Islam v Ali

LORD JUSTICE AULD: This is an appeal by Mrs Afroza Ali, the defendant to a claim by Mr Abu Islam in the Central London County Court for remuneration for his services as a Chartered Accountant in running the accountancy business of her late husband. The judge, His Honour Judge Martineau, found for Mr Islam on his claim and gave him judgment for £12,746.41, inclusive of interest, and he ordered Mrs Ali to pay Mr Islam's costs of the action. It is against the costs order, not the judgment sum, that Mrs Ali appeals. She maintains that the judgment sum of over £12,000 does not truly represent a win for Mr Islam, but merely a relatively small balance in his favour between much larger sums in play and on an issue between them to the end.

To evaluate the rival contentions as to who won "the action", it is necessary first to summarise the facts, the issues raised in the action and the parties' respective without prejudice bargaining sallies as the matter proceeded to trial.

Mr Islam, at Mrs Ali's request, ran her late husband's accountancy practice for 26 months from May 1999 to July 2001. For the first 18 months he received all the monies of the practice into his account and paid all its outgoings, leaving him with a figure close to the net profit for that period of about £72,000. During the remaining eight months, at Mrs Ali's insistence, all the receipts and all the outgoings of the practice went through her account. For part of that period Mrs Ali, pursuant to an interim order in the proceedings which had then begun, paid Mr Islam according to the hours he worked at the rate of £3,000 for a full working month. She made two or three payments on that basis, but then failed to pay for the further five or six months during which Mr Islam continued to work, for which he should have received payment pursuant to the interim order. By his claim Mr Islam maintained that he was entitled to about £156,000, that is to say, in the region of £80,000 more than he had already received in net profits and monthly payments.

The basis of his claim was that he had agreed with Mrs Ali at the outset that he would in due course purchase the practice from her and that, in the meantime, he would run it for her and retain the net profits for himself. He also claimed that they had agreed that, if for any reason the purchase did not take place, she would pay him for his services in running the practice at his normal consultancy rate of £40 an hour for all the hours that he had worked in the practice, such basis, as I have indicated, producing a claim of about £156,000.

Mrs Ali, by her defence, disputed that she had agreed with Mr Islam that in due course he would purchase the practice, or that he could retain the profits of the practice while he ran it, or that she would pay him £40 an hour for his services in the event of the purchase not proceeding. She maintained that he had run the practice simply as her agent and that he was entitled to no more than reasonable remuneration for his services. However, it was only late in the day that her solicitors and counsel gave any indication of the basis upon which she asserted reasonable remuneration should be calculated, namely by reference to the net profits of the business. So she put Mr Islam to proof as to the amount of his claim and counterclaimed for an account of the monies she claimed he had received as her agent in running the practice.

Between January 2001 and October 2001, long before the trial of the action in July 2002, the parties respectively made various proposals and counterproposals with a view to settlement. Their most recent proposals before trial, each taking into account what Mr Islam had already received by way of net profits and monthly payments, showed that they were at least £60,000 apart. Mr Islam proposed that Mrs Ali should pay him £45,000, including interest, and £15,000 worth of costs. Mrs Ali, on the other hand, proposed that the matter should be disposed of by Mr Islam paying her costs of £15,000 plus disbursements. The amount awarded by the judge (£12,000 odd) was somewhat closer to Mr Islam's Part 36 offer than the offer or proposal of Mrs Ali, but they were both significantly distant in their opposite ways from the sum awarded.

In fixing on the sum of £12,746 by way of an award, after taking into account the monies already received by Mr Islam, the judge found against him on the various bases of his claim and for Mrs Ali on her contention that all he was entitled to was reasonable remuneration. Thus, he found that there was no agreement that Mr Islam could retain the profit of the practice pending any possible purchase of it by him. He found that there was no agreement contingent on that purchase not being effected that Mr Islam would receive £40 an hour for his services. All that he was entitled to, as Mrs Ali had conceded from the start, was a reasonable remuneration for his services in running the practice.

The only outstanding questions for the judge, therefore, were the basis of calculation of that reasonable remuneration and the amount of it.

As to the basis of the calculation of the reasonable remuneration, he again found against Mr Islam in his contention that it should be struck at an hourly rate. He found for Mrs Ali on her contention at trial that the appropriate method of calculation should have regard to the net profits that Mr Islam had been instrumental in earning for the practice during the time that he ran the business. The judge found, therefore, that Mrs Ali should have regard to the overall task that Mr Islam had undertaken in managing the business over the 26-month period and to the net profits that he had, as it turned out, achieved for it. On that approach, he considered that a reasonable remuneration for the first 18-month period would be a sum equivalent to the net profits for that period, identified in evidence as £71,067, and for the remaining eight months, when his input to the practice had been less, a sum of £18,394. That produced a total of £89,461 for reasonable remuneration, based on the net profits of the practice over the 26-month period.

The judge deducted £5,000 from that sum to reflect Mr Islam's gain from taking some of the practice's clients with him when he left. As is apparent from the figures, he made no award on either of two other claims that Mr Islam had made as to injury to his own professional activities in the meantime. That left £84,461, which, as I have said, when account was taken of the monies already in the hands of Mr Islam, left £12,746 inclusive of interest, the amount of the judge's award.

Mr Haukland, on behalf of Mrs Ali, acknowledged that the sum of £12,700 odd awarded was better than the most recent proposal that she had made. He also acknowledged that she could have fully protected her position by making an appropriate Part 36 payment beyond the £72,000 odd already in Mr Islam's possession. But, he said, looked at in the balance of the much larger competing sums in play, the award represented a figure some £80,000 lower than the sum of £156,000 that Mr Islam had claimed to the end.

He submitted that the judge should have had regard to two questions when considering whether it would be unjust to give Mr Islam his costs. The first question, he said, was who in truth had succeeded in the action when the case is looked at as a whole, the test of Lightman J in BCCI SA v Ali No 3 [1999] 149, NLJ 1734. The second question, he said, was what order for costs did justice require?

As to the first question, Mr Haukland submitted that Mrs Ali had won on all the critical or determinative issues in the action. She had won as a matter of principle. The proper basis of calculation of Mr Islam's entitlement was, as she had asserted from the start, one of reasonable remuneration for services rendered, one, moreover, in the assessment of which, net profits earned by him was an appropriate guide, as contended on her behalf at trial, not on an hourly professional rate for which he had contended, or, indeed, at any hourly professional rate.

As to the second question -- "What did justice require" -- Mr Haukland submitted that Mr Islam's success (if success it was) was, in the circumstances, very limited. He suggested that justice would best be done in the circumstances of the case by making no order as to costs. He maintained that this court would be entitled to substitute such an order for that of the judge because the judge had erred in principle in not asking or in not properly answering those two questions.

Mr Pliener for Mr Islam relied on the plain fact that he was monetarily the winner by the judge's award of £12,746, and that, as Mrs Ali had not taken the course of protection open to her by making a payment in, the judge was entitled to take the normal course of awarding Mr Islam all his costs. He submitted that it would not have been appropriate for the judge to decide the question of costs by comparing the respective offers made, in particular by penalising Mr Islam, the claimant, for pitching his Part 36 offer too high. He cited in support of that argument the judgment of Thomas J in Quorum v Schramm (No.2) [2002] 2 Lloyd's Reps 72, at page 79.

If comparison of their respective offers played any part in this, he submitted that the comparison favoured Mr Islam, since his Part 36 offer was closer to the sum awarded than Mrs Ali's counter offer. In any event, he submitted, even if Mr Islam's offer had not been closer to the mark, it would not have justified depriving him of his costs before he made it in October 2001 in the permitted time for its acceptance.

As to the considerable shortfall of £68,000 on Mr Islam's claim, based on his failed claim for remuneration of £40 an hour, Mr Pliener relied on the difficulty created for him by Mrs Ali in her failure to produce in good time before trial the practice's accounts to enable him to identify an alternative and lower claim based on net profits. If he had had that information, Mr Pliener maintained, he would have been better placed to consider and make an alternative and lower Part 36 offer to settle for a significantly lower sum than the £156,000 claimed. However, as Mr Pliener acknowledged, even when the practice's accounts became available, Mr Islam held to his £156,000 claim, that is £80,000 after giving credit for the money he had already received.

The general rule is that an unsuccessful party should pay the successful party's costs; see Civil Procedure Rules Part 44.3(2)(a). The trial judge, however, has a wide discretion in furtherance of the overriding objective of justice and fairness to make a different order; see Civil Procedure Rules Part 44.3(2)(b). In exercise of that discretion the judge should have regard to all the circumstances, including the conduct of the parties, for example, how they have respectively pitched and pursued their cases and whether a party has succeeded on part, if not all, of his case and to any payment in or offer made. I take that, with the examples I have added, from CPR Part 44.3(5).

It is, as both counsel have acknowledged, a wide discretion, and the Court of Appeal should only interfere with the judge's exercise of it if he has "exceeded the generous ambit within which reasonable disagreement is possible", a familiar passage taken now from the judgment of Brooke LJ in Tanfern v Cameron McDonald (Practice Note), 1 WLR 13, 11, at paragraph 32, citing Lord Fraser in G v G (Minors) CA [1985] 1 WLR 647, 652.

Another way of putting it, with a more direct focus on costs, is that the Court should only intervene where

To return to the general rule and to the judge's task, did he, within the broad ambit of his discretion, properly identify Mr Islam as the successful party, "the winner"?

Lord Woolf MR, as he then was, indicated in AEI Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507, at 1522-1524 G, that "success" is not to be measured in absolute terms. Orders departing from the general rule are appropriate where the degree of success is substantially less than absolute.

In my view, the reality of this case is that Mrs Ali was the winner. She was facing a claim substantially greater than the amount finally awarded. There were, as I have said, competing claims and offers, not only as to the manner of calculation of the amount due but as to the amount, an issue as to the latter ranging from nil to a balance of £80,000 after giving credit for the monies received. The sum of £12,746.41 ordered was arguably as limited a loss as it was a gain. And it emerged as a result, not only of Mr Islam losing the case on principle on the main issues in the case, but also as to the true amount due out of a very much larger claim. The disparity between what Mr Islam sought, including what he put Mrs Ali through to get it, and what he received was so large as to put the relatively small amount finally awarded in the balance between two rival contentions into relative insignificance.

In my view, the judge erred in principle in failing to have due regard in the exercise of his discretion to the fact that Mrs Ali had won the case in principle, or as near as could be, given the large competing sums being canvassed between the parties and the wide issue between them as to the proper basis of the claim. I would therefore allow the appeal.

As to the appropriate order that the court should make by way of substitution for that of the judge, Mr Pliener submitted, as a fall back contention, that Mr Islam should at least get some of his costs, if not all, and he suggested a proportion of about 75%. Mr Haukland maintained that the appropriate order would be no order as to costs, reflecting as near as could be the draw that the judge's order effectively amounted to.

In my view, the proper order should be that urged by Mr Haukland, no order as to costs, and to that extent, I would allow Mrs Ali's appeal.

LORD JUSTICE MUMMERY: I agree, for the reasons given by my Lord, that this appeal should be allowed.

On a proper analysis of the issues between the parties at trial Mrs Ali was the successful party in the contest between them. Although judgment was entered against her for £12,746.41, she had succeeded in resisting the very much larger claim by Mr Islam. That claim for remuneration was advanced on the basis of an hourly rate of £40 an hour for very many hours. He failed at trial to establish the basis of that claim. In my judgment, in the exercise of his discretion, the judge failed to take account of that relevant factor.

In refusing to grant permission to appeal against his order on costs, the judge said this in his note of 20th February 2003:

In my judgment the judge fell into error in the exercise of his discretion because there were, contrary to his view, special circumstances in this case and he failed to take them into account. The special circumstances were those identified by my Lord and focus principally on the question of the basis on which Mr Islam claimed that he should be remunerated. This court is therefore entitled to interfere with the judge's exercise of his discretion, and I agree with my Lord that no order as to costs would properly reflect the realities of the ultimate outcome of this litigation.

LORD JUSTICE AULD: The appeal is therefore allowed and in substitution of the judge's order as to costs, no order as to costs.