THE LIMITS OF ISSUE BASED COSTS ORDERS: COMMERCIAL LITIGATION IS ABOUT MONEY (WHO KNEW?)
In The Northampton Regional Livestock Centre Company Ltd -v- Cowling [2015] EWCA Civ 651 the Court of Appeal made some important observations about costs, issue based orders and success, particularly in commercial cases.
THE CASE
The Court of Appeal were considering an appeal in relation to actions for negligence, breach of fiduciary duty, and breach of duty of care in relation to the sale of land. The appeal succeeded in part in imposing joint and several liability and allowing a proprietary remedy.
The judge ordered that one of the defendants (Mr Lawrence) [ay 40% of the claimant’s costs and that the claimant pay 60% of Mr. Lawrence’s costs. He also ordered the claimant to pay the whole of another defendant’s costs (Mr Cowling). However the appeal succeeded in establishing joint and several liability on the part of Mr Cowling.
KEY POINTS
- One of the starting points in deciding the issue of who should pay costs is “who is paying money to who” as a result of the action.
- It is open to the Court of Appeal to re-open a costs decision at first instance.
THE COURT OF APPEAL JUDGMENT ON COSTS
Costs
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The judge adopted an issues-based approach to costs. On the basis of the parties’ and his own assessment of the proportion of costs expended on the various issues, he directed Mr Lawrence to pay 40% of the Claimant’s global costs and the Claimant to pay 60% of Mr Lawrence’s global costs. He directed the Claimant to pay the whole of Mr Cowling’s costs of the action.
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I would invite written submissions from the parties as to the appropriate costs order as between the Claimant and the First Defendant Mr Cowling in the light of our decision, if my Ladies agree with me, that Mr Cowling is jointly and severally liable to the Claimant as I have proposed.
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The Claimant sought permission to pursue a free-standing appeal against the judge’s costs order as between it and Mr Lawrence, Ground 8 of the Grounds of Appeal. The premise of that application was however that the judge’s findings on liability remained undisturbed. Richards LJ deferred consideration of that application to the full court hearing the appeal, recognising that it might become academic in the light of the outcome of the substantive appeals. On the hearing of the appeal Mr Reeve did not pursue that application, reiterating that the premise thereof is that there is no change to the underlying basis of the judge’s findings on the substantive issues. He submitted that the circumstance that it is now conceded that the Claimant is entitled to a proprietary remedy against Mr Lawrence of itself vitiates the basis upon which the judge reached his conclusion and entitles this court to reconsider the matter. Subsequently, in submissions lodged after we had circulated our judgments in draft form, we were told that the issue whether the Claimant is entitled to a proprietary remedy had generated significant costs below, necessitating a series of interlocutory hearings. Before the judge, Mr Lawrence estimated the percentage of his overall costs incurred relating to this issue as 10%. It can fairly be assumed that the Claimant incurred a similar percentage.
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I agree with Mr Reeve that the Claimant’s success on this issue, whilst it was conceded before us and therefore took little time, does necessitate a re-visiting of the costs order made by the judge. The judge directed that the costs of this issue be costs in the case. Manifestly, since the judge did not award a proprietary remedy, his award to the Claimant of 40% of its costs does not reflect the Claimant’s ultimate success on this important issue.
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I also agree with Mr Reeve’s further submission, again made after circulation of our draft judgments, that the circumstance that we have concluded that joint and several liability should be imposed upon Mr Cowling, and of course upon Mr Lawrence, has, to use his expression, “changed the architecture of the case.” In the light of his findings, the judge felt it appropriate to adopt a “success-based” approach as between the Claimant and Mr Cowling but an “issues-based” approach as between the Claimant and Mr Lawrence. In my judgment it is no longer appropriate to make different costs orders in respect of the two defendants on inconsistent bases. Accordingly, I would set aside the judge’s costs order as between the Claimant and Mr Lawrence also, and invite written submissions from the parties on the appropriate order in relation to the costs of the action as between the Claimant and Mr Lawrence.
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I would therefore allow the Company’s appeal to the extent of imposing joint and several liability upon Mr Cowling and permitting a proprietary remedy against Mr Lawrence. I would defer consideration of the appeal in respect of the award of interest. Save as indicated above, I would dismiss the Company’s appeal and Mr Lawrence’s cross-appeal.
Postscript
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When we circulated our judgments in draft and invited further submissions on costs we indicated our provisional view that the appropriate order in the light of the outcome of the appeal is that the First and Second Defendants should pay 60% of the Claimant’s costs, both of the action and of the appeal, and that there should be no further order save that, as agreed between the Defendants, Mr Cowling should pay 25% of Mr Lawrence’s costs of the appeals and cross-appeals.
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We also indicated that we were minded to direct that the scope of the enquiry and account should be as directed by a Master, should the Claimant so elect.
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We were asked by the Second Defendant to defer our ruling, foreshadowed at paragraph 104 above, setting aside the judge’s issues-based costs order as between him and the Claimant, until after the Second Defendant had had an opportunity to make full submissions on the point. Accordingly, we allowed all parties to make further written submissions in the light of the draft judgment, and all three parties have made detailed submissions.
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Upon consideration of those submissions, subject to one caveat, I remain of the same view as that which the court had provisionally reached. I reject the submission, based on A.E.I Limited v Phonographic Performance Limited [1999] 1 WLR 1507, that the court lacks jurisdiction to revisit the judge’s costs order. The outcome of the appeal entails that the judge made his order in an inappropriate context, as I have explained at paragraphs 102-104 above. The question of costs is necessarily at large after an appeal the outcome of which has altered the balance of success and failure as perceived by the judge.
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In any event, whilst I can understand why the judge thought it appropriate to adopt an issues-based approach, in my respectful view he has fallen into much the same error as that identified by Longmore LJ (with whom Clarke and Ward LJJ agreed) in A.L. Barnes Limited v Time Talk (UK) Limited [2003] EWCA Civ 402 where he said:-
“It does seem to me that the Judge has, with the greatest respect, fallen into an error of principle. In what may generally be called commercial litigation… the disputes are ultimately about money. In deciding who was the successful party the most important thing is to identify the party who is to pay money to the other. That is the surest indication of success and failure.”
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Like the trial judge in Kastor Navigation Co Limited v AGF MAT (“The Kastor Too”) [2004] 2 Lloyd’s Rep 119, as it happens me, the judge here did not start from the general rule that the successful party is entitled to its costs. Adopting the approach of the Court of Appeal in that case, it was in my view “an error of approach simply to visit the mathematical outcome of the issue by issue approach” on the Claimant – see per Rix LJ at page 149. One needs to stand back from the mathematical result and ask whether in all the circumstances it is the right result.
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I am quite satisfied that, particularly in the light of the outcome of the appeal, the judge’s issues-based approach to costs does not achieve a fair balance between the Claimant’s overall success against the firm MCL and its failure on the negligence issue. The costs order needs to reflect that the Claimant had to litigate in order to vindicate its claim to a very substantial sum, accounting for which was a partnership liability falling jointly and severally upon both partners in MCL, and in relation to which furthermore the Claimant was entitled to pursue a proprietary remedy if so advised. The Claimant’s victory in that regard should not be Pyrrhic. It is apparent that a substantial driver of the claim was the refusal to admit the “secret profit” claim or to make an offer of settlement which valued it correctly. The Defendants also in my view overlook and underestimate the natural and reasonable suspicions which their conduct in that regard engendered. Furthermore, the Defendants approached the litigation upon the basis of a flawed analysis that success by the Claimant on this issue could result in there being no available professional indemnity insurance cover.
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I am however persuaded that the unsuccessful pursuit of the negligence claim should be reflected in a somewhat greater discount from the Claimant’s recovery than I had at first thought appropriate. In all the circumstances the justice of the case is I consider met by an award to the Claimant of 50% of its costs of the action and of the appeal, to be borne jointly and severally by the Defendants.
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The Second Defendant has contended that as between himself and the Claimant he should be regarded as having succeeded on the appeal, bearing in mind that he supported the Claimant’s appeal against exoneration of the First Defendant from joint and several liability. There is something peculiarly unattractive about this submission, not least because it overlooks that the Second Defendant is jointly and severally liable for the costs incurred by the Claimant in seeking to establish the liability of the First Defendant. Be that as it may, the submission also overlooks that the Second Defendant failed in his appeal against the judge’s finding that at the relevant time he owed a fiduciary duty to the Company, and failed also in his appeal upon the associated estoppel point. The order I have proposed fairly reflects relative success and failure on the appeal.
