller advice was received, although more pessimistic, it was too late to enable the Authority to avoid the costs that had been incurred.

(3) No pre-action correspondence. None was entered into before the claim was issued that may have allowed the company to come to a more informed view about the chances of surviving a strike out application.

(4) Delay in issuing until the end of the limitation period. The Master accepted that the proceedings had been issued with a degree of urgency because the very end of the limitation period had been reached but concluded that no proper thought had been given to the possible consequences and the decision had all the hallmarks of "issue first and think about the consequences later".

(5) The company's administration. The Master concluded that the possibility of administration was under consideration when the decision to issue proceedings was made. The company entered administration a few days after the draft judgment had been sent to the parties and before it was handed down.

(6) Lack of planning. The Master concluded that there had been a lack of planning and preparation in the provision of the company's own costs of funding the action to trial in addition to the lack of such planning for the provision of security for the Authority's costs.

34. The Master placed little or no weight on the following matters that had been raised on behalf of the Authority:

(1) For whose benefit the action was brought. The Master accepted the submission made on behalf of the Patels that both actions were brought for the company's benefit and were bona fide. What outweighed that consideration in relation to the second action were the factors already summarised which made the action a speculative action given the lack of thought and planning, the knowledge of the company's financial position and the failure to put firm arrangements in place for security for the Authority's costs.

(2) Benefit to the Patels. The fact that the claim, if successful, would have been to the Patels' benefit was not a factor since the claim was brought bona fide for the company's benefit.

(3) Funding of the litigation. Such funding as was provided by Mr G Patel was not sufficient to justify a NPC order.

(4) Conduct of the Patels. The Patels carrying on trading for a significant time whilst probably insolvent and issuing the proceedings whilst the company was insolvent was not a factor which would have merited a NPC order just as it did not in the first action. Had the action not been struck out and adequate security had been provided, that insolvency would have been no bar to the claim. Equally, the Patels conduct in relation to the company's administration and in the NPC action once joined was not such as to justify a NPC order. Their conduct in all these matters, however, showed their "head in the sand" approach towards the financial implications of the litigation.

35. In relation to Mr R Patel and Mrs Patel, the Master concluded:

"96. Mr R Patel and Mrs Patel were both directors and shareholders of [the company]. This was a family company owned by them. Mrs Patel's evidence was that she regarded her shareholding as a family asset, so they would have benefited substantially if the litigation had proved successful. The funding was provided from the turnover of the company that they owned and from funds provided as loans to that company. Funding in any event is not an essential requirement for a non party costs order. Both Mr R Patel and Mrs Patel made a conscious decision to allow Mr G Patel to conduct the litigation and launch the second action. Mr R Patel gave evidence that whilst he ran the operations side of the business his brother dealt with the strategic decisions, such as raising funding and dealing with legal problems. Mrs Patel gave evidence that she allowed her husband and Mr R Patel complete control over how to run the company. Mr R Patel gave express instructions for the issue of the second claim. In so far as Mr R Patel and Mrs Patel chose not to inform themselves of the background circumstances and the financial risk, but to delegate this function to Mr G Patel, I consider that it does not mean that Mr G Patel should alone be responsible. There is no suggestion that he was acting 'on a frolic of his own'."

(3) Second stage costs judgment dated 6 February 2012

36. The Master gave her reasons for proportioning the costs in this passage of her second stage decision:

"6. It does seem to me in the particular circumstances of this case that there should be a discount, albeit relatively small, to reflect the following factors, first, that there are differences between the position of the Respondents in this case, and secondly, the circumstances in this case are different from that in many of the authorities where impropriety or bad faith has been found and where claimants have deliberately brought actions in the names of shell companies, or hidden behind shell companies, in the knowledge that the company would never be able to fund an adverse costs order. I also take into account in particular of the finding that I have made that the action was brought bona fides for the benefit of the company. I do not take account of the fact that the Respondents were entitled to rely on legal advice, that is a matter that the court can take into account in most decisions because the party and their legal advisors are categorised as one and it is not the fault of the Fire Service insofar as the Respondents were badly advised in respect of the bringing of the second action. The Respondents may have remedies in respect of that.

7. The proportion of costs that I consider should be attributable to the Respondents is 80% of the costs of the second action. I appreciate that that is, of course, as it must be, an arbitrary percentage, but in costs matters the court frequently had to make such a decision as to what proportion of costs is appropriate and does so by reference to forming a view from the available evidence, and there has been a substantial amount of evidence in this matter. It is I think clear from the judgment that those are the factors I have referred to in favour of the Respondents, but I consider that the proposal on their behalf that they pay only 25% of the costs is simply not realistic in view of the findings that I have reached. …

9. … It is clear from the evidence, and has been found, that the company was an asset of the family and that each of the [Patels] should therefore be equally responsible.

10. … although, of course, it is very clear that Mr Ghanshyam Patel was the controller of the litigation and provided the funding, I have found that Mr Ravindra Patel and Mrs Parul Patel as directors of the company delegated that responsibility to him. In my judgment it is not appropriate for those Respondents to delegate that responsibility and then simply sat that they should have no responsibility for the way in which that decision making process was carried out and effected, or the consequences of that. Simply because they chose to take no part in that decision making process does not mean that they should not bear the consequences of the actions taken by Mr Ghanshyam Patel on their express authority. It would not, in my view, be fair to the [Authority] in the circumstances for there not to be a joint and several order for the costs against each of the [Patels]. Each of the [Patels] is able to seek an indemnity from the other [Patels] and if they have agreed between them what the extent of their liability should be t each other then they can deal with that, I would hope, without having to take proceedings."

(4) The Authority's costs of the second action and in the NPC order application

37. The Authority incurred significant costs in pursuing its claims against the Patels for NPC orders. The Master ordered an interim payment on account of costs of £150,000 which she considered to be somewhere between 55% and 60% of the Authority's recoverable costs of both the second action and the NPC application and of the interest payable on both those awards of costs. I was informed during the hearing that the Authority's costs of the second action had been nearer to £150,000 than the £140,000 sum referred to in the order that I have already referred to. This is a remarkably large sum since it represents the costs incurred by the Authority in the short period between 31 May 2005 when the second claim was served and 15 November 2005 when the striking out application hearing was concluded when the Authority should not have needed any significant amount of investigative work and where the only substantial item of costs should have been to pay for its representation at the hearing.
38. Submissions on behalf of the Authority. The submissions made on behalf of the Authority were to the effect that since the Master had found that the Patels had caused the Authority to incur the costs of the second action, they should pay the entirety of the costs that the Authority had had to incur. Moreover, her reasons for proportioning the costs so that the Authority only recovered 80% of its costs were wrong in principle. The suggested errors in her reasons for proportioning them that were referred to were as follows:

(1) The Master suggested that there were differences between the position of each of the Patels. No weight can be or should have been attached to this opaque suggestion but if it is intended to suggest that there was a difference in the levels of culpability of the Patels, it was not a reason to abate their overall liability but only at best the liability of the less culpable. Indeed, it was not a reason to abate the liability of any of the Patels, since it was just for the Patels to compensate the Authority given their speculative, cavalier and reckless conduct of the litigation.

(2) The Master also suggested that the action was not brought by a shell company but that was not an issue in NPC order cases, indeed there was no example of such an order being made that is referred to in the authorities concerned with NPC orders. This is because litigation is rarely conducted through a shell company to shield the funder from a costs order.

39. Discussion – Authority's submissions. These submissions were to the effect that the two reasons advanced by the Master for proportioning the Authority's costs were make weights and did not justify reducing the Patels' liability. The Authority is perfectly entitled to lay considerable stress on the fact that the Patels had undoubtedly conducted highly speculative litigation rashly and without thought of the consequences and it was therefore just that the Authority should recover its costs in principle. That did not mean, however, that it should have recovered all its costs. The Master was entitled to proportion the costs where she considered that the Patels' conduct, although rash, was not mala fide or was intended to profit themselves rather than being for the good of the company. CPR 44.3 gave her a wide discretion and it required her to take the non-parties conduct, both good and bad, into account when exercising it. The end result of a 20% discount was not one which could be said to be wrong in principle in relation to the two matters she drew attention to, particularly since it can be seen that, in context, the Master in her extempore judgment is referring to the bona fide nature of the Patels' actions and her finding that these actions were directed solely towards their conception of what was good for and in the best interests of the company.
40. Submissions on behalf of the Patels. On behalf of the Patels it was suggested that there were two errors of principle. These were that the Master failed to give any proper or sufficient weight to the fact that the Patels, as directors or, in Mr G Patel's case, as being similar to a director of the company, had acted in good faith and in what they perceived to be the best interests of the company. Allied to this was the second failing, namely that the Master took no account of the Authority's conduct and to the fact that it was the Authority's conduct, and not the Patels' reckless conduct, that caused the Authority to incur a significant part of the costs that they were ordered to pay.
41. Discussion - the Authority's conduct. The Authority, just as the company, was required to engage in the second action once it had been served, so far as reasonably possible in conformity with the overriding objective and in compliance with the CPR and practice directions. The Authority was served, out of the blue, with the second claim, both should and would have been advised that service in this way without warning was a serious breach of the Practice Direction concerned with Pre-Action Conduct. The relevant parts of this Practice Direction have already been set out. This Practice Direction was applicable because the action, having been started in the Queen's Bench Division, was not one for which any Pre-Action Protocol was applicable. The object of this Practice Direction was to require parties to make appropriate attempts to resolve the matters in dispute without starting proceedings. It provided for a letter before claim, a defendant's reply and a response and that this exchange of details about the parties respective positions should be followed a by stocktaking by each party as to their respective positions and, if possible, resort to ADR in accordance with the proposals for ADR that the respective letters should have addressed. Where a claim is about to become statute-barred by limitation, the party starting a claim may issue a claim without first complying with the Practice Direction but where that occurs, the parties should then immediately seek to agree to apply to the court for an order to stay the proceedings whilst the parties followed the pre-action procedure.
42. The company was, of course, in serious breach of this procedure and compounded this breach by having failed to follow it in the first claim as well. The Authority, notwithstanding the very serious and repeated breaches by the company of the overriding objective, the Pre-Action Practice Direction and the requirement to seek to achieve a conclusion to litigation without detailed recourse to the court's procedures, would still have been, or should still have been, concerned to dispose of the unwarranted second claim as quickly and cheaply as possible. It was open to it, and indeed incumbent upon it, to seek a stay as soon as it had been served either by agreement with the company or by application to the court. Had it applied for a stay as soon as the claim had been served on it, the court would have inevitably granted a stay for the purpose of requiring the parties to go through the pre-action procedures. The Authority had much it would have wanted to say about the misconceived nature of this claim, the failure to give any warning of it, the detailed reasons why it was both an abuse of process and an unwarranted attempt to re-litigate the first dismissed claim and, if all else failed, the need to be provided with security for costs before any step was taken by it to defend the claim including any application to strike the action out.
43. In reality, the Authority had four chances of putting a stop to the claim before any substantial amount of costs was incurred. Firstly, it could have set out in its pre-action response letter detailed reasons why the claim was bound to fail, was misconceived and a clear abuse of the court's process which, if it continued, would immediately precipitate a security for costs application followed by a strike out order even if the cost security had been provided. This step would inevitably have caused the company to think again about the wisdom of proceeding further.
44. Secondly, the pre-action procedure would have required the company to set out its answer to the points raised, again forcing it to rethink its strategy. Thirdly, following the procedure could, indeed should, have precipitated a without prejudice meeting between the parties' legal representatives, during which the Authority's legal representatives could have explained how formidable the Authority's position the claim should be put paid to in the near future really was. These arguments would have had to have been taken back to the Patels and again forced a rethink. Fourthly, if these initiatives failed to put an end to the case, the Authority's advisers could have applied for security of costs to be provided by way of unless order before any work was done on the defence to the claim or to prepare for the inevitable striking out application so that, in the unlikely event of the action continuing to a strike out application, the costs the Authority might incur in such an application would have been secured and available to cover the Authority's costs that it would be entitled to recover if the strike out application succeeded.
45. This course of action is not only provided for in the Practice Direction but is one of the few matters that CPR 44.3 expressly requires a costs decision-making process to take into account. CPR 4.3(3)(a) requires the court to take into account the extent to which the parties followed the Pre-Action conduct Practice Direction. The company clearly failed to follow that Practice Direction but so did the Authority. This was a significant feature of its conduct that needed to be taken into account, particularly since the overwhelming probability was that amongst the various steps it should have taken was an early request for security for costs of the striking out application. Had such steps been taken, they would have put a stop to the action quickly and cheaply and with every prospect of recovering the small amount in costs that would have been expended. Given the previous history of the dispute and the self-evident reasons why the company's second claim should be struck out without further ado, these steps would, when taken, have left the Authority with the need to incur only a tiny amount of irrecoverable costs.
46. The Master, as can be seen from the relevant passage in her first stage judgment, did not refer to the Pre-Action Practice Direction and also was somewhat dismissive of the Authority's failure to apply for security for costs at an early stage. She thought that such an application would have been likely to have incurred costs incurred in any event because, although the company would have conceded the principle of security, it was not in any position to provide any details as to how the security would be provided and there would therefore have been likely to have been a hearing at which an 'unless' order was made in respect of security. Although that is likely, the possibility of needing to apply for security would have been further reduced if a stay had been sought from the outset to enable the pre-action procedures to be worked through. In any event, the costs incurred in obtaining a security for costs unless order would have been very small compared to the £150,000 that the Authority apparently incurred in the full-blooded first and second stage hearings.
47. The Master also speculated that the Authority might also have been concerned that by seeking security for the claim continuing they would be compromising their principal case that the second action was an abuse of process and/or res judicata. There is no evidence that that was so and, if it was a concern, it would have been a misconceived notion. The overriding objective requires parties to do all they reasonably can to settle disputes cheaply, speedily and at the earliest possible stage and the court is always astute to ensure that that objective is encouraged and given effect to. Thus, the converse is the case, a failure to seek early dispute settlement is a sign of weakness and not strength and any failure must be taken into account when costs are being considered.
48. It follows that the Master gave no consideration to a very significant matter and one which, if it had been taken into consideration, should reasonably have led her to conclude that a part of the costs being claimed by the Authority could and should have been avoided had it taken these elementary steps to mitigate the risk of incurring irrecoverable costs. Moreover, she failed to take into account that the Authority's conduct in not complying with the with the pre-action procedures and the security for costs procedures at an early stage had caused its costs to increase significantly and unnecessarily.
49. The company and the directors. The Master gave consideration and weight to the fact that the claim was made bona fide and that it was highly unusual for company directors to be made subject to a NPC order. Moreover, this factor was taken into account as can be seen from the second stage decision.
50. Conclusion – Master's decision. The Master's decision cannot be faulted save for its failure to take account of the Authority's conduct and of its failure to seek to implement the Pre-Action Practice Direction to engage in the pre-action exchange of information and to seek a stay pending the use of that procedure. She also failed to take into account the Authority's failure to attempt ADR in an attempt to forestall the claim proceeding beyond the issue and service stage altogether and to seek security for costs at the outset and before costs were incurred in the striking out application. It is clear that had these steps been taken singly or collectively, the striking out application would not have been needed since the claim would have been discontinued or dismissed without it either because the company would have been persuaded that its claim was a lost cause or because it would have failed to provide security that would inevitably have been ordered and the second claim would then have been struck out without the need for the application at all.
51. In those circumstances, the decision should be reviewed.

What NPC order should be made

52. The only part of the Master's detailed decisions that is being reconsidered is the proportioning decision given the absence of any consideration of the Authority's conduct in the original decision. This absence or failure, which nonetheless produced a considered decision that had led to a 20% reduction in the Patels' costs liability, adds a significant further reason for reducing the proportion of the Authority's costs that should be paid. Looking at all relevant factors in the round and taking the Master's previous decisions as the starting point, I consider that the proportion should be reduced from 80% to 50% of the Authority's assessed costs. In other words, the significant factor engendered by the Authority's conduct should lead to a reduction of a further 30%.

Conclusion

53. The Authority should recover 50% of the reasonably assessed costs in incurred in the striking out proceedings.

HH Judge Anthony Thornton QC