Costs Judge Cannot Go Behind The Costs Order

The underlying claim in Business Environment Bow Lane Limited v Deanwater Estates Limited involved a dispute over a dilapidations claim under a lease. The lease was terminated in December 2004, and in April 2005, Business Environment, the new landlord, served a schedule of dilapidations valued at around £416,000 on Deanwater, the former tenant.

Deanwater believed it had a complete defence based on a previous collateral contract and/or promissory estoppel. It was ordered that the existence of this defence be tried as a preliminary issue.

In December 2006, the judge found in favour of Deanwater and dismissed the action. However, in June 2007, the Court of Appeal reversed this decision and ordered Deanwater to pay Business Environment’s costs of the appeal and the hearing of the preliminary issue.

Chronology of relevant events

• December 25, 2004: Lease terminated by break clause
• April 2005: Business Environment acquires landlord’s interest and takes assignment of claims under repairing obligations
• April 14, 2005: Business Environment serves schedule of dilapidations valued at around £416,000 on Deanwater
• September 29, 2005: Deanwater’s surveyor writes to Business Environment’s surveyor challenging the dilapidations claim
• December 5, 2006: Judge finds in favor of Deanwater on preliminary issue of collateral contract/estoppel defence and dismisses action
• June 27, 2007: Court of Appeal reverses decision on preliminary issue and orders Deanwater to pay Business Environment’s costs of appeal and hearing below
• November 2007: Claim comes before judge again, now clear it had been grossly exaggerated
• December 7, 2007: Business Environment serves new Schedule of Dilapidations reducing claim to £107,506.34
• March 14, 2008: At pre-trial review, parties agree judgment of £1,073.50 against Deanwater in final settlement of claim apart from costs
• July 31, 2008: Judge orders Deanwater is entitled to its costs of the claim on an indemnity basis due to Business Environment’s exaggeration of the claim
• March 3, 2009: Court of Appeal refuses Deanwater’s application to reopen appeal on costs of preliminary issue
• March 16, 2009: Costs judge assesses Business Environment’s costs of the preliminary issue at nil

Issues to be decided

The key issue was whether, on assessment of Business Environment’s costs that Deanwater was ordered to pay by the Court of Appeal in relation to the preliminary issue, the costs judge could assess those costs at nil on the basis that they were unreasonably incurred because the dilapidations claim as a whole had been grossly exaggerated, as found by the trial judge when making a final costs order in Deanwater’s favor.

In other words, could the costs judge effectively undermine the Court of Appeal’s prior costs order based on the ultimate outcome of the claim, or was he bound to assess the reasonableness of the preliminary issue costs within the context of that issue alone, without regard to the claim’s overall fate?

Parties’ positions and arguments

Business Environment argued that:

• The Court of Appeal’s costs order on the preliminary issue was a self-contained, final order that had to be given effect to and assessed on its own terms, irrespective of subsequent events in the main action.
• The costs judge was wrong to infect the assessment of the Court of Appeal’s order with the later findings about exaggeration of the claim as a whole. Those findings were not germane to assessing the discrete costs of the preliminary issue.
• The costs judge’s approach impermissibly undermined and failed to give proper effect to the Court of Appeal’s order. As stated in Cope v United Dairies, “the taxing master could not properly refuse to carry out an order for taxation, in whole or in part, because he considered it to be wrong“.

Deanwater argued that:

• The costs judge was entitled and indeed obligated under CPR 44.5 to consider the conduct of the parties before and during the proceedings in assessing costs. The claimant’s gross exaggeration of the claim fell under this.
• Based on cases like Lahey v Pirelli Tyres and Booth v Britannia Hotels, the costs judge had the power to disallow the entirety of the preliminary issue costs as unreasonably incurred if the claim overall was exaggerated.
• It had been misled by Business Environment into thinking the dilapidations claim was substantial and genuine. Had it known the claim’s true minimal value, it would never have pursued a preliminary issue. So the preliminary issue costs were unreasonably caused by the exaggerated claim and should be disallowed.
• The costs judge’s decision was correct on the merits and did not impermissibly undermine the Court of Appeal, but gave effect to his duty to allow only reasonable costs in light of the claim’s ultimate outcome.

Decision

The High Court allowed Business Environment’s appeal and overturned the costs judge’s assessment at nil. The key points in its reasoning were:

• The central issue was to construe the Court of Appeal’s costs order in its proper context and give effect to what that court intended.
• The Court of Appeal’s order dealt with the preliminary issue costs as a discrete matter, to be paid by Deanwater irrespective of the main action’s ultimate fate. So reasonableness had to be judged within the context of the preliminary issue alone.
• If the Court of Appeal had intended its costs order to be susceptible to later revision based on the claim’s overall outcome, it could and would have made a different form of order, like costs in the case.
• The modern trend is to make issues-based costs orders as cases progress, rather than leaving all costs to the end. Consistent with this, such orders should be treated as self-contained.
• It would undermine the Court of Appeal’s role in deciding the incidence of costs of the hearing before it if a later judge or costs judge could effectively neutralize its order based on subsequent events.
• Deanwater’s argument, if correct, would have far-reaching and undesirable consequences – any successful party could challenge interlocutory costs orders against it based on the ultimate result.
• While there is a limited power to revisit prior costs orders under CPR 3.1(7), the circumstances for doing so are very confined, such as a material change in circumstances or the original order having been made based on misleading information. Those circumstances were not present here.

“The citations from the modern Court of Appeal cases extracted above, and Cope, make it clear that the important thing to do is to construe the order. If the effect of the order is that it was intended to take effect whatever the outcome of the action, then the Master’s order was wrong.  He should have assessed the costs of the issue, by reference to their reasonableness and propriety within the issue, but not by reference to the ultimate fate of the action, no matter how misconceived it might have been.  It is the duty of the assessing tribunal to carry out the assessment which the previous court has directed it to carry out.” [29]

“In the circumstances I think that the Master 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 they would not have been incurred if it had not been. That is saying no more than the action was ultimately lost. He should have determined the costs of the preliminary issue by looking at the reasonableness of their being incurred, and the conduct of the parties under CPR 44.5(a), in relation to that issue, and not by reference to what happened in the action at the end of the day.” [41]

In conclusion, the Court held that the costs judge erred in disallowing the preliminary issue costs based on the claim’s exaggerated nature as a whole. Those costs had to be assessed by reference to their reasonableness and the parties’ conduct in relation to that preliminary issue alone. The matter was remitted back to the costs judge to carry out the assessment on that correct basis.