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Cite as: [2007] EWCA Civ 368

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Neutral Citation Number: [2007] EWCA Civ 368
Case No: B2/2006/2456

ON APPEAL FROM Liverpool County Court
His Honour Judge Stewart QC

Royal Courts of Justice
Strand, London, WC2A 2LL
25th April 2007

B e f o r e :

Vice-President of the Court of Appeal, Civil Division


- and -

Tudor Rose (A Firm)


Giles Maynard-Connor (instructed by Brabners Chaffe Street LLP) for the Appellant
Neil Hext (instructed by Morgan Cole, Solicitors) for the Respondent
Hearing dates : 22nd March 2007



Crown Copyright ©

    Lord Justice Waller :

  1. After a trial lasting some four days HHJ Stewart QC awarded the claimant (the appellant in this court) damages in the sum of 11,688.25 plus interest of 2021.76. The defendants, respondents in this court had, prior to any proceedings, made a part 36 offer backed up soon after the commencement of proceedings with a payment into court under Part 36 of 9000. Despite the sum in damages exceeding the sum in court the judge awarded the appellant only his costs up until a date some months prior to commencement of the proceedings and no costs thereafter. The effect of the judge's order was that the claimant would receive none of the costs of the action, and only limited pre-action costs.
  2. The key issue is whether the judge misdirected himself. It is well known that this court will be loath to interfere with the discretion exercised by a judge in any area but so far as costs are concerned that principle has a special significance. The judge has the feel of a case after a trial which the Court of Appeal cannot hope to replicate and the judge must have gone seriously wrong if this court is to interfere.
  3. I should perhaps start by saying that in the pre-CPR world one would have had no hesitation is saying the judge must have gone wrong. A payment into court was the touchstone in relation to costs if it was beaten by a plaintiff, the plaintiff got their costs; if the plaintiff failed to beat it the defendant got their costs. There was hardly an exception to that rule.
  4. The position under the CPR is not the same. Part 36 deals with payments in. That rule however does not give any guidance as to what should flow from a situation in which a claimant obtains a money judgment in excess of the sum in court. For that guidance one must go to CPR 44.3, and the relevant rules are in the following terms:-
  5. "44.3(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.
    . . .
    44.3(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;
    (b) whether a party has succeeded on part of his case, even if he has not been wholly successful; and
    (c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention (whether or not made in accordance with Part 36).
    44.3(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 any relevant pre-action protocol;
    (b) whether it was reasonable for a party to raise, pursue or contest 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. It will be seen that 44.3(2) provides the starting point i.e. that the general rule is that the successful party gets an order for his costs to be paid by the losing party, but it provides the court "may" make a different order. 44.3(4) provides for certain matters that "must" be taken into account. Included alongside parties' conduct, and without apparently any special status is whether an offer to settle under part 36 or otherwise has been made.
  7. There would however be no point in having a machinery for making a payment into court or for making a part 36 offer if the question whether it has been beaten or not did not form an important starting point for considering at least who the successful party is and to whom the general rule should at least prima facie apply. As to the proper approach where a Part 36 offer or payment has been made, Thomas J in Quorum A.S. v Charles William Schramm November 21st 2001 unreported cited an important passage in the judgment of Chadwick LJ in Johnsey Estates(1990) Ltd v Secretary of State for the Environment [2001] EWCA Civ 535 :-
  8. "32. The submission has some superficial attraction on the facts of the present case; but, for my part, I would reject it. It seems to me that a court should resist invitations to speculate whether offers to settle litigation which were not in fact made might or might not have been accepted if they had been made. There are, I think, at least two reasons why a court should not allow itself to be led down that road. First, the rules of court provide the means by which a party who thinks that his opponent is not open to reason can protect himself from costs. He can make a payment in; he can make a Calderbank offer; now, under the Civil Procedure Rules 1998, he can make a payment or an offer under CPR pt 36. The advantage of the courses open under the rules is that they remove speculation. The court can see what offer was made, when it was made, and whether it was accepted. Second, speculation is likely to be a most unsatisfactory tool by which to determine questions of costs at the end of a trial. It is not, I think, suggested that each party would be required to disclose, at that stage, what advice it had received, from time to time, as to the strengths and weaknesses of its claim or defence. But without knowing that and without a detailed knowledge of the financial and other pressures to which each party was subject from time to time speculation would be hopelessly ill-informed. If Mr Gaunt's submission were to be accepted generally, there would, I think, be a serious danger that, at the end of each trial, the court (in order to decide what order for costs it should make) would be led into another, potentially lengthy, inquiry on incomplete material into "what would have happened if ?" I am not persuaded that that could be compatible with the overriding objective to deal with cases justly."
  9. Thomas J himself then said this at paragraph 29:-
  10. "It was urged upon me by the claimants that this evinced a clear attitude on behalf of the underwriters not to improve their offer; that they were therefore being unreasonable. It seems to me implicit in any Part 36 payment that a party must be taking the position that, at any rate at that stage, it is their final Part 36 payment. Thus what was stated expressly on behalf of underwriters in the letter to which I have referred is no more than would be implicit. It is, however, open to each party to negotiate. But is it for the court then to assess, after the Part 36 offers have been made, whether the parties should have negotiated and, if so, which party was unreasonable in not doing so? It seems to me to follow from the judgment of Chadwick LJ in Johnsey Estates that the court should not in a case such as the present examine the question of the reasonableness of the payment in or whether one or the other party should have negotiated. Answering such a question would lead to the need for an extensive enquiry at the end of any case and would create uncertainty. A payment under Part 36 or a Part 36 offer should be regarded as the best to which a party is prepared to go; if the defendant goes no further, and the claimant recovers more, that should in the usual case be an end of it."
  11. That is not to say that beating a payment in will always have the consequence that the "successful party" will get an order for costs. In Painting v University of Oxford [2005] EWCA Civ 161 Maurice Kay LJ said:-
  12. "22. There are two additional points which seem to me to have called for the affording of considerable weight by the Recorder, whereas the transcript does not suggest that he afforded them any weight at all. The first is the strong likelihood that, but for exaggeration, the claim would have been settled at an early stage and with modest costs. The second is that at no stage did Mrs Painting manifest any willingness to negotiate or to put forward a counter-proposal to the Part 36 payment. No one can compel a claimant to take such steps. However to contest and lose an issue of exaggeration without having made ever a counter-proposal is a matter of some significance in this kind of litigation. It must not be assumed that beating a Part 36 payment is conclusive. It is a factor and will often be conclusive, but one has to have regard to all the circumstances of the case."
  13. The Court of Appeal in that case, having found that the recorder had misdirected himself, actually made an order in the defendants' favour despite the claimant beating a payment in, but the circumstances were extreme with a vastly exaggerated case supported by untruthful evidence from the claimant.
  14. Other Court of Appeal decisions were cited to us. I do not gain much assistance from them. In the area of costs, where all cases are different and fact specific, I would suggest that authorities apart from those that lay down clear principles are of little assistance. It is to the rules that one should go, and it is by reference to the rules that one should test whether the judge has gone wrong in any particular case.
  15. How then would the rules suggest one should approach a case such as this? The court must first decide whether it is case where it should make an order as to costs, and have at the forefront of its mind that the general rule is that the unsuccessful party will pay the costs of the successful party. In deciding what order to make it must take into account all the circumstances including (a) the parties' conduct, (b) whether a party has succeeded on part even if not the whole, and (c) any payment into court.
  16. Having regard to the general rule, the first task must be to decide who is the successful party. The court should then apply the general rule unless there are circumstances which lead to a different result. The circumstances which may lead to a different result include (a) a failure to follow a pre-action protocol; (b) whether a party has unreasonably pursued or contested an allegation or an issue; (c) the manner in which someone has pursued an allegation or an issue; and (d) whether a successful party has exaggerated his claim in whole or in part.
  17. Where, particularly in a commercial context, the claim is for money, in deciding who is the successful party, I agree with Longmore LJ when he said in Barnes v Time Talk (UK) Ltd. [2003] EWCA Civ 402 para 28 that "the most important thing is to identify the party who is to pay money to the other". In considering whether factors militate against the general rule applying, clear findings are necessary of factors which led to a disapplication of the general rule, e.g. if it is to be said that a successful party "unreasonably" pursued an allegation so as to deprive that party of what would normally be his order for costs, there must be a clear finding of which allegation was unreasonably pursued.
  18. The questions in this case are whether the judge accurately analysed and kept in mind who was the successful party, whether he properly directed himself and/or whether his decision to disapply the general rule to the extent that he did was wrong and "exceeded the generous ambit within which reasonable disagreement is possible" [see Brooke LJ in Tanfern v Cameron Macdonald 1WLR 13, 11 quoting Lord Frazer in G v G [1985] 1 WLR 647 at 652].
  19. It is in that context necessary to say a little about the facts of the case. The appellant wished to purchase two properties "off-plan" from a developer and instructed the respondent solicitors to carry out the conveyancing. The respondents were acting for both sides in the transaction. The appellant entered into purchase contracts at a discounted price of 87,125 for each property, conditional on him obtaining mortgage finance by 18th October 2002. The obtaining of finance was a condition in his favour which he could have waived.
  20. He did not obtain finance by that date. That date, it seems, was extended but the respondent solicitors never obtained any proper extension or sought instructions from the appellant as to whether he wished, if necessary, to waive the condition. In March 2003 the appellant received offers of finance but he did so in a manner which probably led the lenders to believe that he was purchasing at the full price of 102,500 each because, when the respondents informed the lenders of the true prices, the lenders withdrew their original offers.
  21. On 28th April 2003 the developers rescinded the contracts. The respondents did not inform the appellant of that rescission. The appellant, in May 2003, arranged mortgage offers based on the discounted prices but that would have left him 18,000 short. The appellant wrote an e-mail to the respondents on 9th May 2003 complaining about the reduced offer of finance and explaining that he would have to withdraw from the purchase of one of the plots and transfer the deposit to the other, but the judge found that the e-mail was written in haste and that prior to the appellant being aware that the contracts had in fact been rescinded he had returned to his original intention of purchasing the two properties with a view to somehow making up the 18,000 shortfall.
  22. The respondents accepted they had acted in breach of duty in failing to obtain an extension of time and/or in failing to take the appellant's instructions but their case at the trial was that the appellant had suffered no loss because he would not have been able to raise the finance to purchase either property.
  23. The appellant's case at trial was that he would have been able to raise funds to purchase both properties. Ultimately the judge held that the appellant would have been able to purchase one property but not on the basis that he would have raised funds externally but on the basis that he would have been able to transfer the deposit from one to the other, leaving such a small amount outstanding that he would have managed to complete the purchase.
  24. On this basis the judge awarded 11,688.25 plus interest at 6%, that sum exceeding the payment into court of 9,000.
  25. As regards his order for costs the judge relied heavily on the pre-action correspondence. On 4 February 2004 the appellant sent its protocol letter of claim. Following investigation, the respondent's insurers, Zurich Professional Limited, sent their response dated 18 October 2004. In that letter, Zurich referred to the 9 May 2003 email ("I really cannot come up with all these unplanned, additional sums . . .") and continued:
  26. "[We] refer to our comments above and suggest that your client's loss if any should be limited to the loss of opportunity to purchase a single property rather than both properties. A discount will need to be applied to reflect your client's contribution to the delay.
    Before considering the basis of any offer of settlement we would like you to let us know;
    . . . if your client wishes to maintain his claim in respect of losses arising from both properties.
    It would also be helpful if you could revisit your schedule of loss."

    22. The appellant's solicitors' response to this question, in their letter of 15

    November 2004, was short:

    "Further, whilst we understand your role to reduce losses to your client we do not believe that you have any reasonable prospect of success in arguing that our client's loss should be limited to the purchase of a single property rather than both properties.
    . . .
    . . .
    As discussed above, we confirm that our client does wish to maintain his claim in respect of losses arising from both properties."

    23. On 21 January 2005, Zurich wrote to the appellant:

    'We believe that the evidence shows that your client could not complete on two purchases when the correct mortgage offers were made. We believe the email dated 9 May 2004 is conclusive on this point, it says 'I really cannot come up with these unplanned, additional sums. My preferred course now would be to withdraw from Plot 10 . . '
    With this in mind we think that our Insured is only at risk for losses arising from one property."
  27. The letter continued to make a part 36 offer in the sum of 9,000 inclusive of interest, plus costs. The appellant's solicitors responded by letter dated 31 January 2005:
  28. "We note the reliance which you place on our client's email dated 9th May 2004 (actually dated 9th May 2003). We have already advised you in our letter dated 15 November 2004 that our client had informed your client's Ms Strong that he wished to proceed with both properties, stating that he had funds available for investment purposes. This conversation took place on 14th May 2004.
    Evidence of our client's intention comes by way of him returning both mortgage forms to Ms Strong. Furthermore, had our client wished to withdraw from the purchase of one of the properties, we assume that there would be some correspondence from Ms Strong to the lender and Barratts to confirm the position. Barratts would have had to be informed of our client's decision in writing and his deposit returned to him. Please provide copies of any such correspondence, absent of which we will infer that none exists.
    With this in mind, our client believes that he should be compensated for the loss on two properties rather than one. We await your response on this issue. In the meantime, we do not believe it appropriate to comment on the offer made in respect of one of the properties and our client's rights in this regard are reserved.
    We would request that your offer is reconsidered to include both properties. At that time we can discuss whether your calculation (and figures) are appropriate."
  29. Proceedings were issued on 10 August 2005 and on 10 October 2005, the respondent backed up its earlier offer with a payment into court of 9,000.
  30. Discussion

  31. By the time the judge came to consider the question of costs he had had considerable experience of the litigation. In the second paragraph of his costs' judgment he described the position in the following terms :-
  32. "2. The reason for the four days, in very broad outline, is this: day one was evidence and I gave judgment at the end of day one on the basis of findings of fact, which led into day two. On day two there was an assessment of damages and some argument, indeed an application by the Defendants for permission to appeal my finding that the Claimant could succeed as to one property when that had not been expressly pleaded, what he had pleaded was two properties. There was then some discussion on day two about Capital Gains Tax, and that became ever more complicated. It was clear to anybody then that there would be a thorny issue as to costs, and has so turned out to be, and led to an adjournment to August."
  33. He recognised the principle that he should identify the successful party and the general rule because he quoted 44.3(2) in para 7. However having quoted paragraphs 44.3(4) and the first two subparagraphs of 44.3(5) he then, in paragraph 8, said this:-
  34. "The court has a range of potential options from giving the Claimant, essentially, all the Claimant's costs to giving the Defendant all the Defendant's costs. Let me say at the outset that I do not believe it is appropriate to give the Defendant all the Defendant's costs, or indeed any of the Defendant's costs by reason of the fact that the Claimant has been the successful party, albeit only to the tune of (excluding interest) some 2,688, that being more than the Part 36 payment."
  35. That use of language in my view suggests at the very least the possibility of a wrong approach. By indicating as his first point that because the claimant is the successful party but "only to the tune of 2,688" he is not going to award the defendants all their costs, he seems to me to be in danger of starting from the wrong place. His starting point should have been because the claimant is the successful party the general rule is that he is entitled to his costs, and the only question is whether there are factors which might lead to a different conclusion.
  36. In considering whether there were factors which called for an order adverse to the successful party, he was of course right to consider how the litigation had developed; the extent to which the pre-action protocol had been adhered to; and the extent to which the claimant had unreasonably pursued an allegation or issue. [It would seem from the fact that the judge did not quote subparagraphs (c) and (d) of 44.3(5) that the manner of contesting the action and exaggeration of the claimant's claim were not factors causing him concern].
  37. In looking at how the litigation had developed, what concerned the judge was that prior to the litigation commencing the defendants had suggested that the claimant's only chance of success related to one property and not two. It was in that context that the defendants had made their original part 36 offer followed by a payment in. It was with that contention by the defendants that the judge felt that the claimant had not engaged.
  38. The judge ultimately found that the failure by the claimant to engage in negotiations was a failure to comply with the pre-action protocol. But before considering the effect on his order for costs of that aspect, importantly, he found that if he were to disregard the defendants willingness to engage in negotiations on a one property basis and if he were to look at the matter as if there were no part 36 payment, he would have awarded the claimant two thirds to three quarters of his costs. In paragraph 10 he said this:-
  39. "He [counsel for the claimant] says that the fact that he has succeeded on one property rather than two as a matter of strict causation means that pretty well the same amount of time would have been spent in arguing this case had he limited it to one property. There may be some merit in that, although I believe that had there been no willingness to engage by the Defendant's pre-action and no Part 36 payment (albeit one which was 2,000 odd shy, with no counter Part 36 offer by the Claimants) that solely on the points arising out of 44.3.4(b) I suspect that there would have been a percentage order of costs and perhaps the majority of the costs I have not thought it through in great detail but my preliminary thoughts are that he would have received perhaps something in the region of two-thirds to three-quarters; but I go back to the protocol. The Practice Direction on protocols at paragraph 1.4 makes it clear that the objectives of pre-action protocols are to "encourage the exchange of early and full information about the prospective legal claim and to enable parties to avoid litigation by agreeing a settlement of the claim before the commencement of proceedings."
  40. In so finding the judge must have been of the view that the running of a case in relation to external funds being available so as to be able to buy two properties merited a discount of one quarter or one third of the costs that the claimant as the successful party would have been entitled to absent any payment in.
  41. What then brought the judge down from his two thirds to three quarters to effectively nil when there was a payment in which the claimant had beaten? The answer is that he found that the defendant had been willing to engage in negotiations on the one property basis but the claimant had not and thus the preaction protocol had not been complied with. He, of course, in his reasoning also relied on the fact that the claimant had pursued the two-property issue or as Mr Hext would suggest it should be called the external funding point and lost it. But at this stage he failed (as it seems to me) to take into account the extent to which that factor had already in his paragraph 10 reasoning reduced the claimant's entitlement by one third or one quarter.
  42. The judge's findings are in these terms:-
  43. "13. I, therefore, stand back and look at the matter. The main issue, it seems to me, which has led to proceedings is the fact that the Claimant was not prepared to even consider the possibility of a recovery of damages in respect of one property only. The net result of that is that proceedings have gone on and the Claimant has, after four days of hearing, recovered 2,688 more than the Part 36 payment. Mr Connolly puts arguments as to why this would not have been a fast track case in any event because it would have been a two day case and the issues take it outside the fast track criteria. One does not know. If he had started proceedings on the basis of one property, never mind been willing to engage on the basis of one property alone, one does not know what the result would be in terms of which track it would properly have been on, how long it would have taken. My clear impression, having dealt with this case, is that it would have taken an awful lot shorter time.
    14. Mr Connolly says that the Defendants did not admit one property in their defence; that is true and is one of the factors I take into account why they should not get any of their costs. But it is also right to say that the express alternative pleading was not made by the Claimant and, therefore, it was not expressly open to them to admit one property in the defence.
    15. Taking into account, therefore, the factors in 44.3 and, in particular, looking together at the conduct of the parties, including the lack of willingness to engage on one property by the Claimant in accordance with the pre-action protocol, and the fact that he has raised and pursued an issue in respect of which he has not been successful, and that has made the difference between recovering 2,000 odd more than the Part 36 payment as opposed to well over twice as much as the Part 36 payment, it seems to me that in respect of the action itself no costs should be awarded."
  44. Mr Hext submits that the judge was finding by implication that if the claimant had engaged in negotiations with the defendants on the basis of one property the case would have settled on the basis that the defendants would have offered more than the 9,000 in court. He further submits that by implication the judge was finding that in running the external funding point in relation to two properties the claimant was acting unreasonably. It is those factors he submits which entitled the judge to depart from the general rule and reduce the claimant's recovery to nil.
  45. If the judge is finding that the case would have settled as opposed to finding that there was a chance it would have settled, that could not have been other than a speculation. In my view it does not come well from a defendant who has paid money into court to argue that if a claimant had been more reasonable he would have offered more. An investigation as to how negotiations would have gone is precisely the form of investigation which should be avoided. In a case about money a defendant has the remedy in his own hands where a claimant is being intransigent. He can pay into court the maximum sum he is prepared to pay.
  46. So far as running the external funding case to support the case that two properties could have been bought, there is in fact no finding of the judge that it was unreasonable to do so. There is certainly no finding that the case was a dishonest one supported by dishonest evidence or anything of that sort. The finding is simply that a two property case was run, it was never a good case and it was an issue on which the claimant lost. The loss of the two property issue is clearly a factor which the judge was entitled to take into account in considering the extent to which the general rule should not apply since the rules require a judge to take all circumstances into account.
  47. But unreasonableness or dishonesty, like exaggeration, very properly will lead to more punitive orders. If a finding is to be made so as to lead to punitive measures it needs to be made in clear terms, and I do not read the judge's judgment as saying more than that an allegation was run which was always likely to fail, and that should be reflected in the costs order. That is the thrust of paragraph 10. It is that which has led to a one third or one quarter discount, and I do not read later paragraphs as altering that position. It would, in my view, have been a harsh finding that the appellant behaved unreasonably when it was the defendants who accepted they were in breach of duty, the appellant did intend to buy the two properties, and it was the defendants at the trial who were asserting he could not even have bought one so as to establish no damage.
  48. The only question is therefore what further reduction should be made for the fact that the claimant did not engage in accordance with the pre-action protocol. To some extent the availability of part 36 guards a defendant against a claimant who will not engage as required by the protocol, but I accept in addition the court must mark its disapproval of failures to comply. In this instance the rule does not refer to unreasonable conduct mere failure is enough.
  49. However to reduce the recovery of costs to nil for failure to comply with the protocol in a case such as this seems to me to be wrong and so seriously wrong as to be outside the generous ambit within which reasonable disagreement is possible.
  50. In my view the judge must have misdirected himself as to the applicability of the general rule. He also failed to appreciate that the reduction he had made in paragraph 10 reflected the appropriate discount for the running of a case which failed. In the event he reached a result which was wrong and outside the generous ambit within which reasonable disagreement is possible.
  51. In the circumstances, it is necessary for this court to exercise a discretion afresh. In my view, although anxious as to the judge's starting point in relation to the general rule as indicated by his paragraph 8, we should be guided by the judge's view in paragraph 10 as to the way he would have treated the claimant as the successful party without the defendants' willingness to negotiate and in the absence of a Part 36 offer. We should then ask what further discount should be applied for non-compliance with the protocol.
  52. The conclusion I would reach is that the claimant should have 60% of his costs from the date of the part 36 offer, and I would not disturb the judge's order for the period up until that date.
  53. Lord Justice Tuckey: I agree.

    Lord Justice Jacob: I also agree.

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