Preliminary issue – Order for costs – Discretion — Claimant obtaining costs order in its favour on way to trial but failing on substantive issue at trial – Costs judge reducing earlier costs order to nil as not reasonably incurred – Whether judge adopting correct approach – Appeal allowed
The defendant was the tenant of business premises under a lease, which had been granted by the claimant’s predecessor in title in 2002, for a term that expired in December 2004. In 2005, the claimant took a long lease of the premises together with an assignment of the right to sue the defendant for terminal dilapidations. In response to a schedule of dilapidations served by the claimant, setting out a claim for more than £550,000, the defendant relied on a collateral contract or promissory estoppel by which the previous landlord had purportedly agreed that no dilapidations liability would arise at the end of the term. The claimant subsequently brought proceedings against the defendant in the sum of £414,932.
Determining a preliminary issue, the High Court decided that the defendant’s collateral contract and promissory estoppel arguments afforded a defence to the claim and it dismissed the action: see [2006] EWHC 3363 (Ch); [2007] 2 EGLR 37; [2007] 19 EG 166. The Court of Appeal allowed the claimant’s appeal against that decision and ordered the defendant to pay the claimant’s costs of the preliminary issue; the claimant maintained its large claim for dilapidations: see [2007] EWCA Civ 622; [2007] 2 EGLR 51; [2007] 32 EG 90. Ultimately, the action was compromised on the basis that judgment should have been entered against the defendant in the sum of £1,073.50 in full and final settlement of the claim save for costs. The claimant conceded that the works it had carried out were mostly referable not to dilapidations but to its wholesale refurbishment of the building as offices.
However, the court ordered the claimant to pay the defendant’s costs and was of the view that the claimant’s conduct took the case outside the norm, such that indemnity costs could be awarded against it under CPR 44.4(1)(b). The claimant had represented to the defendant, before and after the institution of proceedings, that it had a substantial dilapidations claim, whereas a proper investigation would have revealed that it was not a genuine claim. The claimant had persisted until a late stage in a substantial claim that it knew or ought to have known was unsustainable: see [2008] EWHC 2003 (TCC); [2008] 3 EGLR 105.
In the light of that decision, the defendant took the view that it was entitled to challenge the Court of Appeal’s order that it should pay the costs of the preliminary issue. An application to the Court of Appeal to reopen the costs point on the appeal was rejected but the costs judge determined that the defendant’s liability under the Court of Appeal costs order should be reduced to nil, bearing in mind the way in which the dilapidation proceedings had been resolved. The claimant appealed.
Held: The appeal was allowed.
Where a claimant had received one or more costs orders in its favour on the way to a trial but failed at the trial (for example, because of exaggeration), the costs judge was not entitled to assess those costs at nil on the basis that they had not been reasonably incurred because they related to an action that sought an exaggerated sum that should not have been claimed.
The key to the instant appeal lay in giving proper effect to the order of the Court of Appeal, which involved construing it in its proper context. It was the duty of the assessing tribunal to carry out the assessment which the previous court had directed it to undertake. In the instant case, the Court of Appeal intended 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 costs being irrespective of that fate involved two issues, namely whether: (i) the identification of the paying and receiving parties could be affected by that fate; and (ii) the assessment of costs should be affected by what transpired in the remainder of the action. So, costs were to be assessed by reference to their reasonableness within the issue. They could not be characterised as unreasonable on the basis that the action was misconceived and had failed: Cope v United Dairies (London) Ltd [1963] 2 QB 33 and Koshy v DEG-Deutsche Investitions- und Entwicklungs Gesellschaft GmbH [2003] EWCA Civ 1718 considered, Booth v Britannia Hotels Ltd [2002] EWCA Civ 579; [2003] 1 Costs LR 43 and Lahey v Pirelli Tyres Ltd [2007] EWCA Civ 91; [2007] 1 WLR 998 distinguished.
Accordingly, in the instant case, the judge had 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 the costs would not have been incurred had it not been. That was saying no more than that the action was ultimately lost. The judge should have determined the costs of the preliminary issue by considering the reasonableness of their being incurred and the conduct of the parties under CPR 44.5(a), in respect of that issue, and not by reference to the outcome of the action. The case would be remitted to the costs judge for assessment on the correct basis.
Alexander Hutton (instructed by Howard Kennedy) appeared for the claimant; Jonathan Ferris (instructed by Michael Conn Goldsobel) appeared for the defendant.
Eileen O’Grady, barrister
