United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants and the Third Respondent	MR PHILIP JONES (of Counsel) Instructed by: Messrs Thompsons Solicitors Agincourt 14-18 Newport Road Cardiff CF24 OSW
For the First Respondent	MR RHODRI WILLIAMS (of Counsel) Instructed by: Sentinel Employment Law Dryburgh House 3 Meikle Road Kirkton Campus Livingston EH34 7DE
For the Second Respondent	No appearance or representation by or on behalf of the Second Respondent


 


SUMMARY

PRACTICE AND PROCEDURE: Costs

Costs – whether a party can recover by way of costs counsel's fees (yes) and those of a non legally qualified adviser, as defined in s.71 C&LSA 1990 (no). Employment Tribunal Rules 38, 40-42 considered.

Whether VAT recoverable by way of costs; point not taken below (Kumchyk).

Whether claim misconceived and if so when that ought to have been appreciated by paying party (McPherson v BNP Paribas).


 


HIS HONOUR JUDGE PETER CLARK

1. This is a costs appeal. The parties before the Cardiff Employment Tribunal were Mr Ramsay and Others (the Claimants) and (1) Bowercross Construction Ltd (Bowercross) and (2) The Construction Workers Guild Ltd (CWG) (the Respondents). Strictly there are two appeals. The first is against the judgment of Employment Judge Dr Rachel Davies dated 20 April 2007, following a hearing on 17 April; the second is against that Judge's final judgment with Reasons dated 3 September 2007, following a further hearing held on 24 August. Both those hearings related to the issue of costs and thus both appeals have been combined.

Background

2. By a Form ET1 lodged on 15 March 2006 the Claimants, Mr Ramsay and two other individuals and the GMB Union to which they belonged brought claims of breach of contract (failure to pay notice pay) and, in the case of the Union, a protective award. The individual Claimants contended that they were employees of Bowercross.
3. On 11 April 2006 Bowercross lodged a Form ET3. By their detailed Response, Bowercross pleaded (paragraph 40):

"It is submitted for the Respondent that the Claimants are holders of CIS cards which allow them to claim the tax benefits of self-employed status. It is the Construction Workers Guild (CWG) which pays the Claimant and which deducts their tax at the beneficial rate of 18% …"

4. The Response concludes with a request that costs be awarded against the Claimants for a claim which is at best misconceived.
5. At a preliminary hearing review (PHR) held before the Regional Employment Judge Mr Bird on 5 June 2006 it was argued on behalf of Bowercross that a deposit should be ordered under Rule 20 of the Employment Tribunal Rules. Mr Bird decided to express no opinion on the basis that the outcome of the case depended on the facts found by the Employment Tribunal after hearing the evidence. In a letter dated 7 June 2006 he referred to the issue as to whether the Claimants were employees.
6. On 6 July the Claimants made an application to join the CWG as a Respondent and sought disclosure from Bowercross in relation to the contention that CWG were the Claimants' employers. CWG was added as the Second Respondent and a disclosure order made by the Employment Tribunal on 10 July.
7. On 17 July Bowercross wrote to the Employment Tribunal clarifying their position, that the Claimants were not employees of CWG but were self-employed CIS4 workers provided by CWG and disclosed the sub-contract agreements made between CWG and the individual Claimants, signed by both parties.
8. On 31 August 2006 a preliminary hearing was held before Dr Davies to determine whether individual Claimants were employees for the purpose of bringing their claims and for the purposes of making a protective award. Having considered the evidence, both oral and documentary, before her she held that they were not employees, they were self-employed operating under a genuine CIS4 contract and that their contractual relationship was with CWG.
9. Bowercross then applied for a Costs Order against the Claimants, including the Union. The application was opposed. Following the 17 April 2007 hearing Dr Davies issued a Judgment dated 20 April, indicating that Bowercross was entitled to costs payable by the Claimants, but made no order on the basis that it was hoped the parties could reach agreement. I am not concerned with the question as to whether that constituted a Judgment or Order against which the Claimants' first appeal could properly be made. In the event, no agreement was reached as to costs and the matter returned before Dr Davies on 24 August 2007.
10. By her Substantive Costs Judgment with reasons dated 4 September 2007 Dr Davies ordered the Claimants to pay Bowercross's costs in the sum of £10,000. She held that, having heard the preliminary issue on employment status, the claim against Bowercross had no merit whatsoever; she was satisfied that the Claimants were aware that they worked under CIS4 contracts, having signed them and that those contracts were made with CWG, not Bowercross. That fact was pleaded by Bowercross in their Form ET3.
11. The point was raised again by Bowercross before Mr Bird on 5 June 2006. I would add that CWG was joined by the Claimants as Second Respondent in addition to Bowercross, not in substitution therefor on 10 July 2006. In these circumstances Dr Davies held that, in pursuing their claims against Bowercross the Claimants, who were represented by solicitors, Messrs. Thompsons, throughout, had acted unreasonably within the meaning of Employment Tribunal Rules 38 and 40 and ordered the Claimants to pay Bowercross's costs from 12 April 2006, the date on which they were served with Bowercross's Form ET3.
12. At each hearing, commencing with that before Mr Bird on 5 June 2006, Bowercross were represented before the Employment Tribunal by Mr Rhodri Williams of Counsel, instructed by Ms Dempster of Sentinel Employment Law. A point was taken on behalf of the Claimants that Ms Dempster was not a legal representative for the purposes of Rules 38(2) and (3) of the Employment Tribunal Rules. That contention was rejected by Dr Davies, who found that Ms Dempster was a qualified solicitor and on the Solicitors Roll albeit that she does not currently have a practising certificate. She is authorised by the Bar Council to instruct counsel direct. Dr Davies reasoned that Bowercross was legally represented at the hearing by Counsel, Mr Williams (Rule 38(2)) and any costs arising out of Ms Dempster's involvement were incurred on behalf of Bowercross "in relation to the proceedings" within the meaning of Rule 38(3). Dr Davies further, or alternatively found that because Bowercross was legally represented at the hearing under Rule 38(2), that party was entitled to their costs, including those attributable to Ms Dempster's work on the case.
13. The Schedule of Costs produced by Mr Williams at the final costs hearing totalled £10,547.98, including VAT of £1,570.98. It broke down as to Counsel's fees, exclusive of VAT, totalling £6,915 and Sentinel's costs of £2,062 (exclusive). Dr Davies disallowed one small item amounting to £268.80 and ordered the Claimants to pay maximum assessed costs of £10,000.

The Appeals

14. Mr Philip Jones, who appears on behalf of the Claimants, not having represented them below, takes a preliminary objection to a revised schedule of costs, with supporting documents, inserted into the Employment Appeal Tribunal trial bundle by Bowercross. That shows Counsel's fees totalling £6,915 and Sentinel's fees of £3,142, both exclusive of VAT, but in all exceeding by £57 the £10,000 award of costs made by Dr Davies.
15. As to the substantive grounds of appeal, they may be summarized as follows:

(1) Was Dr Davies entitled to conclude that the claims against Bowercross were misconceived and pursued unnecessarily?

(2) the status of Ms Dempster and whether Bowercross was legally represented for the purposes of Rule 38?

(3) the date from which any proper award of costs should run.

(4) the VAT element.

Discussion

16. I shall consider each of the 4 grounds of appeal, in a slightly different order, as follows:

A. The VAT element

17. No point was taken below that the VAT element should be excluded from the costs calculation, although it is now common ground that it ought to have been excluded, since both Bowercross and Mr Williams are registered for VAT and able to recover that element of their fees in their VAT returns to HMRC. I ruled that it was not open to the Claimants to take this new point for the first time on appeal. There were no exceptional circumstances justifying that course, applying the well-known Kumchyk principle. That the point on VAT was a good one does not alter the position see Jones v Burdett Coutts School [1998] IRLR 521.
18. It is convenient to deal at this stage with the revised schedule of costs put before me by the Respondent. By the same token I shall not admit this in evidence. Thus the case on appeal will proceed on the basis of the Schedule lodged at the Employment Tribunal, including the VAT element.

B. Was the claim against B misconceived. If so, at what point do costs start to run? I shall deal with these two grounds of appeal together.

19. Mr Jones submits that, costs orders still being exceptional in the Employment Tribunal, see Lodgwick v London Borough of Southwark [2004] ICR 884, paras 23-27 (per Pill LJ); endorsed in McPherson v BNP Paribas [2004] ICR 1398, para 2 (per Mummery LJ), the Employment Judge's conclusion that the claim against Bowercross was misconceived within the meaning of Rule 40(3) of the Employment Tribunal Rules of Procedure 2004 (the Rules) was legally perverse and one reached with hindsight rather than foresight when the proceedings were commenced. Alternatively, it was perverse to conclude that the Claimants knew that the claim against Bowercross had no reasonable prospect of success when the Respondent's Form ET3 was served on 12 April 2006.
20. Mr Williams submits that it was clear from the Form ET3 that the claim against Bowercross had no reasonable prospect of success. He relies particularly on paragraph 40 of the detailed grounds of resistance which I have earlier set out.
21. Having considered the rival submissions of counsel I reject Mr Jones' principal contention but agree with his alternative position – that it is an error of law for an Employment Tribunal to arrive at a premature date in determining that one of the trigger points in Rule 40(3) is reached, as demonstrated by the Court of Appeal decision in McPherson (see paragraph 43, per Mummery LJ).
22. In my judgment what led to the claim against Bowercross being properly characterised as misconceived was a combination of (a) the absence of any contract between the individual Claimants and Bowercross and (b) the absence of a contract of service with Bowercross, or indeed CWG. Whereas Bowercross's Form ET3 clearly argued that there was no contract of service, it did not make plain its case that any contract was made between the Claimants and CWG. I accept Mr Jones' submission that the Regional Employment Judge's refusal to express an opinion and order a deposit at the PHR held on 5 June 2006 on the basis that the outcome depended on the precise facts found by the Employment Tribunal after hearing evidence (at a substantive hearing) justified the Claimants in pursuing the claim against Bowercross at that stage. However, in my view the position changed once (a) the Claimants applied to join CWG as a Second Respondent on 6 July and applied for disclosure by Bowercross of all documentation which it relied on in asserting that CWG were the Claimants' employers (b) Orders for disclosure and joinder were made by the Employment Tribunal on 10 July and (c) on 17 July Sentinel wrote to the Claimants' solicitors stating that they did not assert that CWG were the Claimants' 'employers' and provided copies of contracts for services made between CWG and the individual Claimants, who signed those contracts.
23. It follows, in my judgment, that as at 18 July 2006, upon receipt of the letters and disclosure sent on 17 July, it became clear to the Claimants and their legal advisers that the claim against Bowercross was misconceived ant that proceedings against the First Respondent should then have been discontinued and the claims continued against CWG. I am not persuaded by Mr Jones that the so-called triangular relationship between the Claimants, Bowercross and CWG merited proceeding against both Bowercross and CWG.
24. Accordingly I shall limit the costs properly recoverable by Bowercross to the period after 18 July 2006.

C. Sentinel's Fees

25. This, it seems to me, is the point of general interest raised in this appeal. As indicated earlier Ms Dempster is a qualified solicitor. She appears on the Solicitors Roll. She is expressly authorized by the Bar Council to instruct counsel direct. She did not however hold a practising certificate at the relevant time; Mr Williams was unable to tell me why this was the case.
26. Turning to the costs regime under the Rules, by Rule 38(2) a costs order may be made under, among others, Rule 40 where the receiving party (here, Bowercross) has been legally represented at the Hearing, or in proceedings which determined without a Hearing, if the receiving party is legally represented when the proceedings are determined.
27. Rule 38(5) provides that 'legally represented' means having the assistance of a person who, for present purposes, has a general qualification within the meaning of s71 of the Courts and Legal Services Act 1990. Section 71 defines 'general qualification' as having a right of audience in relation to any class of proceedings in the senior courts or all proceedings in county courts or magistrates' courts. It is common ground in this case that Mr Williams, as a member of the independent Bar, has a general qualification but that Ms Dempster, in the absence of a solicitors practising certificate, does not; she does not have the rights of audience mentioned in s71.
28. The Rules also provide for a preparation time order where the receiving party is not legally represented. By Rule 42(3) preparation time means time spent by the receiving party or his employees carrying out preparatory work directly relating to the proceedings and the receiving party's legal or other advisors relating to the conduct of the proceedings up to but not including time spent at any Hearing. However, by Rule 46(1) a tribunal may not make a preparation time order and a costs order in favour of the same party in the same proceedings.
29. During argument there was considerable discussion as to the distinction drawn in the Rules between a hearing and a Hearing. In Regulation 2(1) of the 2004 Regulations to which the Rules are annexed as Schedule 1;

"hearing" means a case management discussion (CMD), pre-hearing review (PHR), review hearing or Hearing (as those terms are defined in Schedule 1) …"

30. Turning to the Rules (Schedule 1); Rule 14(1) provides that a chairman (now employment judge) or tribunal may hold the following types of hearing; a CMD under Rule 17, a PHR under Rule 18, a Hearing under Rule 26 or a review hearing under Rule 33 or 36.
31. 'Rule 26 Hearings' appear under a heading 'The hearing'. Rule 26(1) provides:

"A Hearing is held for the purpose of determining outstanding procedural or substantive issues or disposing of the proceedings. In any proceedings there may be more than one Hearing and there may be different categories of Hearing, such as a Hearing on liability, remedies, costs … or preparation time."

and by Rule 26(2):

"Any Hearing of a claim shall be heard by a Tribunal composed in accordance with Section 4(1) and (2) of the Employment Tribunals Act" [ETA 1996]

32. Section 4 Employment Tribunals Act 1996 (ETA) deals with the composition of a tribunal, that is, whether proceedings shall be heard by an employment judge sitting alone or a full three member panel. I confess that I do not find it altogether easy to construe the reference to s4(1) and (2) ETA in Rule 26(2). Section 4(1) provides that, subject to the following provisions of s4, proceedings shall be heard by a full tribunal. S4(2) provides that, subject to the discretion to sit with lay members contained in sub-section (5), an employment judge alone shall hear the proceedings listed in sub-section (3). Sub-section (3) is concerned with various types of claims under employment legislation together with proceedings where the parties have consented in writing to those proceedings being heard by an Employment Judge sitting alone.
33. Section 4(6) provides for procedural regulations to be made by the Secretary of State, currently the 2004 Rules contained in Schedule 1 to the Employment Tribunal (Constitution and Rules of Procedure) Regulations 2004. Thus, for example, by Rule 18(1) PHRs are interim hearings and shall be conducted by an employment judge alone unless, under Rule 18(3) it shall be conducted by a Tribunal composed in accordance with s4(1) and (2) ETA in the circumstances there set out.
34. It therefore seems to me, based on the construction of Rule 18, that any reference to 'a tribunal composed in accordance with s4(1) and (2) ETA' means a full three member panel as opposed to an employment judge sitting alone (cf. Rule 18(1)).
35. Thus, reverting to the costs/preparation time regime presently under consideration, I hold that a PHR before an employment judge alone under Rule 18(1) is a hearing, not Hearing (see Regulation 2(1) read with Rules 14(1) and 26(1) and (2); whereas a costs/preparation time Hearing is a Hearing by virtue of Rule 26(1), for the purposes of Rules 38(2), 42(3) and 43 - 44 That construction, it seems to me, is also consistent with the distinction between judgments and orders drawn in Rule 28(1). Whether the distinction drawn between hearings and Hearings makes any sort of logical sense is a matter for the Rules Committee, not for me.
36. Mr Jones submits, broadly, that in the present case whereas Bowercross is entitled to recover the costs of Mr Williams of counsel it cannot recover any of the fees incurred by Sentinel because Ms Dempster is not a legal representative, as defined in Rule 38(5) so that only a preparation time order is appropriate in her case; but the tribunal cannot make a preparation time order and a costs order in favour of the same party in the same proceedings (Rule 46(1)). Thus Bowercross's costs are limited to those of Mr Williams, on my ruling, after 18 July 2006.
37. Support for that somewhat curious and, it may be thought, unjust result he submits is to be derived from the civil case of Agassi v Robinson (HMIT) (No. 2) [2006] 1 WLR 2126. That was a decision of the Court of Appeal, sitting with Master Hurst, Senior Costs Judge, as assessor. The case concerned a tax dispute involving the international tennis player, Andre Agassi. The issue was whether Mr Agassi could recover, in addition to the fees of counsel, those of a firm of specialist tax advisers who, although not solicitors, instructed counsel directly through the Bar's Licensed Access Scheme. The Court held that he was not entitled to recover the tax adviser's fees.
38. Mr Williams seeks to distinguish the rationale in Agassi but I am unable to do so, not least because, as Mr Jones points out, Rule 41(1)(c) provides, in the absence of a sum assessed by the tribunal (as in this case) or agreed between the parties, that the amount to be paid by way of costs shall be determined by way of detailed assessment in the County Court in accordance with the CPR 1998. In Agassi the Court of Appeal was directly concerned with the interpretation of CPR Rule 48.6. I therefore agree with Mr Jones that on a detailed assessment of tribunal costs the County Court District Judge would be bound by the approach of the Court of Appeal in Agassi. I further agree with Mr Jones that the same principles must apply where the tribunal is carrying out the assessment under Rule 41(1)(a).
39. Mr Williams also seeks to support Dr Davies' alternative finding that since Bowercross was legally represented at the Costs Hearings by counsel, Sentinel's fees were recoverable under Rules 38(2) and (3). I am quite unable to accept that submission. In my judgment either Sentinel, through Ms Dempster, is a legal representative or it is not. I have found that it is not because Ms Dempster does not fall within the definition contained in Rule 38(5). Accordingly Sentinel's fees are recoverable only by way of a preparation time order and Rule 46(1) precludes the recovery by Bowercross in these proceedings of both Mr Williams fees (costs) and those of Sentinel by way of a preparation time order.
40. For completeness, I drew Counsel's attention to the judgment of HHJ McMullen QC in Khan and King v The Home Office (UKEAT/0026/06/LA and 0250/06/LA 17 November 2006) paragraphs 95-96. The Employment Appeal Tribunal ruling on costs in that case was not expressly considered by the Court of Appeal in dismissing the Claimants' appeal [2008] EWCA Civ 578. Although the Employment Appeal Tribunal in Khan was not required to condescend to the detailed argument raised in the present appeal I am satisfied that my conclusion, that only Mr Williams' fees post 18 July 2006 are properly recoverable by way of costs accords with the approach of Judge McMullen's division in Khan.

Disposal

41. It follows that I shall allow this appeal against the substantive costs judgment dated 4 September 2007 in part and substitute a finding that Bowercross is entitled to recover the fees of Mr Williams (inclusive of VAT) incurred in these proceedings after 18 July 2006, based on the Schedule put before the Employment Tribunal. The parties should agree the amount within 21 days of the seal date of my order, failing which the parties have permission to apply to me on paper for further directions. I make no order on the appeal against the first costs 'Judgment' dated 20 April 2007.