The rules governing the conduct of cases on the small claims track are contained in Part 27 of the Civil Procedure Rules 1998.

The small claims track is the track to which most disputes valued at £10,000 or below are allocated.

Rule 27.14 provides that on the small claims track, the court has very limited powers to award costs to one side or the other. It is only if the court considers that one side has behaved unreasonably that the court is empowered to award of costs beyond the fixed level.

On to the action.

Chaplair Ltd sued Mrs Kumari in the Romford County Court for unpaid service charges and rent arrears in relation to her flat in Brook Court in Barking, Essex.

In its Particulars of Claim, it pleaded an entitlement to recover its costs directly and in full from Mrs Kumari under the terms of the lease pursuant to which Mrs Kumari owned her flat.

The claim was allocated, by agreement between both parties, to the small claims track.

At the same time, nine other lessees in Brook Court were disputing their service charges in the LVT. The claim against Mrs Kumari, so far as it related to matters within the LVT’s jurisdiction, was therefore also transferred to the LVT.

The LVT made some reductions in the service charges payable by Mrs Kumari and her fellow lessees, but Chaplair was broadly successful. Mrs Kumari therefore remained liable for the majority of her service charge arrears.

The LVT made no section 20C order because Chaplair accepted that it could not put the costs of the LVT application through the service charge.

The whole dispute being about the service charges, there was nothing left for the county court to decide, apart from costs.

Chaplair made an application for a determination that Mrs Kumari was liable for its costs of:

• The LVT proceedings, and
• The county court claim.

It needed that determination as a prelude to service of any section 146 notice and forfeiture proceedings by virtue of section 81 of the Housing Act 1996.

The parties agreed that the court was required to consider whether Chaplair was entitled to its costs pursuant to the lease – its contractual costs – as well as any costs recoverable under the small claims track rules.

District Judge Watson heard the application and dismissed the claim to contractual costs, allowing instead only the amount allowed by Civil Procedure Rule 27.14.

Chaplair appealed District Judge Watson’s order. The appeal was heard by His Honour Judge Wulwik.

He reversed District Judge Watson’s order.

Costs of the LVT proceedings

He held that Chaplair could recover the costs of the LVT proceedings in the county court, and that Mrs Kumari was liable for 90% of 10% of the costs:

• Ten lessees were parties to the LVT proceedings hence the 10%;
• 90% of that 10% was the amount that he ordered Mrs Kumari to pay following his summary assessment.

He observed that if the parties to a dispute were also parties to a contract which allowed them to recover their costs, the general rule is that the court’s discretion should normally be exercised in accordance with the contract.

He was fortified in his decision by the judgments in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No.2) [1993] Ch 171 and Church Commissioners v Ibrahim [1997] EGLR 13.

On the small claims costs issue, he found that the restrictions of CPR 27.14 did not apply because the costs were not payable as a matter of county court procedure, but as a matter of contract under the terms of the lease.

Costs of the county court claim

He applied the same reasoning to the costs of the county court proceedings. Those costs were therefore also recoverable.

Very anxious scrutiny

The order made by HHJ Wulwik – awarding Chaplair’s costs on the indemnity basis – required the detailed assessment of the costs to be “subject to the very anxious scrutiny” referred to by the Court of Appeal in O’Beirne v Hudson [2010] 1 WLR 1717.

O’Beirne was not a landlord and tenant case – in fact it was hardly a case at all until the parties fell out about costs.

The claim was settled by consent before it was allocated to a track. The consent order stated that the costs were to be paid “on the standard basis”, but, had the case been allocated, it would have been allocated to the small claims track.

The paying party claimed that the costs should be limited to the small claims limit. The receiving party – no surprises here – contended that it was entitled to its full costs.

The Court of Appeal produced a judgment which rather hedged its bets. It held that, when the costs judge was assessing the costs, he was entitled, as described by Arden LJ:

“to take the view that the case would have been allocated to the small claims track and, in determining what costs were necessarily or reasonably incurred, to decide, if he thought fit, that it was not reasonable for the paying party to pay more than would have been recoverable in a case that was allocated to the small claims track”.

The lease

Mrs Kumari’s lease required her to pay her landlord’s costs in the following circumstances, which I will set out in full, because wording is always key.

12.

(a)  To pay to the Landlord all costs charges and expenses (including legal costs and fees payable to a surveyor) which may be incurred by the Landlord in or in contemplation of any proceedings under Sections 146 and 147 of the Law of Property Act 1925 notwithstanding forfeiture may be avoided otherwise than by relief granted by the Court

(b)  To pay all proper and reasonable expenses including solicitors’ costs and surveyors’ fees incurred by the Landlord of and incidental to the service of all notices and schedules relating to wants of repair to the Flat whether the same be served during or after the expiration or sooner determination of the term hereby granted …

(c)  To pay all reasonable expenses of the Landlords its Managing Agents or Solicitors in respect of any requests for information previously provided…

14

(a) To comply with all requirements whatsoever of any local or other competent authority corporation or others in relation to the demised Premises and to comply at the Tenant’s own expense with any notices whatsoever served by any such authority or others whether on the Landlord or the Tenant in relation to the Demised Premises

(b) At all times hereafter to indemnify the Landlord from and against all actions proceedings costs losses expenses claims and demands arising out of any failure by the Tenant to observe or perform any of its obligations under this Lease in relation to any legislation for the time being in force and non-compliance with any of the provisions herein contained in general or any matters referred to in sub-clause (a) and (b) hereof in…

Arden LJ began her consideration of the case by clarifying the basis on which HHJ Wulwik had awarded the costs: they were awarded under the terms of the lease, “and not simply [under] the court’s power under the CPR to award costs”.

Issue 1: recovering LVT costs in the county court

Arden LJ rejected both of Mrs Kumari’s arguments, which were:

• The issue of costs was res judicata, and
• Chaplair was estopped from seeking its costs now because it should have claimed them in the LVT proceedings and did not do so.

Res judicata

There has, in recent years, been a concerted effort to iron out latin in legal language. I, who have never studied latin, and am very grateful for that effort.

Some latin remnants still populate the legal lexicon however. Res judicata is one of them.

Helpfully therefore, Arden LJ began her consideration of Mrs Kumari’s argument with a definition:

 “A res judicata is a decision, pronounced by a judicial or other tribunal having jurisdiction over the cause of action and the parties, that disposes once and for all of all the fundamental matters decided, so that, except on appeal, they cannot be re-litigated between persons bound by the judgment”, quoted Arden LJ from Res Judicata, 4th edition, Spencer Bower & Handley.

In Mrs Kumari’s case, Chaplair had accepted that the costs of the LVT proceedings could not be put through the service charge because the lease did not allow it.

Thus, argued Mrs Kumari, the question of costs had already been dealt with in the LVT.

Not so, held Arden LJ. The LVT was required to consider only whether the costs could be put through the service charge. In the county court, the court was concerned with whether the court could make an order for costs against Mrs Kumari personally.

Estoppel

Again, Arden LJ supplied a loose definition:

“A party may be estopped [ie prevented] under the rule in Henderson v Henderson (1843) 3 Hare 100 from bringing a claim if he had the opportunity to bring it with an earlier claim and failed to do so”.

She continued: “The court in Henderson v Henderson held: 
the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of a matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case”.

Henderson v Henderson is 172 years old, but it has not gathered dust in a legal cupboard for all that time. On the contrary, it has enjoyed regular outings, including consideration by Lord Bingham in the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1.

Lord Bingham held that, in deciding whether Henderson v Henderson applied, the following factors needed to be taken into account:

• The merits of the case;
• The public and private interests involved, and
• All the facts of the case.

The aim of the exercise was to establish whether, in any given case a party was raising an issue which could have been raised before, and which led the court to conclude that the party was misusing or abusing the court process.

How could this help Mrs Kumari?

As it turned out, not very much.

She initially argued that when the claim against her was transferred to the LVT, the whole claim – including the question of costs – was transferred.

As her argument developed however, she was obliged to concede that the LVT’s only jurisdiction related to determining the amount of service charge that she was liable to pay.

It did not relate to any claim for costs payable directly by Mrs Kumari.

Sadly therefore, the Henderson argument turned out to be rather a lame pigeon.

The outcome, issue 1

Arden LJ made rather short work of Mrs Kumari’s case on the first issue:

• “The LVT had not dealt with an order for payment of those costs, and
• “Chaplair could not be estopped from claiming them in the County Court because the LVT could not have ordered it its costs under the terms of the lease”.

This ground of appeal was therefore dismissed.

Mrs Kumari argued here that the Civil Procedure Rules limit the recoverable costs in a case allocated to the small claims track, even if there is a contractual claim to costs. That was all the more the case where the parties had actually agreed that the case should be allocated to the small claims track.

Chaplair asserted that it was entitled to its costs as a matter of contract, despite the small claims track rules. It was however content to abide by the judge’s decision that Mrs Kumari should only pay 90% of the costs which it had incurred.

It argued that:

• It had pleaded the entitlement to costs in the Particulars of Claim as a matter of contract;
• Where a case is allocated to the small claims track, a contractual entitlement to costs is a factor to be taken into account when the court is determining the amount of costs payable, and
• The CPR provides for the court to assess a contractual claim to costs. The current rule is CPR 44.5, although at the date of the claim, it was CPR 48.3.

Arden LJ accepted those arguments.

“In my judgment”, she said, “the judge applied the correct principle. He had to deal with the landlord’s contractual right to costs. It is not suggested that this right was other than to a full indemnity for costs properly incurred. In this situation, the relevant law is as it was held to be in Church Commissioners v Ibrahim”.

Church Commissioners v Ibrahim

In the course of his lead judgment in Ibrahim, Roch LJ, with whom Butler-Sloss LJ agreed, reviewed Scott LJ’s summary of the principles applicable where a mortgagee, ie a lender, is entitled under the terms of the mortgage to an indemnity for their costs.

Those principles were set out in Gomba Holdings v Minories Finance. Here they are:

• “An order for the payment of costs of proceedings by one party to another party is always a discretionary order: section 51 of the Senior Courts Act 1981;
• “Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right;
• “The power of court to disallow a mortgagee’s costs sought to be added to the mortgage security is a power that does not derive from section 51 but from the power of courts of equity to fix the terms on which redemption will be allowed;
• “A decision by a court to refuse costs, in whole or in part, to a mortgage litigant may be a decision:
  • “In the exercise of the section 51 discretion, or
  • “In the exercise of the power to fix the terms on which redemption will be allowed, or
  • “A decision as to the extent of a mortgagee’s contractual right to add his costs to the security or
  • “A combination of two or more of these things. The pleadings in the case and the submissions made to the judge may indicate which of the decisions to which we have referred has been made.

• “A mortgagee is not … to be deprived of a contractual or equitable right to add costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee’s contractual or equitable rights and without any adjudication as to whether or not the mortgagee should be deprived of those costs.
• “… parties to litigation cannot tie the hands of the court on the question of costs by agreement whether that agreement is one made after the commencement of proceedings or in the contract, breach of the terms of which gives rise to the proceedings.
• “The court’s power to decide by whom costs should be paid could probably not be fettered by a prior contract between the parties to the effect that a successful litigant should have to pay costs to an unsuccessful litigant. Clearly it would be contrary to the public interest that the court should be deprived of the powers given under section 51(6) to disallow wasted costs.
• “Further, section 51(8) requires the person responsible for determining the amount of costs to take account of the factor there mentioned if it exists and that duty placed on that person cannot, in my view, be abrogated by a term in the contract.
• “Whether the court’s discretion to decide by whom the costs of proceedings should be paid could be fettered by a contractual agreement made before the litigation is started is a more difficult question which does not arise in this appeal”.

Arden LJ noted that, in Ibrahim, Roch LJ determined that these principles could be applied in other cases where there was a contractual right to claim costs, and held that the contractual position was “highly relevant” to the exercise of the court’s discretion when deciding what to do about costs.

In Roch LJ’s view, the successful litigant:

“…is not to be deprived of his contractual rights to costs where he has claimed them unless there is good reason to do so and that applies both to the making of a costs order in his favour and to the extent that costs are to be paid to him. Indeed I would adopt the citation in the Gomba Holdings case from the judgment of Vinelott J which appears at p193A, namely:

“If the parties have agreed the basis of taxation it would, I think, be an improper exercise of the court’s discretion to direct the taxation on some other basis, unless satisfied that there had been some conduct on the part of the mortgagee disentitling him to costs or to costs on the agreed basis”.”

In Roch LJ’s view, the court might refuse to allow a party to recover costs to which s/he was contractually entitled if:

• That party’s legal representatives indulged in conduct that would fall within the meaning of improper, unreasonable or negligent, and
• That conduct caused the paying party to incur wasted costs within the meaning of section 51(7) of the Senior Courts Act 1981.

Conversely, he considered that the court should not deny costs to a successful litigant on the basis that:

• There had been an imbalance in the parties’ bargaining positions when entering the contract, or
• It is important to controlling costs in undefended possession claims.

An odd observation

As to the mechanics of recovering the costs, Arden LJ observed, rather mysteriously bearing in mind the fact that neither Gomba nor Ibrahim were service charge cases:

“However the landlord could not simply add the costs to the service charge, he had to come back to the court to obtain an order. In that situation, the court had a discretion whether to award the costs but it is established that in general the court should exercise its discretion in line with the parties’ contract”.

The outcome, issue 2

She concluded that HHJ Wulwik had the power to award the landlord its costs, notwithstanding the allocation of the case to the small claims track, and that he exercised his discretion correctly:

• The landlord’s entitlement to costs included the costs it had incurred before the LVT and in the court action;
• The contractual entitlement allowed Chaplair to recover all of its costs, even though it had been allocated to the small claims track;
• There was no justification for denying Chaplair the exercise of its contractual rights.

She therefore refused permission to appeal on the second issue.

Patten LJ, whilst agreeing with Arden LJ, was at pains to emphasise the distinction between the court making an order for costs under the CPR and the court awarding costs – effectively as a debt – because the entitlement to claim them was pleaded as part of the substantive claim.

He emphasised that HHJ Wulwik’s order was bipedular.

• First, it was an order and an assessment made under the CPR.
• Second, it was judgment on a pleaded claim for contractual costs to which the landlord asserted a right under the lease.

Like Arden LJ, Patten LJ was of the view that rule 27.14 did not limit claims to contractual costs.

In his judgment, Gomba Holdings established the principle that where a contract entitles a landlord to recover his/her costs, that entitlement should be realised.

That principle had subsequently been incorporated into the CPR by way of rule 44.5.

That said, sight should not be lost of the fact that the underlying entitlement to costs was a contractual one, enforceable by the court, “subject to its equitable power to disallow unreasonable expenses”.

Here is the text of rule 44.5:

44.5 Amount of costs where costs are payable under a contract

“(1)  Subject to paragraphs (2) to (4), where the court assesses (whether by summary or detailed assessment) costs which are payable by the paying party to the receiving party under the terms of a contract, the costs payable under those terms are, unless the contract expressly provides otherwise, to be presumed to be costs which –

“(a)  have been reasonably incurred; and

“(b)  are reasonable in amount,

“and the court will assess them accordingly.

“(2)  The presumptions in paragraph (1) are rebuttable. (Practice Direction 44 (General rules about costs) sets out circumstances where the court may order otherwise.)

“(3)  Paragraph (1) does not apply where the contract is between a solicitor and client”.

Some of the arguable more technical Civil Procedure Rules are excluded from the operation of Part 27 of the CPR. Rule 44.5 is not one of them.

Accordingly, concluded Patten LJ:

“There is nothing in the rule-making powers in respect of the CPR which enable the rules to exclude or override that contractual entitlement and I therefore agree with Arden LJ that the judge had jurisdiction to assess the costs free from any restraints imposed by CPR 27.14”.

Clark LJ

Clark LJ added nothing to Arden and Patten LJJ’s judgments.

My thoughts on this case, which are strident, will follow in a second post.

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