COSTS INCURRED PRIOR TO DEFENDANT’S BREACH ARE RECOVERABLE: THEY WERE “INCIDENTAL” TO THE APPLICATION

In Gee, Re The Estate of [2022] EWHC 1590 (Ch) HHJ Paul Matthews (sitting as a High Court Judge) considered an argument that costs incurred by the claimant in an attempt to prevent the breach of a court order, and before the breach itself, were not recoverable.  This argument was roundly rejected.  The costs incurred prior to the breach were “incidental” to the application and recoverable on this basis.

“it is long established that recoverable costs may be incurred before the relevant proceeding has begun”

THE CASE

The judge had heard an application by the claimant and and a company relating to the defendant’s breach of a court order.  The judge held that there had been a breach and there should be an enquiry into the losses caused by the breach.   The defendant opposed the making of a costs order and, alternatively, argued that the costs incurred before the breach should not be recovered.

THE JUDGMENT ON THIS ISSUE

The judge did not accept the defendant’s submissions.  The court had power to order costs “incidental” to any application. The costs incurred before the breach, and in attempting to persuade the defendant not to breach the court order, were incidental to the application and therefore recoverable.

1. 1. There is an issue about the scope of these costs. The applicants say that these costs should include the costs of the breach issue, which was contested. Their costs in relation to this issue began to be incurred from October 2019 onwards, when they learned of the respondents’ threat to commit the breach. There followed an extended dispute by correspondence leading to the breach itself in September 2020. This application for relief in relation to the breach was issued on 10 December 2021 and, as I have said, heard by me in March 2022. The respondents say that costs incurred prior to the breach are not costs of the application, and therefore not within the scope of the order being sought.

1. 1. The court’s jurisdiction to award costs arises from section 51 of the Senior Courts Act 1981, which relevantly provides that

“(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

(a) the civil division of the Court of Appeal;

(b) the High Court; and

(ba) the family court;]

(c) [the] county court,

shall be in the discretion of the court.”

1. 1. The critical words defining the scope of the court’s jurisdiction therefore are “the costs of and incidental to all proceedings”. The proceeding with which I am currently concerned is the application made by the applicants and dated 10 December 2021. The question accordingly is, what are the costs “of and incidental to” that application. As to this, it is long established that recoverable costs may be incurred before the relevant proceeding has begun: see eg Re Gibson’s Settlement Trusts [1981] Ch 179, 184-88; ENE Kos v Petroleo Brasileiro SA [74]-[100]. Indeed, I pointed this out in my judgment in the earlier application in these proceedings which I dealt with in July 2020: see [2020] EWHC 1842 (Ch), [34].

1. 1. In National Westminster Bank plc v Kotonou [2009] EWHC 3309 (Ch), Briggs J (as he then was) said:

“35. The question of principle thrown up by that analysis is whether costs incurred in the pursuit of negotiations designed to provide an interim solution to issues forming the subject matter of pending (or contemplated) litigation while leaving the issues to be finally determined at a later date, can (subject to the usual questions of proportionality and reasonableness) form part of the costs of those proceedings.

36. The need to negotiate interim solutions to difficulties thrown up by contemplated or pending claims is a common feature of civil litigation. They include questions as to security for costs, questions as to the liberty of the defendant to use his assets (or assets claimed from him in the proceedings) for his own purposes pending trial, including for the purposes of funding the litigation, and issues as to the interim custody of, and dealings with, property the subject matter of the claim. Such issues are very frequently resolved without either party having to make an interim application, for example during pre-action stages, or by solicitors’ correspondence and oral negotiations shortly after the commencement of a claim.

37. In the context of the litigation environment created and encouraged by the CPR and the Woolf Reforms, it seems to me obvious that such negotiations as to the resolution of interim issues should be encouraged, and that, therefore, the costs regime should accommodate the costs of such negotiations as part of the costs of the litigation, subject to the usual considerations of reasonableness and proportionality.

38. It has for many years been part of the court’s analysis of the question whether pre-litigation costs are costs of the proceedings to ask whether those costs related to the creation of materials ‘ultimately proving of use and service in the action’ or as being costs the incurring of which was ‘proper for the attainment of justice’ in the case: see Frankenburg v. Famous Lasky Film, Service Ltd [1931] 1 Ch 428 at 436 per Lord Hanworth MR, and Re Gibson’s Settlement Trusts [1981] 1 Ch 179 at 185-187 per Sir Robert Megarry V-C. In my judgment costs incurred in the reasonable negotiation of interim solutions to problems arising between the parties in connection with issues to be decided in contemplated or pending litigation clearly fall within those principles.”

1. In my judgment, the position here is similar. The original claimant (now the first claimant) reacted to the threat of what he considered to be a proposed breach of the order made in the original litigation and sought to dissuade the respondents from committing that breach. As it turned out, he was unsuccessful in doing so. But, had he succeeded, it would have saved this further application. And the materials which were produced by those attempts have been relevant to and useful in this application. I have no hesitation in saying that in my judgment the costs of reacting to the threat to commit a breach and the attempts to dissuade the commission of the breach are “incidental to” this application, seeking relief in respect of the breach after the event.