Scottish & NEWCAstle Plc v Raguz

By two underleases dated respectively 17th March 1967 and 7th March 1969 Colston Property Holdings Ltd demised to the respondent, Scottish & NEWCAstle Breweries Ltd (“the Assignor”) the Abbey Motor Hotel, Abbey Street, Leicester and an adjoining plot of land forming part of the hotel for a term of years expiring on 22nd March 2062. The Assignor covenanted to pay the rents thereby reserved in conventional terms but subject to rent reviews every fourteen years. In accordance with the terms of the underleases rent reviews were due as at 18th April 1995 in respect of the 1967 Lease and 25th December 1996 in respect of the 1969 Lease. The relevant reviews were completed on 23rd September 2000 and 10th July 2001 and gave rise to rents payable from the review date of £68,000 and £16,000 respectively. At all times material to this appeal the reversion expectant on the underleases has been vested in National Car Parks Ltd (“the Lessor”).

By an agreement dated 12th August 1982 and made between the Assignor (1) and the appellant (“Mr Raguz”) and Impney Hotel Properties Ltd (2) the former agreed to assign to the latter the then residue of the terms demised by the underleases. The price was £30,000. The agreement was completed by the registration of the relevant transfers on 29th September 1982. In accordance with s.24(1) Land Registration Act 1925 there is to be implied in each of the transfers:

“(b)

on the part of the transferee, a covenant with the transferor, that during the residue of the term the transferee and the persons deriving title under him will pay, perform, and observe the rent, covenants, and conditions by and in the registered lease reserved and contained and on the part of the lessee to be paid, performed and observed, and will keep the transferor and the persons deriving title under him indemnified against all actions, expenses, and claims on account of the non-payment of the said rent or any part thereof, or the breach of the said covenants or conditions or any of them.”

In about March 1983 Mr Raguz and his company disposed of their interest in the underleases which in March 1992 became vested in Hotel St James Ltd (“the Tenant”). Administrative Receivers were appointed in respect of the Tenant on 6th October 1999. On or about 6th August 2000 there was an agreement (“the Support Agreement”) whereunder the Assignor or one of its associate companies agreed to support the Tenant by underwriting its trading losses.

The Tenant ceased to pay the rent due in June 1999. The Administrative Receivers paid the rent due at the pre-review level for the period 6th October 1999 to 14th February 2000 only. On and after 11th November 1999 the Lessor served on the Assignor notices, as required by s.17 of the Landlord & Tenant (Covenants) Act 1995, and statutory demands for the purpose of recovering the outstanding rent from the Assignor. The Assignor paid £346,313-05 to the Lessor on 5th July 2001 and sought by these proceedings to recover the same from Mr Raguz pursuant to his covenants implied by s.24(1)(b) Land Registration Act 1925.

The original defence served on behalf of Mr Raguz on 18th October 2001 consisted of little more than non-admissions. Accordingly by an application issued on 9th November 2001 the Assignor sought summary judgment for the whole of its claim pursuant to CPR Part 24. This prompted an application by Mr Raguz for permission to amend his defence. The application came before HH Judge Norris QC, sitting as a deputy High Court judge which took no fewer than three days to conclude. On 22nd July 2002 the judge gave limited permission to amend for the reasons given in a detailed judgment handed down on 14th June 2001 and gave directions for the hearing of the Part 24 application.

The Part 24 application was heard by HH Judge Norris QC on 1st November 2002. In his judgment handed down on 9th December 2002 he concluded that:

a)

the covenant implied by s.24(1)(b) Land Registration Act 1925 is a contract by way of indemnity and not liable to be discharged by misconduct on the part of the creditor/lessor;

b)

it is, nonetheless, arguable with real prospects of success that the obligation undertaken pursuant to that covenant does not extend to liabilities resulting from the creditor/assignor’s own actions, in particular in relation to the Support Agreement made in August 2000;

c)

such a contention could not apply to the rent aggregating £39,978.08 demanded on or before 3rd August 2000 so that summary judgment should be entered for that amount;

d)

VAT on such rent was also recoverable so that paragraph 20 of the amended defence should be struck out; and

e)

payment of the rent by the Assignor to the Lessor had been established.

There is no appeal by the Assignor from the conclusion summarised in sub-paragraph (b). Mr Raguz appeals from the conclusions summarised in sub-paragraphs (a) and (c) to (e) with the permission of Waller and Jonathan Parker LJJ. I will deal with those issues in that order.

In paragraph 13 of his amended defence Mr Raguz claims that in relation to the Assignor he stood and stands in the position of guarantor or surety of the obligations of all subsequent assignees of the terms demised by the underleases. He contends that from that relationship arise duties not to cause or connive at a default by the principal debtor such that in the event of a breach his liability is discharged altogether. This contention is denied by the Assignors in their reply. They contend, in effect, that the obligation is one of indemnity not guarantee.

The distinction between contracts of guarantee and indemnity are real and important, cp per Harman LJ in Yeoman Credit Ltd v Latter [1961] 1 WLR 828, 835. In a contract of indemnity the indemnifier undertakes an independent obligation which does not depend on the existence of any other obligation on the part of any other person. He agrees to keep the other harmless against loss whether or not a third party is liable for that or a cognate loss. By contrast a contract of guarantee presupposes some principal obligation of a principal obligor to which the guarantee is secondary or ancillary. The guarantor assumes a secondary liability to the creditor for the default of a third party who remains liable as the principal debtor. The importance of the distinction for present purposes is that the obligation of a guarantor may be discharged by transactions between the creditor and principal debtor, for example by giving time, the release of securities or novation of the obligation because any of those transactions may alter the mutual rights and obligations of the guarantor and the principal debtor. As there is no need for a principal obligation in the case of an indemnity its discharge depends on the usual rules of contract.

The judge rejected the submissions of counsel for Mr Raguz. In paragraph 14 of his judgment he pointed out that S.24 Land Registration Act 1925 is (and always has been regarded as) a contract of indemnity. He considered that this proposition was demonstrated by the decision of Warrington J in Harris v Boots Cash Chemists (Southern) Ltd [1904] 2 Ch. 376. He concluded:

“There is nothing in the structure or language of the usual covenant (now contained in s.24) which suggests that whilst the term is vested in the assignee the obligation to the assignor is one of indemnity, but on a subsequent assignment by him it changes into an obligation of guarantee. The single promise that the assignee and those deriving title under him would perform the covenants in the lease does not suggest that two separate obligations, different in nature, are being undertaken. The actual language used is that of indemnity: and the common understanding of conveyancers is that there exists a chain of indemnities. This established understanding of the nature of the assignee’s obligation mirrors the established understanding of the original tenant’s obligation. The original tenant’s obligation to pay rent does not become a contract of guarantee when he assigns the term.”

Counsel for Mr Raguz submit that the judge was wrong. They contend that a contract to be answerable for the defaults of another is necessarily a contract of guarantee not of indemnity. They submit that the covenant implied by s.24(1)(b) makes the assignee answerable for the defaults of whoever may be the current tenant, the difference between a guarantee and an indemnity being merged when the tenant and the assignee is the same person. They rely on a dictum of Sir Donald Nicholls V-C in RPH Ltd v Mirror Group (Holdings) Ltd [1993] 1 EGLR 74. They contend that the judge read too much into the decision of Warrington J in Harris v Boots Cash Chemists (Southern) Ltd [1904] 2 Ch. 376.

The Assignor contends that the judge was right for the reasons he gave. In addition to Harris v Boots Cash Chemists (Southern) Ltd it relies on Allied London Investments Ltd v Hambro Life Assurance Ltd [1984] 1 EGLR 16 and the other cases cited therein.

It is convenient to start with the authorities relied on. In Harris v Boots Cash Chemists (Southern) Ltd [1904] 2 Ch. 376 Warrington J was concerned with the question whether the original lessee could enforce by injunction against a successor in title to the term a provision in a lease precluding alteration without consent. The ground on which he sought to do so was a covenant by the successor in title in the usual form to observe and perform the covenants etc. contained in the lease. Warrington J held that he could not. As he said at page 381

“I think the true object of the covenant entered into on the assignment of the lease is to indemnify and protect the original lessee against breaches of covenant contained in the lease under which he holds.”

That conclusion was approved by the Court of Appeal in Butler Estates Company Ltd v Bean [1942] 1 KB 1. Thus both Warrington J and the Court of Appeal considered that a covenant in the usual form is one of indemnity only. But this was in the context of a contention that it was more than that and provided the basis for an injunction against the successor in title. There was no issue whether the covenant was one of guarantee rather than of indemnity.

In Allied London Investments Ltd v Hambro Life Assurance Ltd [1984] 1 EGLR 16 the lessors sued the original lessees for rent due under the lease after the term had been assigned to another. The lessors had given a licence to assign and the licence contained a guarantee from a third party to the lessors that the assignee would pay the rent etc. Subsequently the lessors released the guarantee. The original lessees contended that the release of that guarantee released them from their covenant in the lease to pay the rent. The obligation was in the following form:

“The tenant for itself and its assigns and to the intent that the obligations may continue throughout the term covenants with the landlord as set out in the third schedule hereto.”

Walton J rejected that contention. Having referred to, inter alia, s.24(1) Land Registration Act 1925, he considered that

“..it is quite clear that the position is not as between the assignee and the original lessee that of principal debtor and surety.”

It is true, as counsel for Mr Raguz pointed out, that the covenant with which Walton J was primarily concerned was that contained in the original lease, not that implied into the assignment. Nevertheless there can be no doubt what Walton J considered to be the legal relationship between the original lessee and an assignee of the term.

In RPH Ltd v Mirror Group (Holdings) Ltd [1993] 1 EGLR 74 the landlord sought payment of the rent from the original lessee because the subsequent assignees were insolvent. This claim prompted that original lessee to apply for orders designed to obtain reimbursement from subsequent assignees. The application was dismissed. Sir Donald Nicholls V-C observed (p.75):

“The implied covenant [under s.24(1) Land Registration Act 1925] extends to the whole of the residue of the term. In its simplest form it is a covenant by the transferee with the transferor that during the residue of the term the transferee will pay the rent and will indemnify the transferor against all claims on account of non-payment. The covenant cannot be taken to envisage that if the transferee further assigns the lease, thereafter quarter by quarter the transferee himself will solemnly continue to pay the rent. The obligation must be to see that the rent is paid. Due payment of the rent is being guaranteed by the transferee for the residue of the term.”

Counsel for Mr Raguz rely on the reference in the last sentence to “the rent is being guaranteed” as indicating that the implied covenant is one of guarantee not of indemnity. I do not accept that submission. There is no indication that the Vice-Chancellor had any such distinction in mind. Indeed on all other occasions he described the implied covenant as one of indemnity.

I prefer the submissions of counsel for the Assignor. First, the form of covenant has been in use for many years. A similar implication is made in unregistered conveyancing by s.77(1)(C) and Schedule II Pt IX Law of Property Act 1925. As the note to Pt IX in Wolstenholme and Cherry 13th Ed. Vol.1 p.384 shows the form of implied covenant was that in general use before 1926. There is no suggestion in any reported case or text book concerning leasehold conveyancing of which I am aware to the effect that such a common form covenant is to be regarded as imposing a secondary or ancillary obligation only. It would be inconsistent with the purpose of such covenants that they should be capable of being discharged by an accommodation reached between the landlord and a subsequent holder of the term. Second, the terms of the covenant implied by s.24(1)(b) are inconsistent with the imposition of a secondary or ancillary obligation only. While the term is vested in the original assignee the obligation is obviously primary. In my view it is equally primary after the term has been assigned to a subsequent assignee. The original assignee covenants that “the persons deriving title under him will pay...the rent....and will keep the transferor...indemnified against all actions, expenses and claims on account of the non-payment of the said rent...”. The covenant does not presuppose any obligation on the successor in title to pay the rent and is expressly an indemnity against actions etc on account of its non-payment. Third, I consider that the clear statement of Walton J in Allied London Investments Ltd v Hambro Life Assurance Ltd [1984] 1 EGLR 16, 17H that the relationship of assignee and original lessee is not that of surety and principal debtor expresses the common understanding of conveyancers in both registered and unregistered land to which effect should be given.

For these reasons I conclude that Judge Norris QC was right to hold that the obligation of Mr Raguz implied by s.24(1)(b) Land Registration Act 1925 was not liable to be discharged by conduct of the Assignor falling short of what will discharge a primary contractual obligation. Accordingly Mr Raguz fails to establish a defence to all claims under the implied covenant which, on this ground alone, would warrant the dismissal of the Part 24 application as a whole.

In paragraph 13 of the amended defence Mr Raguz claims that if his obligation implied by s.24(1)(b) is that of an indemnifier rather than that of a guarantor or surety then the Assignor is obliged not to prolong or increase the losses the subject of the indemnity. The oral argument addressed to the judge was summarised by him in these terms:

“Given that the Defendant’s obligation is one of indemnity, it is nonetheless only an indemnity against the defaults of the occupying tenant within the scope of the original indemnity. As an indemnifier, the Defendant accepted the risk that the occupying tenant might default through the ordinary operation of the market. But he did not accept the risk that the indemnified party might procure the default, or that the indemnified party might prolong the default. Defaults in these circumstances were not within the ordinary scope of the indemnity covenant.”

The judge held that there was a real prospect of success in such an argument and considered the extent to which (if any) it might reduce the amount claimed by the Assignor. In that respect he concluded:

“The earliest that there is any hint that St. James is in trading difficulties is on 17 April 2000. It is not until 25 May 2000 that an indication in principle is given by the Claimant of its willingness to underwrite trading losses. It is not until the 6 August 2000 that the arrangement is actually entered. I regard it as fanciful to suggest that the Claimant “prolonged” the existence of St. James during this period. It is unrealistic to suggest that (on the footing that the administrative receivers had identified the loss making nature of the business in April 2000) St. James would have been placed in liquidation and a liquidator would have assigned the lease at a forced sale value to a solvent tenant by August 2000. Accordingly in my judgment the argument raised by the Defendant has no application to the notices under Section 17 of the Landlord and Tenant (Covenants) Act 1995 served on the Claimant on the 11 November 1999, 16 June 2000 and 3 August 2000 in respect of each lease, and which total £39,978.08. The Claimant is entitled to judgment under Part 24 in this sum together with interest thereon at 6.5% from the 5 July 2001. That is the date upon which the statutory demands were satisfied.”

In a supplemental judgment handed down on 7th January 2003 the judge noted that there was a difference between the amounts claimed in the s.17 notices served on the Assignor by NCP and those covered by the statutory demands. Accordingly he directed that the judgment be drawn up so as to include a declaration of liability to indemnify in the full amount but judgment for payment of only £22,797.36. It has since been agreed that the full amount is £31,764.08, not the figure stated in the order of £39,978.08.

Counsel for Mr Raguz now claim, by reference to further documents not before the judge, that no such limited but summary judgment should have been granted. They contend that such further documents show that it is arguable with real prospects of success that all the rent paid by the Assignor to the Lessor related to periods of occupation by the Tenant caused or prolonged by the acts or omissions of the Assignor. The relevant matters are related in the witness statement of Mr Plessier, the solicitor for Mr Raguz, dated 26th March 2003. It was put before this court without objection by counsel for the Assignor, though I am not aware of any grant of permission to do so.

The further documents have been produced by the Assignor pursuant to an order made on 17th September 2002. Some were available by the time of the hearing before Judge Norris and were put before him. Others were not disclosed until later because, we were told, they were not provided to the Assignor by the Administrative Receivers of the Tenant until after the sale of the Hotel for £70,000 had been achieved on 28th February 2003. The extent of the disclosure since the Judge’s judgment is some 2,500 pages and is not yet complete.

Before referring to the documents on which counsel for Mr Raguz rely it is necessary to consider the notices of 11 November 1999, 16 June 2000 and 3 August 2000 in respect of each lease. The notices dated 11th November 1999 covered the quarter’s rent payable in advance on 24th June 1999 and 29th September 1999, those of 16th June 2000 the quarter’s rent payable in advance on 25th December 1999 and 25th March 2000 and those of 3rd August 2000 the quarter’s rent payable in advance on 24th June 2000. As the judge indicated all these periods preceded the Support Agreement. Counsel for Mr Raguz contends that it is not the period for which the rent was outstanding that matters but the prolongation of the period during which they remained unpaid from April 2000 to July 2001.

The contentions of counsel for Mr Raguz fall into various categories. The first relates to the alleged prolongation of uncertainty arising from the time taken to resolve the rent reviews. Review notices had been duly served in 1995 and 1996 but remained unresolved when the Administrative Receivers were appointed to the Tenant on 6th October 1999. On 4th April 2000 the Administrative Receivers wrote to the solicitors for the Assignor informing them, at their request made on 3rd March 2000, that the Administrative Receivers had been advised that the proposed reviewed rents were not unreasonable. They invited urgent discussions concerning the rent reviews because “as original tenants your clients are most at risk”. In their reply dated 6th April 2000 the Assignor’s solicitors pointed out that they did not have details concerning the rent reviews. On 12th April 2000 the Administrative Receivers replied to the effect that they did not seek any input to the rent reviews from the Assignor but recorded their understanding that the Assignor did not wish them to make any concessions. On 25th May 2000 the Assignor informed the Administrative Receivers that it had appointed an expert to advise on, inter alia, the rent reviews. On 23rd September 2000 the independent expert fixed the reviewed rent payable under the 1967 lease at £68,000. The review of the rent due under the 1969 lease was fixed on 10th July 2001 in the sum of £16,000.

I am unable to see how any conduct or inactivity of the Assignor in the period April to August 2000 in relation to the rent reviews could affect Mr Raguz’s liability under the indemnity. His liability had already accrued on the respective dates for payment of the quarter’s rents in advance. All those quarters fell before April 2000 except those covered by the s.17 notices served on 3rd August 2000. Only the liability for the quarter’s rent to which it related could be affected by the events indicated by the correspondence on which counsel for Mr Raguz now relies.

The liability for the rent due in advance on 24th June 2000 accrued due a month after the Assignor had indicated that it had instructed an expert to advise on the rent review and other matters. There is no evidence of any event during that month which could affect the accrual of the liability. Accordingly I would reject the contention that the involvement of the Assignor in the rent reviews could, even arguably, limit or discharge the liability of Mr Raguz for the rent covered by any of those notices.

The second contention of counsel for Mr Raguz is to the effect that the Assignor became involved in the marketing of the Hotel thereby delaying its sale. It is true that the Assignor became involved. By virtue of clause 10 of the Support Agreement the prior agreement of the Assignor was required to any application to the Lessor for a licence to assign. The Hotel was marketed in November 2000 and eventually sold on 28th February 2003. But the correspondence and events on which counsel for Mr Raguz relies occurred after August 2000. Again I am unable to understand how those events can affect the accrued liability of Mr Raguz under the implied covenant They were not alleged to amount or give rise to a release, novation or discharge by breach.

The third contention of counsel for Mr Raguz is the more general allegation that the Assignor frustrated the expeditious disposal of the Hotel. In essence this allegation is an amalgam of the other two. It is suggested that the delay in finalising the rent review created uncertainty in the market and the loss of a sale at £200,000 in June 2000. It is also suggested that the sale for use as a hotel was delayed by an abortive attempt to procure the consent of NCP to a change of use to an asylum seekers hostel. I do not see how the economic consequences of these matters can with the benefit of hindsight be laid at the door of the Assignor so as to limit or discharge the accrued liabilities of Mr Raguz.

The conclusion of the judge that the procurement or prolongation of defaults by the Tenant by the Assignor might limit or reduce the extent of the liability of Mr Raguz was not challenged by the Assignor. It appears that the judge envisaged that the defaults would not fall within the scope of the covenant relating to “all actions, expenses, and claims on account of non-payment of the said rent” if they were effectively caused by the Assignor. Assuming but without deciding that if such an effective cause were proved it might have that consequence it is fanciful to suggest that any such allegation can be proved when the alleged defaults occur after the liability has accrued. To my mind it is equally if not more fanciful to suggest that such an effective cause could be established by the events and documents on which counsel for Mr Raguz relies.

For all these reasons I reject the submission that Mr Raguz has a real prospect of establishing that he is not liable for the rent covered by the s.17 Notices served on 11th November 1999 and 16th June and 3rd August 2000.

This is the issue to which I have referred in paragraph 6(d) above. In paragraph 20 of the amended defence Mr Raguz denied that there was any liability for VAT from the Assignor to NCP so that there can be no liability on Mr Raguz to indemnify the Assignor against it. This contention was rejected by the judge. In paragraph 19 of his judgment he said:

“The argument advanced at the hearing was that VAT was a tax on supply: that the “supply” was actually to the [Tenant]. If [the Tenant] had paid the rent it would also have to pay the VAT. But because there had been no “supply” to the [Assignor] (whose only liability was as original covenantor) the [Assignor] was not liable to pay VAT. I reject this argument (which was not that advanced at the time permission was sought to amend the Defence) as having no realistic prospect of success. The imposition of VAT on rent post-dated the 1967 and the 1969 Underlease. Section 89 of the Value Added Tax Act 1994 provides that where there is a change in the VAT charged on a supply (including a change from no VAT being charged to VAT being charged) then (unless the contract otherwise provides) there shall be added to the consideration for the supply an amount equal to the VAT. Section 89 (2) provides that where a lease does not specifically refer to VAT this is not to be taken as a “provision” that Section 89 (1) shall not apply. Accordingly, in a lease unless there is some specific provision to the contrary, there is to be added to the rent the amount of the VAT. This applies as much to the continuing contractual liability of the original tenant to pay the rent as it does to the liability of the estate owner under the covenant that runs with the land. I do not see that any sensible distinction can be drawn between the “supply” to the occupying tenant and the “supply” to the original tenant.”

S.89 VAT Act 1994 provides:

“(1)

Where, after the making of a contract for the supply of goods or services and before the goods or services are supplied, there is a change in the VAT charged on the supply, then, unless the contract otherwise provided, there shall be added to or deducted from the consideration for the supply an amount equal to the change.

[(2)...]

(3)

References in this section to a change in the VAT charged on a supply include references to a change to or from no VAT being charged on the supply (including a change attributable to the making of an election under paragraph 2 of Schedule 10).

The argument of counsel for Mr Raguz was, as it had been before the judge, that there was no taxable supply by the Lessor to the Assignor. As this is not disputed I need say no more about it. The submission was that s.89 only permits adjustments to the consideration for the supply, not to sums payable by reference to a supply but not as consideration for it.

I do not accept the argument advanced by counsel for Mr Raguz. The original lease constituted a contract for a relevant supply by the landlord to the tenant for which the rent covenanted to be paid was consideration. In view of the terms of s.89(3) it is indisputable that when the lessor opted to tax the supply there was a change in the VAT charged on that supply. That change occurred before the supplies with which this claim is concerned were rendered. Accordingly the express terms of s.89(1) requires VAT at the relevant rate to be added to the rent as part of the consideration for the supply by the Lessor to the Tenant. In my view it follows that the default of the Tenant in paying the rent including the VAT thereon falls within the terms of the implied covenant because it constitutes a failure to pay the rent “by and in the registered lease reserved and contained” as amended in accordance with s.89(1). In my view the judge was right for the reasons he gave.

This is the issue to which I have referred in paragraph 6(e) above. In paragraph 13 of the particulars of claim the Assignor asserted that on 5th July 2001 it paid to the Lessor £346,313.05 in discharge of its liabilities under the Underleases. This was verified by the Group Estates Manager of the Assignor. In paragraph 9 of the amended defence Mr Raguz required the Assignor to prove the facts set out in paragraph 13 of the particulars of claim. In her witness statement made on 17th October 2001 the Assignor’s solicitor stated that on 5th July 2001 she arranged for the telegraphic transfer to the solicitors for the Lessor the sum of £346,313.06 receipt of which was subsequently acknowledged. This statement was not disputed in the witness statements made by any of the witnesses for Mr Raguz.

The contention of Mr Raguz was rejected by the judge in paragraph 22 of his judgment where he said:

“The final argument advanced by the Defendant was one advanced only at the hearing (and is not contained in the Amended Defence). It was to the effect that the recitals to the funding agreement dated the 6 August 2000 indicated that Pubs had indemnified the Claimant against any liability that the Claimant had to NCP, and accordingly it might be the case that the Claimant had paid nothing to NCP (the payment actually being made by Pubs). On the state of the evidence before me I do not consider that that argument has a realistic prospect of success. The statutory demands by NCP were actually addressed to the Claimant. Paragraph 5 of the witness statement dated 25 February 2002 of Miss Martin on behalf of the Claimant says that the Claimant paid under the statutory demand (confirming paragraphs 11 and 12 of her first statement). Paragraph 13 of the Particulars of Claim (on which is endorsed a statement of truth by Martyn Fenwick, the Group Estates Manager of S & N), says that the Claimant has paid £346,313. I see no reason to go behind the witness statements or the statement of truth and to speculate that Pubs’ indemnity obligation was, in fact, discharged by a direct payment.”

The submission recorded by the judge as made to him is substantially the same as that made to us. The only additional material relied on before us was further correspondence relating to the genesis of the indemnity referred to by the judge, the fact that the Support Agreement was signed but the associated indemnity was not and internal accounting records indicating that the relevant payments were made out of an S&N plc group account. Counsel for Mr Raguz submit that the documents do not demonstrate the identity of the company within the Group to which the payment was ultimately debited.

I agree with the judge on this issue too. Notwithstanding the extensive arguments on the application for permission to amend no amendment was allowed or made to raise any substantive case of non-payment. The argument for Mr Raguz goes no further than to suggest that the ultimate burden of the payment might not have remained with the Assignor. But this is entirely speculative. The issue remains whether the payment by the Assignor has been properly made out by evidence. I am satisfied that, for the reasons given by the judge, it has.

Counsel for Mr Raguz contend that even if the judge were right on all the preceding issues he was wrong to have ordered Mr Raguz to pay 40% of the costs of the Assignor relating to its Part 24 application. In paragraph 26 of his judgment handed down on 1st November 2002 Judge Norris QC indicated a provisional view that Mr Raguz should pay 50% of the Assignor’s costs. Having heard further argument he handed down a supplemental judgment on 7th January 2003.

In paragraph 6 of his supplemental judgment Judge Norris QC indicated that he had reconsidered the matter entirely afresh. He then described the arguments of counsel for Mr Raguz in some detail. He summarised the arguments for the Assignor. He considered that the Assignor had succeeded in part so that he should make a percentage order in favour of the Assignor. In paragraphs 13 and 14 he concluded:

“13.

In assessing the percentage I take particular account of the following:

•

When the application was issued an unarguable defence was being advanced.

•

The application to amend the Defence was conducted in such a way that it was necessary for me to “crystallise” the statement of case in a particular form (that contained in Counsel’s draft used at the hearing on 26 February 2002) in order that the somewhat fluid arguments being advanced could be addressed: but the Amended Defence as so crystallised did not in fact express the principal point ultimately argued. That only reached its full expression in the skeleton argument for the Part 24 application (whereas the Claimant’s Part 24 skeleton addressed the precise case pleaded). The Amended Defence did clearly identify the section 17 arguments.

•

Only the Defendant knew precisely what his defence was and he at no time acknowledged that none of its branches could apply to the sum for which judgment was given.

•

The claimant restricted the time available to the Defendant to apply his legal argument to the facts by not providing disclosure until late in the day (though that was because they had a legal answer to the precisely pleaded case that would render disclosure unnecessary). However, there was still sufficient time to do.

•

The general conduct of the defence gives me no confidence that if the Claimant had confined its summary judgment application to some smaller sum the Defendant would have submitted to judgment.

•

The Defendant established that there was a sufficient prospect of success on one limb of his principal argument (despite the absence of any clear authoritative statement supporting it) for the claim to go on trial and to render inappropriate consideration of his other arguments on section 17 and on some smaller points, and the amount which is in issue on those arguments is about 9 times greater than that covered by the judgment.

•

The time taken on the Defendant’s unsuccessful points (indemnity, VAT and actual payment) was slightly less than the time taken on the successful point (and points which it then became inappropriate to consider).

14.

Bearing in mind those particular factors, and having assessed the matter in the round, I order that the Defendant shall pay 40% of the Claimants costs of the Part 24 application.”

The judge then decided that there should be a detailed assessment at the conclusion of the action (para 15) and an interim payment of £4,650 (para 16). In paragraph 17 he gave directions that the balance of costs should lie where they fell and that no part of Mr Raguz’s costs as set out in the schedule before the judge or of the balance of the Assignor’s costs should subsequently reappear on a subsequent assessment as the general costs of the action. He added:

“The parties must understand that no part of these costs is at issue in the remainder of the action, and that I have ruled upon them. I hope that this both will bring home to the parties the need to conduct litigation on a proportionate basis consistent with their duty under CPR Pt 1.3, and will also facilitate settlement.”

Counsel for Mr Raguz submit that the judge was wrong because it was Mr Raguz, not the Assignor who should be regarded as the successful party and that the facilitation of a settlement is an irrelevant consideration. Counsel for the Assignor points out that this court will not interfere with the exercise of a judge’s discretion as to costs unless it is shown that he erred in principle, cf Johnsey Estates (1990) Ltd v Secretary of State for the Environment [2001] EWCA Civ 535 para 22.

In my view no such error is shown. The facilitation of a settlement was no part of the judge’s reasoning in relation to the costs order he made on the Part 24 application. Rather it was an explanation why he had felt it necessary to point out expressly that costs of the Part 24 application not allowed should not be claimed again as part of the general costs of the action. It was not a reason for his costs order but a statement of its consequence. Given the factors which the judge took into account I do not think that he fell into error in treating the Assignor as the successful party or in the assessment of the percentage.

For all these reasons I do not accept any of the grounds of appeal. But in view of the arguments addressed to us I should deal with a number of other matters. First, it is common ground that the figure specified in the declaration contained in paragraph 1 of the judge’s order should be £31,764.08 not £39,764.08. This could and should have been dealt with by agreement. The fact that it was included as ground 6 of the appellant’s notice should not lead to any expectation or entitlement to costs of the appellant’s notice or otherwise.

Second, it was contended in the written argument for Mr Raguz that the test for granting permission to amend was in effect the same as the test for the grant of summary judgment under CPR Part 24, namely real prospect of success. The suggested consequence was that it was an abuse of the process of the court for the Assignor to proceed with its application for summary judgment under Pt 24 in relation to matters for which permission to amend had just been granted.

I reject this contention. First, it is clear from paragraph 8 of his judgment on the amendment application that the judge did not apply so strict a test as counsel for Mr Raguz suggested was appropriate. The lower tests he did apply benefited Mr Raguz. Second, in the light of the different tests applied the Part 24 application was not a duplication of the amendment application and so could not be an abuse of the process of the court.

Third, it was suggested that as there was to be a trial anyway it was inappropriate to decide the points of law on the nature of the covenant implied pursuant to s.24(1)(b) Land Registration Act 1925 or the application of s.89 VAT Act 1994 or to reach any factual conclusion as to payment by the Assignor or whether 6th August 2000 was the appropriate cut off date for the defence the judge found to be arguable with real prospects of success.

I do not agree. As the points of law have now been argued twice and neither is fact sensitive it is appropriate to decide them so as to avoid the expenditure in further costs and time involved in arguing them again at the trial. With regard to the issues of fact, if, as I consider, there is no real prospect of the defence succeeding at the trial then the sooner judgment is given the better. Counsel for Mr Raguz suggested that somehow the Assignor was at fault in relation to disclosure and judgment should not be given in advance of a trial in case further material documents are produced. I cannot accept this argument either as neither issue is dependent on further disclosure of documents. The nature of the defence the judge considered to be arguable with real prospects of success cannot, because of the chronology, extend to the earlier payments. In view of the nature of the defence the issue of payment is merely one of proof not the resolution of a disputed issue of fact.

Fourth, it was submitted by counsel for Mr Raguz that the Part 24 application having been launched in respect of the whole of the claim it was wrong for the judge to give judgment in relation to only part of it. I do not accept this submission. Formally the judge has the jurisdiction to do so under CPR Rule 24.2. In the circumstances of this case for the judge to have refused to do so would have been contrary to the overriding objective in general and CPR Rule 1.4(2)(c) and (i) and 3.3(1) in particular.

For all these reasons I would dismiss this appeal.

I agree that the appeal should be dismissed for the reasons given by the Vice-Chancellor. I understand that Sedley LJ also agrees that the appeal should be dismissed on all issues, but that he initially had doubts about the judge’s allocation of costs which he explains in his judgment. These are my brief reasons for agreeing with the Vice-Chancellor that the costs appeal should fail.

This court will not interfere with a judge’s discretionary decision as to costs unless it was wrong in principle or manifestly unjust. I do not consider that the judge’s decision in this case was either of these. On the contrary, there is an amalgam of factors which together are capable of supporting his decision. These included but were not, I think, limited to those which the judge set out in paragraphs 13 and 14 of his judgment which the Vice-Chancellor has quoted in paragraph 39 above.

The claimants were entirely justified in starting the summary judgment proceedings in the light of the then unamended defence. The amendments to the defence which the judge permitted were teased out of an unstructured larger body of proposed material, some parts of which the judge described as “outrageous”. The principal point upon which the summary judgment application was eventually in part resisted was not clearly pleaded, although, as the judge acknowledged, arguments relating to the notices served under section 17 of the Landlord and Tenant (Covenants) Act 1995, which the judge dealt with quite shortly, were clearly identified.

On the first main point which the judge did deal with, that is whether the covenant to be implied from section 24 of the Land Registration Act 1925 was an indemnity or a guarantee, the claimants were successful. On the secondary point, that the scope of the indemnity entered into by the defendant did not include claims against the defendant which resulted from the claimant’s decision to underwrite St James’ losses, the defendant resisted summary judgment on the judge’s decision that there was “something” in the submission of Mr Bannister QC sufficient to lift it from the realm of the “merely arguable” into the “more than fanciful”. If this had been the only point, the defendant would not, I think, have secured a positive costs order of the application for summary judgment in his favour.

But it was not the only point. In addition to succeeding on the indemnity/guarantee issue, the claimants succeeded on the VAT issue and, importantly, obtained judgment for a significant sum. It was admittedly a fraction of the total amount claimed, but that was properly reflected in the judge’s order which limited the costs of the summary judgment application to be paid by the defendant to 40%. In addition to this, the judge had been concerned with this action and application over a number of days and so had the feel of the case.

For these reasons, I would not interfere with his costs order.

I agree that, for the reasons given by the Vice-Chancellor, this appeal should be dismissed on all substantive issues. The doubts which I have entertained on the judge’s allocation of costs are resolved by the judgment of Lord Justice May. I will nevertheless take the liberty of explaining them, and of adding a word about a further problem on which this appeal has touched.

It may not be sufficient to rest an appellate judgment on the proposition that costs are in the judge’s discretion. Increasingly since the introduction of the Civil Procedure Rules, appellate courts have had to look more closely than they once did at how courts of first instance have allocated costs. It is right that this should be so, for in a situation in which legal fees can be massive and interlocutory costs are immediately payable, a mistaken or unjust costs order alone can ruin a party. This is not to say that every costs order which might have been different is appealable. It is to recognise that in the exercise of this as of all discretions, a fair judgment has to be made upon a proper appreciation of the relevant facts. It is only where, within such a framework, the decision can legitimately go more than one way that an unappealable discretion comes into play.

In the present case the assignor had secured summary judgment for only a fraction of what it had come to court to obtain. It seemed to me at the end of the argument that the worst that should have happened, from Mr Raguz’s point of view, is that the parties’ costs should have been left to lie where they fell. But the judgment of Lord Justice May has persuaded me that the judge’s award of costs does not represent a misapprehension of the balance of success and failure and is not otherwise inherently unjust. It follows that it lay within his discretion to make the award he did.

Attention was briefly given in argument to an issue which, in the light of our decision on the substantive merits, is academic but in other cases may be important. What are the obligations of a claimant and its lawyers (I am assuming a corporate claimant, but the issue affects natural persons too) when the latter are instructed to seek summary judgment but know, or ought to know, that their client has documents or knows facts which might afford a complete or partial defence to their claim and which would have to be disclosed if the claim went to trial?

Mr Stoner for the assignor suggested that in such a situation it would be incumbent on the lawyer to advise the client that it could not properly sign a statement of truth. The trouble is that no statement of truth is required on an application for summary judgment under CPR Part 24, unless the contents of the application notice are to be relied on as evidence: see CPR 22.1(1)(f), 22(3). But 24 PD 2(3) requires the application notice to state that “the applicant knows of no other reason why disposal of the claim or issue should await trial”, and to this, it may be, Mr Stoner’s suggestion would apply so as to limit at least what a solicitor or counsel can properly do or advise in the situation I have described.

Since the issue is one which in the nature of things is unlikely to arise in a litigation context (except retrospectively, and therefore without legal consequences, where summary judgment has been refused and documents or facts which undermine the claimant’s case have then been disclosed) it perhaps deserves the attention of the profession.