Alpha Chauffeurs Ltd. v Citygate Dealership Ltd. (t/a HR Owen) & Anor

We have had before us an appeal and cross-appeal from an order made on 21 May 2003 by Mr Ronald Walker QC, sitting as a Deputy judge of the High Court in the Queen’s Bench Division, in proceedings brought by Alpha Chauffeurs Limited against Citygate Dealership Limited (trading as H R Owen) and Lombard North Central Plc. The appeals are limited to those parts of the order which direct payment of the costs of the proceedings.

The proceedings arose out of the sale by H R Owen of a Rolls Royce Silver Dawn motor vehicle, registration R 138 VLT, for use by Alpha in its chauffeur hire business. A contract for the sale of the vehicle to Alpha was made in July 1997 upon terms that, prior to delivery, Alpha could direct that the transaction be effected by a sale to a nominated finance company and a purchase from that company on hire purchase terms. That is what happened. Finance for the purchase was provided by Lombard North Central; and the transaction was effected by a sale of the car by H R Owen to Lombard North Central in conjunction with a hire purchase agreement between Lombard North Central and Alpha. The hire purchase agreement is dated 7 October 1997.

Alpha did not find the car at all satisfactory. In May 1998, after making a series of complaints to H R Owen, it purported to reject the car by leaving it at the premises of another dealer, Jack Barclay Limited. But it did not inform Lombard North Central of what it had done. It continued to make payments of the monthly charges payable under the hire purchase agreement until the end of November 1998. On 25 November 1998 Alpha informed Lombard North Central that it was stopping further payments; and it claimed reimbursement of the purchase price and compensation. Lombard North Central terminated the hire purchase agreement in March 1999. These proceedings were commenced by the issue of a claim form on 20 May 1999.

By its particulars of claim Alpha sought against Lombard North Central a declaration that the hire purchase agreement had been rescinded; return of the monies paid under that agreement; and damages in an aggregate amount of £145,000 odd - of which the principal claim was in respect of loss of profit. There was, in addition, a claim against H R Owen for damages for breach of collateral warranty. On 16 July 1999, Lombard North Central served a defence and counter claim. Unsurprisingly, it denied responsibility for whatever warranties had been made by the dealer. It relied upon clause 3.10 of the hire purchase agreement, which was in these terms:

“Since you have chosen the goods and we have not inspected them, we do not make or give any representation or undertaking (express or implied) about the condition, description, quality or performance of the goods about their fitness for any particular purpose. Such representations and undertakings are specifically excluded”.

By counter claim Lombard North Central sought payment of monies due under the hire purchase agreement from 7 December 1998 (when payments ceased) to 23 March 1999, (when, following demand for payment, the agreement was treated as having been repudiated).

H R Owen served its defence to Alpha’s claim a few days later, on 21 June 1999. It denied having given the warranties alleged; and denied that the car was unfit for the purpose for which it was supplied. It was said that such defects as there were had been rectified under the manufacturer’s warranty before the purported rejection by Alpha in May 1998. On the same day, 21 June 1999, Lombard North Central served a Part 20 Notice on H R Owen seeking indemnity against Alpha’s claims in the action.

Some two years passed without any significant progress having been made towards a trial of the proceedings. In or about June 2001 Alpha served amended particulars of claim, raising a new case against H R Owen based on the contract for sale made in July 1997. It was said that Alpha entered into that contract in reliance on representations which were then made to it . The claim against H R Owen for damages for breach of the July 1997 contract included a claim for an amount equal to the amount claimed by Lombard North Central under the hire purchase agreement. An amended defence was served on behalf of H R Owen in July 2001 denying the alleged representations.

The action and Part 20 claim came on for trial before the deputy judge in February 2002. His judgment, of which we have been provided with a draft, was handed down on 13 May 2002.

The judge addressed, first, Alpha’s claim against H R Owen. He rejected the claim based on misrepresentation and collateral warranty. He was not satisfied that whatever statements were made were intended or understood to have contractual effect. But, after some prompting from the judge, Alpha’s particulars of claim had been amended at trial to plead against H R Owen a breach of the terms implied under sections 14(2) and (3) of the Sale of Goods Act 1979. The claim succeeded on that basis. The judge said this:

“Having decided that those terms applied I have no hesitation in finding that H R Owen was in breach of both of them. As to section 14(2) I find that the car delivered to Alpha did not meet the standard that a reasonable person would regard as satisfactory for a new Rolls Royce motor car costing £112,000. The defects which manifested themselves and persisted during the period of six months following delivery of the vehicle, some of which were minor, but some of which were not (I have in mind in particular the intractable problems with the dashboard warning lights), combined to render the quality of the car far from satisfactory. Likewise, I accept the evidence of the Claimant’s witnesses to the effect that the defects, if they manifested themselves in the presence of clients of the kind that Alpha was seeking to and did attract, would give rise to embarrassment such that the car was not reasonably fit for the purpose of being used as a chauffeur hire car at the very top of the market; accordingly H R Owen was also in breach of the term implied by section 14(3).”

The judge then turned to claims between Alpha and Lombard North Central. In that context Alpha relied on the equivalent terms implied under sections 10(2) and (3) of the Supply of Goods (Implied Terms) Act 1973. The judge rejected the claim under section 10(3) of that Act (fitness for purpose); but accepted that section 10(2) (satisfactory quality) was in point. In reaching that conclusion he rejected Lombard North Central’s contention, under section 10(2C) of the 1973 Act, that the faults of which Alpha complained had been, or ought to have been, known to it before the date of the hire purchase agreement (7 October 1997). In the light of the judge’s conclusion that there had been a breach of the term implied by section 10(2) of 1973 Act; counsel for Lombard North Central accepted that (but for defences of affirmation, lapse of time, absence of defects at the date of rejection and the impossibility of restitutio in integrum - all of which the judge rejected) there was no answer to Alpha’s claim that it had been entitled to rescind the hire purchase agreement and to be repaid all monies paid by it under that agreement. It followed that Lombard North Central’s counter-claim for payment under the hire purchase agreement failed. It followed, also, that Alpha’s claim against H R Owen for the payments which it had made to Lombard North Central under the hire purchase agreement fell away.

The judge addressed the question what damages were recoverable by Alpha for breach by H R Owen of the terms implied by sections 14(2) and (3) of the Sale of Goods Act 1979. He held that there was no evidence of loss prior to 7 October 1997. He was not satisfied that claims for loss of profits or for wasted expenditure had been established. He said this:

“It follows that in my judgment the only substantial claim upon which Alpha is entitled to succeed is its restitutionary claim against Lombard. Against H R Owen it is entitled only to nominal damages, which I assess at £2.”

Payments made by Alpha under the hire purchase agreement were taken to be £55,937. The judge adjusted that figure downwards by £8,075 to allow for benefits which Alpha had received for use of the vehicle, deterioration and storage charges. Accordingly, he awarded an amount of £47,862 in respect of Alpha’s claim against Lombard North Central.

The judge then turned to the Part 20 claim. He accepted, on the basis of the facts which he had found, that H R Owen was in breach of terms implied in its contract for sale of the car to Lombard North Central; but he rejected Lombard North Central’s claim for indemnity. He said this:

“The measure of damages is not, however, an indemnity in respect of Alpha’s claim. It is (ignoring litigation costs) the loss of the value of Lombard’s agreement with Alpha, valued on the assumption that the car had not been defective, less the value of the car when Alpha rescinded the hire purchase agreement.”

On that basis he held that Lombard North Central was entitled to damages against H R Owen on its Part 20 claim in the amount of £41,219.

There are no appeals against the substantive findings of fact or law made by the judge. In the result, therefore:

After handing down judgment on the morning of 13 May 2002, the judge heard submissions that afternoon as to the costs orders which should be made in the light of that judgment. In the course of those submissions he was told that H R Owen had made a Part 36 payment of £15,000 on 24 January 2002 in respect of Alpha’s claim - a claim then based on misrepresentation and collateral warranty. H R Owen had made no Part 36 payment - and no offer - in respect of Lombard North Central’s Part 20 claim. In giving judgment on the costs issues, the judge said this:

“As to costs, I have heard detailed submissions, and I have taken into account, I hope, all the points that have been urged upon me. The claimant has substantially succeeded and has had to come to court to recover a substantial sum of money. However, it has pursued heads of claim on which it has failed, and I am satisfied that the costs incurred in the pursuit and defence of those heads of claim have been substantial. Of course, the trial would need to have taken place anyway, so that the trial costs would have been incurred, but, in my judgment, considerable time would have been saved had those claims been pursued and considerable investigation costs would have been avoided.

The first defendant [H R Owen] made a Part 36 payment into court of £15,000 on 24 January 2002, but made no offer or payment in respect of the second defendant’s Part 20 proceedings. The second defendant itself made no Part 36 payment or, so far as I am aware, offer to the claimant, defended and persisted in the defence of the claim and in its counterclaim.”

The orders as to costs which the judge made were as follows:

Lombard North Central appeals against paragraphs 6 and 7 of that order with permission granted by this Court (Lord Justice Mance) on 23 September 2002. Alpha appeals (by respondent’s notice filed on 9 October 2002) against paragraph 5 of that order. H R Owen does not appeal; but has filed a respondent’s notice seeking to uphold the judge’s order on grounds which are more detailed than those which the judge himself gave.

The power to determine by whom and to what extent the costs of proceedings in the High Court are to be paid is conferred by section 51(3) of the Supreme Court Act 1981. The power is exercisable by the Court and in its discretion - see section 51(1) of that Act and CPR 44.3(1). If the Court decides to make an order about costs, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but the Court may make a different order - see CPR 44.3(2). In deciding what order (if any) to make about costs the Court is required to have regard to all the circumstances; including, in particular, those matters set out in CPR 44.3(4). An appellate court ought not to interfere with an order made by a judge in the exercise of his discretion unless it is satisfied that the judge has erred in principle; has taken into account matters which he should not have taken into account; has left out of account matters which he ought to have taken into account; or has made an order which is so plainly wrong that the exercise by the judge of the discretionary power entrusted to him must have been flawed.

It follows that the first question for this Court, on an appeal from an order as to costs, is whether the order was one which, in a proper exercise of his discretion, the judge was entitled to make. Unless satisfied that the judge was not entitled to make the order that he did, the Court must respect his decision. It must resist the temptation to substitute the order which it thinks it would, itself, have made if it had been exercising the power which the judge was required, and entitled, to exercise.

In considering whether the costs orders which are now under appeal were orders which the judge was entitled to make, it is necessary to have in mind that, in broad terms (i) Alpha was the successful party in this litigation, (ii) H R Owen and Lombard North Central were unsuccessful, as against Alpha, and (iii) that, as between H R Owen and Lombard North Central, the burden of satisfying Alpha’s claim is to be borne by H R Owen. Application of the general rule, therefore, would lead to the conclusion that the costs of this litigation should fall on H R Owen.

That is not the effect of the costs orders which the judge has made. Ignoring, for the moment, the cost of Alpha’s direct claim against H R Owen (which, in substance, failed) and the cost of Lombard North Central’s unsuccessful counter claim against Alpha (the costs of which fall wholly upon Lombard North Central), it can be seen that the orders contain five elements: (i) Lombard North Central bears its own costs of the action; (ii) Lombard North Central bears 80% of Alpha’s costs of the action (including Alpha’s costs of pursuing its direct claim against H R Owen); (iii) Lombard North Central bears 80% of the costs incurred by H R Owen in resisting Alpha’s direct claim after the Part 36 payment had been made on 24 January 2002; (iv) H R Owen bears its own costs of the action down to 24 January 2002; and (v) H R Owen bears both its own costs and Lombard North Central’s costs of the Part 20 proceedings. The burden of the costs of the action (including the costs attributable to Alpha’s direct claim against H R Owen) falls on Lombard North Central; not on H R Owen. In particular, the order made in the Part 20 proceedings does not have the effect (as might have been expected on the application of the general rule) of passing that burden on to H R Owen. But the burden is mitigated, to some extent, by the restriction of the costs payable to Alpha to 80% of its costs of the action.

It is, therefore, both appropriate and necessary, to ask why the judge made costs orders which have the effect which I have described. I have already set out the reasons which he gave. It is, I think, reasonably clear why he took the view that Alpha should be restricted to 80% of the costs of the action. He was satisfied that costs had been needlessly incurred in the pursuit of heads of claim on which Alpha had failed. It is plain that he had in mind the costs of pursuing the claims based on allegations of misrepresentation and collateral warranty; and the costs of pursuing the claim for loss of profits. In so far as Alpha (who has sought to appear in this Court by one its directors, Mr Yuen) seeks to challenge the judge’s decision to restrict the costs of the action which it is to recover against Lombard North Central to 80%, that challenge must fail. In relation to that point the judge was clearly entitled to take the view that he did for the reasons which he gave.

It is, however, much less clear why the judge took the view that the burden of the costs of the action (including costs attributable to Alpha’s direct claim against H R Owen) should fall on Lombard North Central alone. The reasons which he gave were (i) that H R Owen had made a Part 36 payment into Court on 24 January 2002 and (ii) that Lombard North Central made no Part 36 payment or offer to Alpha; but had persisted in its defence of Alpha’s claim.

On a proper analysis, the first of those reasons is irrelevant, both as between Alpha and H R Owen and, more pertinently, as between Lombard North Central and H R Owen. The Part 36 payment is irrelevant as between Alpha and H R Owen because the claims in response of which it was made - the claims based on allegations of misrepresentation and collateral warranty - were claims on which Alpha failed in any event. On a true analysis, H R Owen would have been entitled to the costs of those issues whether or not it had made a Part 36 payment in January 2002. The claims on which Alpha succeeded against H R Owen - the claims under sections 14 (2) and (3) of Sale of Goods Act 1979 - were first introduced by amendment at the trial. But on those claims Alpha was awarded nominal damages only. An order that Alpha pay H R Owen’s costs in relation to claims which failed - or which (having been introduced by amendment at the trial) led to an award of nominal damages only - would have been fully justified whether or not the Part 36 payment had been made in January 2002. And the fact that a Part 36 payment was made in respect of Alpha’s direct claims against H R Owen in the action is of no relevance in relation to Alpha’s claim against Lombard North Central or to H R Owen’s liability - indirectly, as defendant to the Part 20 claim - in relation to those claims. In that context the relevant consideration is that neither H R Owen (in the Part 20 proceedings) nor Lombard North Central (in the action) made any Part 36 payment or offer - or, so far as the judge was aware, any other offer.

The judge appreciated that neither H R Owen nor Lombard North Central had made any Part 36 payment in relation to the claims against Lombard North Central (for which H R Owen was held liable indirectly). He referred to that in his reasons. The absence of any Part 36 payment justified an order that Lombard North Central should pay Alpha’s costs of pursuing its claims against Lombard North Central - or, more accurately, led to the position in which Lombard North Central had not protected itself against the order for costs which would follow (on an application of the general rule) from Alpha’s successful pursuit of those claims - but it provided no reason for denying Lombard North Central an order, in the Part 20 proceedings, that H R Owen should bear not only the costs of those proceedings but also the costs incurred by Lombard North Central, and the costs for which Lombard North Central was liable, in the unsuccessful defence of the action. In so far as the judge thought that the absence of any Part 36 payment in relation to the claims against Lombard North Central (for which H R Owen was liable indirectly) was a reason for making costs orders under which the burden of the costs of the action fell on Lombard North Central (and not H R Owen) he was in error.

The judge was in error, also, in so far as he thought that the fact that Lombard North Central had, as he put it, “defended and persisted in the defence of the claim” was a reason for denying Lombard North Central an order in the Part 20 proceedings that H R Owen should bear the costs incurred by Lombard North Central, and for which Lombard North Central was liable, in the event (which had happened) that that defence was unsuccessful. A Part 20 claim is defined to include a claim by a defendant against any person (whether or not a party) for contribution or indemnity - see CPR 20.2(1)(b). The purpose of Part 20 is to enable Part 20 claims to be managed in the most convenient and effective manner - see CPR 20.1. The Court is required to ensure that, so far as practicable, the Part 20 claim and the main claim are managed together - CPR 20.13(2); and, in deciding whether the Part 20 claim should be dealt with with the main claim by the claimant against the defendant, to have regard to the matters set out in CPR 20.9(2). This was obviously a case in which the Part 20 claim and the claim in the action against the Part 20 claimant, Lombard North Central, should have been heard together. No one has suggested - or could have suggested - otherwise. In a case such as this the Part 20 claimant cannot sensibly compromise with the claimant in the main action at a time when the Part 20 defendant is denying liability. Lombard North Central had no independent knowledge of the state of the vehicle which H R Owen had sold and Alpha had purchased. Lombard North Central had not inspected the vehicle at the time of the transaction in 1997; and no one would have expected that it would. Lombard North Central could not sensibly contemplate a trial to determine whether the vehicle was in such a condition that the ultimate purchaser was entitled to reject it at which either Alpha or H R Owen did not take part. So it was not in the least surprising that Lombard North Central was persisting in its defence to Alpha’s claim in the action at a time when H R Owen was denying liability in the Part 20 proceedings. That was not a ground upon which a departure from the general rule - that the unsuccessful party bears the costs of litigation - could be justified.

This Court is faced, therefore, with costs orders which lead to a result in which, contrary to the general rule, the burden of costs has not fallen on the party against whom, in substance, judgment has been given in the proceedings taken as a whole. And it is faced with an order which leads to that result in circumstances in which the reasons which the judge has given do not provide any support for that result. If the judge thought that they did, then - in my view - he fell into error. If he did not think so, then he has given no reasons to support a result which - because it departs so significantly from that to which application of the general rule would lead - cannot be supported without explanation.

Mr Gunning, who appears in this Court on behalf of H R Owen as he did in the court below, has drawn attention to the fact that the judge said that he had taken into account the detailed submissions as to costs which had been made to him. On the basis of that observation by the judge, Mr Gunning has sought to persuade us that the judge must have accepted the arguments which he, Mr Gunning, had put to him; and that, although unacknowledged in the reasons which the judge gave, it must have been those arguments which provided the reasons for the costs orders which the judge made.

For my part, I would accept that there are many cases in which it can be seen, from examination of the arguments put before a judge, what it is that has led him to make the order as to costs which he has made. But this is not one of those cases. The underlying issue in this case was whether the condition of the vehicle, on delivery in October 1997 and thereafter, was such that Alpha was entitled to reject it, and to rescind the hire purchase agreement. On that issue H R Owen and Lombard North Central made common cause. It was impossible for the judge to hold that, on that underlying issue, Lombard North Central was advancing a case of its own, distinct from and inconsistent with the case that was advanced by H R Owen. There were, of course, subsidiary issues on which the interests of Lombard North Central and H R Owen differed - and there was Lombard North Central’s counterclaim for payment under the hire purchase agreement in which H R Owen had a conflicting interest - but the issue underlying Lombard North Central’s defence in the action and H R Owen’s defence to the Part 20 claim was the same. The judge could not have accepted the arguments advanced by Mr Gunning on behalf of H R Owen in the course of his submissions on costs. If he did (which I doubt) he was led astray.

It follows - in my view - that this is one of those comparatively rare cases in which (without hearing an appeal on the substantive parts of the order below) this Court is entitled - indeed, bound - to interfere with the order for costs made in the court below. It is entitled and bound to do so because it is satisfied that the judge has exercised the discretionary power entrusted to him on a basis which can be seen to be flawed. The question, then, is what order should this Court make.

We were invited by Alpha - in its notice of cross appeal - to substitute for paragraph 5 of the judge’s order an order that H R Owen pay 80% of Alpha’s costs in the action. Indeed, Mr Yuen, appearing on the appeal as a director of Alpha, invited us to order that both Lombard North Central and H R Owen pay 100% of Alpha’s costs. I am not persuaded that it would be right to accept either invitation. In my view, on the facts of this case, it was never necessary for Alpha to pursue a direct claim against H R Owen; and the attempt to do so was misconceived. Alpha’s true claim was against Lombard North Central; H R Owen’s proper role in the proceedings was as defendant to Lombard North Central’s Part 20 claim. In the events which happened it seems to me that Alpha could have accepted the Part 36 payment made by H R Owen in January 2002; taken the £15,000; obtained an order for its costs down to that date; and still pursued its claim against Lombard North Central. For reasons which no doubt seemed good to Alpha or its advisors at the time it did not do so. In the result it has been ordered to pay the costs incurred by H R Owen from the date of the Part 36 payment. That might be thought to be an order which was generous to Alpha in the circumstances; but, as H R Owen have not appealed from paragraph 5, I would not think it right to make a different order. I would make it clear, however, that the costs to be paid by Alpha under paragraph 5 do not include any costs attributable to H R Owen’s defence of the Part 20 claim. Those fall under paragraph 7.

I would not go behind the judge’s view that the costs of the actions to be paid by Lombard North Central under paragraph 6 should be limited to 80%; for the reasons that I have already given. But I would exclude from those costs (i) costs attributable only to Alpha’s claim against H R Owen and (ii) costs payable by Alpha to H R Owen under paragraph 5. I can see no reason why Lombard North Central should be required to pay any part of the costs of Alpha’s direct claim against H R Owen - a claim which, as I have said, I regard as conceived in error and pursued without proper evaluation. I would not disturb the order that Lombard North Central pay the whole of the costs of the counter claim.

In my view the costs of the action for which Lombard North Central is made liable to Alpha under paragraph 6, and Lombard North Central’s own costs of defending the claim in the action, should be passed on to H R Owen under paragraph 7. That gives effect to the general rule - from which I can see no reason to depart in this case - that the costs of litigation should be borne by the party who is unsuccessful.

It follows that the order which I would propose is that paragraphs 6 and 7 of the order of 13 May 2002 be set aside; and that there be substituted in the place of those paragraphs:

“6.

The second defendant pay (i) 80% of the claimant’s costs of the action (there being excluded from the costs payable under this paragraph costs wholly attributable to the claimant’s claims against the first defendant and any costs payable by the claimant to the first defendant under paragraph 5 of this order) and (ii) the claimant’s costs of the second defendant’s counter-claim.

7.

The first defendant pay the second defendant’s costs of the action and of the Part 20 proceedings (such costs to include the costs payable by the second defendant to the claimant under sub-paragraph (i) of paragraph 6 of this order but not those payable under sub-paragraph (ii) of that paragraph or the second defendant’s own costs of its counter claim).”