CONTRACTUAL CLAIM FOR COSTS CONSTRUED AS BEING COSTS ON AN INDEMNITY BASIS

In Criterion Buildings Ltd v McKinsey & Company Inc (United Kingdom) & Anor [2021] EWHC 314 (Ch)  HHJ Paul Matthews (sitting as a High Court Judge) rejected a paying party’s argument that it did not have to pay the costs of an action on an indemnity basis.  Liability to costs was governed by the terms of a lease and that could only properly be construed as meaning that indemnity costs were payable.

THE CASE

The claimant had succeeded in an action against the defendants.  The claimant claimed entitlement to costs based on the terms of the leases between the parties.  An issue arose as to whether the leases should be construed as meaning costs were to be paid on the standard or indemnity basis.

THE JUDGMENT ON THIS ISSUE

The judge set out the relevant Civil Procedure Rules and then considered the terms of the leases involved.

1. 1. The claimant referred me to clause 3.22 of the underlease, clause 5.2 of the supplemental lease and clause 3.22 of the further lease, to show that the first defendant had covenanted to pay all the lawyers’ costs of proceedings to recover arrears of service charge. Those clauses indeed contain covenants to pay such costs and expenses, including solicitors’ costs. But they use slightly different terminology. In relation to the underlease and the further lease, the reference is to expenses “properly incurred” by the landlord. In relation to the supplemental lease, there is no limitation to expenses “properly” incurred. Instead, the covenant is to pay “all costs, charges and expenses which the Landlord may from time to time incur …” But the supplemental lease was for a term of only a little more than six months, so the amount of sums claimed in these proceedings attributable to that lease will be modest.

1. 1. The claimant relies on the decision of the Court of Appeal in Macleish v Littlestone [2016] 1 WLR 3289, where a decision as to the assessment of costs on the standard basis was in issue. Briggs LJ (with whom Black and Gloster LJJ agreed) said:

“38. … It is well settled that when exercising discretion as to the basis of assessment of costs under the CPR, the court should normally do so in a way which corresponds with any contractual entitlement agreed between the parties: see Gomba Holdings (UK) Ltd and Others v Minories Finance Ltd and Others (No 2) [1993] Ch.171 at 190-1 and 194-5. In that case, the relevant contractual basis was set out in a mortgage deed between the parties, and was better reflected in an indemnity rather than standard basis of assessment. But the contractual basis may equally appear from a lease between the parties, as in the present case.

[ … ]

40. Clause 2.12 of the Lease provides, so far as is relevant, the following covenant by the defendants as Lessees:

‘To pay to the Lessor all costs and expenses (including legal costs and fees payable to a surveyor) which may be incurred by the Lessor

2.12.1 in or in contemplation of any proceedings under Sections 146 and 147 of the Law of Property Act 1925 notwithstanding forfeiture is avoided otherwise than by relief granted by the Court or

2.12.2 the recovery or attempted recovery of arrears of rent or other sums due from the Lessee or

…’

41. In my judgment, although that phraseology does not refer expressly to an indemnity, it corresponds more closely with assessment upon the indemnity basis than upon the standard basis. This is because of the obligation on the lessee to pay ‘all costs and expenses …. which may be incurred’. The principal difference between the standard basis and the indemnity basis is that, on the standard basis, costs are recoverable only if proportionately incurred and proportionate in amount, whereas the indemnity basis is not concerned with proportionality and nor is the contract.

42. The contract is silent as to the reasonableness of the costs and expenses which are to be paid but I do not think this adds to or detracts from this analysis. By virtue of CPR 44.3(1), costs will not be allowed if they were unreasonably incurred or unreasonable in amount, whether the court is assessing them on the standard or the indemnity basis. Where the court assesses costs which are payable by the paying party to the receiving party under the terms of a contract, CPR 44.5(1) provides, subject to certain exceptions, that the costs payable under those terms are, unless the contract expressly provides otherwise, to be presumed to be costs which have been reasonably incurred, and which are reasonable in amount.“

1. 1. This decision was followed in Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd [2019] EWHC 3668 (Comm) by Moulder J, where the covenant required the lessee to pay to the lessor on demand “all reasonable costs and expenses (including reasonable legal expenses) incurred by the Lessor…” The judge said that “the presence of the word ‘reasonable’ in the relevant clause does not preclude a conclusion that costs should be ordered on the indemnity basis”.

1. 1. The defendants resist this approach, arguing that the wording in this case is indistinguishable from that considered in the decision of HHJ Esyr Lewis QC in Primeridge Ltd v Jean Muir Ltd [1992] EGLR 273. In that case the tenant’s covenant included the words “to pay the landlord all proper costs charges and expenses are as… incurred by the landlord … in connection with … the recovery of arrears of rent due from the tenant.” The judge held that costs should be awarded on the standard basis, because of the presence of the adjective ‘proper’ in relation to costs.

1. 1. The defendants say the present case that the words “properly incurred” in the covenants for the underlease and the further lease effectively mean the same thing as the “proper costs” in the Primeridge case.

1. 1. I do not accept that the decision of the Official Referee in Primeridge nearly 30 years ago should govern the decision in this case. First of all, that decision was made on the basis of the procedural rules then in force, namely the Rules of the Supreme Court 1965, as amended. The present case is governed by the Civil Procedure Rules 1998, as amended. This is a new procedural code. The terms of the functionally equivalent rules are not the same, and nor is the context in which those rules exist and are applied. The need for a sanction to discourage unnecessary litigation is greater than ever today.

1. 1. Secondly, the phrase “proper costs” is not the same as “costs properly incurred”. Something may be a “proper cost”, in the sense that it would be appropriate in some circumstances to incur it, and yet not “properly incurred”, in the sense that the circumstances pertaining were not such as to make it appropriate to incur it.

1. 1. Thirdly, and with all respect to HHJ Esyr Lewis QC, I do not understand why the existence of the word ‘proper’ should make all the difference anyway. No improper cost can have been reasonably incurred, and yet the assessment of costs on the indemnity basis is restricted to costs which have been not unreasonably incurred. So the contract here is consistent with an indemnity costs award. In Macleish v Littlestone Briggs LJ considered that the absence of a statement as to the reasonableness of costs made no difference. In Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd, Moulder J agreed, saying that adding ‘reasonable’ to costs did not preclude an indemnity costs award. I take the same view about ‘proper’. The thing which did matter to Briggs LJ was proportionality, because that was and is the main difference between standard and indemnity basis costs. But, just as in that case, in the present lease there is nothing restricting costs to what is proportionate.

2. Accordingly, I regret to say that I consider that the decision in Primeridge Ltd v Jean Muir Ltd was wrong, and I decline to follow it. In my judgment, the terms of this lease are such that an award on the indemnity basis would best reflect the contract between the parties. That is not conclusive, but I see nothing here to justify a departure from that contract. I will therefore order indemnity costs.