Kostic v Chaplin & Ors

On 2 November 2007 I heard argument on the questions of costs which arise following the judgment which I handed down on 15 October. The positions of the two main parties are diametrically opposed, and the amounts at stake are very considerable (the total costs incurred to date on both sides are of the order of £900,000). I therefore decided to reserve my judgment.

The difference of approach between Zoran, who has of course succeeded in the action, on the one hand, and the CPA, which has unsuccessfully sought to uphold the 1988 or 1989 Wills, on the other hand, could hardly be more stark. The primary submission advanced on behalf of Zoran by Miss Montgomery QC is that the first and second defendants should pay his costs from 29 May 2007, including all the costs of the trial before me in July, on the indemnity basis together with interest at 10% above base rate, and that they should pay all his costs down to that date on the standard basis. By contrast, the primary submission of Mr Simmonds QC for the CPA is that the first and second defendants should be awarded all their costs of opposing Zoran’s claim, including the costs of the trial, out of Bane’s estate on the standard basis. Since Zoran is, in the event, the sole beneficiary of his father’s estate, the effect of making an order in these terms would be to cast upon him the burden of all the costs incurred by the CPA in opposing his successful claim, subject only to detailed assessment if the amount of those costs could not be agreed.

I shall begin by attempting to identify the relevant principles which should guide me.

The costs of a contentious probate action, like those of any other civil claim, are within the discretion of the court, and CPR Parts 43 and 44 will apply. The general rule, enshrined in CPR 44.3(2)(a), is that the unsuccessful party will be ordered to pay the costs of the successful party, or in other words that costs follow the event. However, sub-paragraph (2)(b) provides that the court may make a different order, and it was common ground before me that in contentious probate claims there are two long-established exceptions to the general rule which have survived the introduction of the CPR and are still valid. Miss Montogomery did, however, reserve the right to argue in a higher court that the exceptions have now been replaced by the provisions of the CPR. For what it is worth, my own view is that the position is indeed now governed by the CPR, but the considerations of policy and fairness which underlie the two exceptions remain as valid today as they were before the introduction of the CPR, and they should therefore continue to guide the court in deciding whether it is appropriate to depart from the general rule and to make a “different order” pursuant to sub-paragraph (2)(b).

The two exceptions were stated as follows by Sir Gorell Barnes P in Spiers v English [1907] P 122 at 123:

This statement of principle makes it clear, in my judgment, that a positive case has to be made out before departing from the general rule that costs should follow the event, and also that “the two great principles upon which the court acts” are neither exhaustive nor rigidly prescriptive. They are guidelines, not straitjackets, and their application will depend on the facts of the particular case. The important distinction between the two exceptions to the general rule is, of course, that where the first exception applies the unsuccessful party may be awarded his costs out of the estate, whereas if the case is merely one where “the circumstances lead reasonably to an investigation of the matter”, the appropriate order is likely to be that each side will be left to bear its own costs.

What is meant, for the purposes of the first exception, by saying that the testator has been “really the cause of the litigation”? And what is meant, for the purposes of the second exception, by saying that “the circumstances lead reasonably to an investigation of the matter”? There are at least four earlier cases which throw some light on these questions, and I will now consider them in turn.

In Mitchell v Gard (1863) 3 Sw.&Tr. 275 the relevant principles were stated for the first time by Sir James Wilde (the future Lord Penzance) hearing an application by the next of kin of the deceased, who had unsuccessfully opposed the will in a testamentary suit tried before Byles J and a jury, for their costs to be paid out of the estate. Sir James Wilde said this at 277-8:

Although Sir James Wilde framed his first rule in terms of blame and fault, it is in my view reasonably clear that he did not necessarily mean moral fault or culpability, but rather that the touchstone should be whether it was the testator’s own conduct which had led to his will “being surrounded with confusion or uncertainty in law or fact”. If that causal test is satisfied, it should not in my judgment matter for the purposes of the first rule whether the problem is one relating to the state in which the deceased has left his testamentary papers (for example where a will cannot be found, or where there is a question whether a will has been revoked), or whether the problem relates to the capacity of the deceased to make a will. I do not, therefore, read Sir James Wilde’s formulation of the second rule as implying that an unsuccessful challenge to (or defence of) a will on grounds of want of knowledge and approval, lack of due execution or mental incapacity can never come within the scope of the first rule, but rather as being intended to provide guidance in cases where, on the facts, the first rule is not engaged.

I would also point out that at 279 the judge noted the difficulty of extracting any general rule from the earlier case law, and said that his two rules were designed to strike a balance between two principles of high public importance, the first being that “parties should not be tempted into a fruitless litigation by the knowledge that their costs will be defrayed by others”, and the other being that “doubtful wills should not pass easily into proof by reason of the cost of opposing them”.

In Davies v Gregory (1873) LR 3 P&D 28, Sir James Hannen, giving a reserved judgment on costs after hearing an action in which he had pronounced in favour of a will, held that (to quote the head note):

After giving some instructive examples of cases where the first rule had been applied, Sir James Hannen went on at 33 to explain in what circumstances each party ought to pay his own costs:

Two months after Davies v Gregory Sir James Hannen presided over another probate action which was tried before him and a special jury, Boughton v Knight (1873) LR 3 P&D 64. The issue in the case was testamentary capacity, and the jury found that the testator had not been of sound mind, memory and understanding when he made the will propounded by the plaintiffs. The judge’s direction to the jury on the subject of testamentary capacity was based on the recent decision in Banks v Goodfellow, to which he had been party as a member of the court. However, the importance of the case for present purposes lies in the judge’s decision on costs, which is accurately summarised in the headnote as follows:

Sir James Hannen’s comments at 78-9 on the absence of any necessary correlation between eccentricity and testamentary incapacity are in my view apposite to the present case. He said at 78:

Finally, in Twist v Tye [1902] P 92 Sir Gorell Barnes distinguished Boughton v Knight in holding that costs should follow the event in a case where the three plaintiff executors, who had unsuccessfully propounded a will, were also residuary legatees under the will, had themselves managed the deceased’s affairs before she made it, and had had ample opportunity of forming an opinion as to her testamentary capacity. The case was therefore not one within the first exception, “because these three gentlemen were as much parties or privy to the making of the documents as she was herself”. They had not acted improperly, but they had taken a view about the testatrix which turned out to be mistaken: see page 97. Nor was it a case where there should be no order as to costs, because the truth of the matter was that the executors had taken a view and acted upon it, in circumstances where they stood to benefit if the will was upheld. There was accordingly nothing to warrant a departure from the general rule that costs should follow the event: see page 98.

I should also refer to two cases in the Court of Appeal subsequent to Spiers v English, namely Re Plant deceased [1926] P 139 and Re Cutliffe’s Estate [1959] P 6.

The position in Re Plant was one of some procedural complexity, and the decision was mainly concerned with the right of an executor to his costs out of the estate unless he has acted unreasonably. The court was also divided on the appropriate order to be made on the facts. However, two members of the court endorsed the general rules stated by Sir Gorell Barnes P in Twist v Tye and Spiers v English (see per Lord Hanworth MR at 147-9 and Scrutton LJ at 152-3), although Scrutton LJ added this salutary warning at 152:

In Re Cutliffe the Court of Appeal dismissed an appeal on costs from the trial judge (Collingwood J) who had ordered costs to follow the event in a case with highly unusual facts where the unsuccessful defendants had pleaded undue influence as well as lack of due execution and want of knowledge and approval, and their evidence had been disbelieved. In those circumstances it is hardly surprising that the Court of Appeal were unreceptive to the argument that the judge had erred in principle by failing to apply either of the exceptions in Spiers v English. The leading judgment was given by Hodson LJ, who at 16 referred to Spiers v English as “the most convenient case in which to find the principles on which the Probate Court exercises its discretion as to costs”. At 19 he rejected a submission that the testator had himself been responsible for the litigation by making various confusing and inconsistent statements about his testamentary intentions in the final weeks of his life, and said that the first exception in Spiers v English should not extend to a case where the testator has by his words misled other people or inspired false hopes that they would benefit after his death. With regard to the first exception, he drew a parallel with the position on a construction summons where the testator has used language which is difficult to understand, and where he, either in person or through his solicitor, has created the difficulty. In such cases the costs are normally borne by the estate. He said that a similar rule applies in probate actions where, for example, execution of the will is on the face of it doubtful, and there are grounds to make a handwriting expert suggest that the signature was a forgery.

Morris LJ began his judgment at 21 by saying:

According to the report of the argument in Re Cutliffe at 11-12, Hodson LJ said that the old decisions, including Davies v Gregory, had been superseded by the principles stated in Spiers v English. However, I do not read this observation as implying that in his view the first exception was incapable of application in a case like Davies v Gregory where the testator’s conduct had given rise to a trial on the issue of lack of testamentary capacity. Furthermore, even if that was Hodson LJ’s view, it was obiter and does not seem to me to form part of the ratio of his judgment, which went no further than endorsing the correctness of the two general principles in Spiers v English.

I mention this point because Miss Montgomery QC referred me to an unreported decision of Mr Nicholas Warren QC (as he then was) sitting as a deputy High Court judge, Francis Hoff and others v Mary Atherton [2004] EWHC 2007 (Ch), where he reviewed the cases and quoted extensively from the report of the argument in Re Cutliffe. In the light of that review, he expressed the view in paragraphs 6 and 7 of his judgment on costs that a challenge to testamentary capacity falls within the second exception in Spiers v English and not the first. If he meant to imply that a challenge to testamentary capacity could never fall within the first exception, and that costs could no longer properly be ordered out of the estate in a case like Boughton v Knight, I would, for the reasons which I have already given, respectfully disagree. However, it is I think fair to say that the trend of the more recent authorities has been to encourage a very careful scrutiny of any case in which the first exception is said to apply, and to narrow rather than extend the circumstances in which it will be held to be engaged. There are at least two factors which have in my judgment contributed to this change of emphasis. First, less importance is attached today than it was in Victorian times to the independent duty of the court to investigate the circumstances in which a will was executed and to satisfy itself as to its validity. Secondly, the courts are increasingly alert to the dangers of encouraging litigation, and discouraging settlement of doubtful claims at an early stage, if costs are allowed out of the estate to the unsuccessful party.

In the light of these principles, I begin by asking myself whether (and, if so, down to what date) it is reasonable to regard Bane as having been, to quote the first exception in Spiers v English, “really the cause of the litigation”. Or as Morris LJ put it in Re Cutliffe, was he “in any way responsible for the litigation”?

Leaving aside for the moment the state of knowledge of the CPA, it seems to me that in the highly unusual circumstances of the present case Bane’s conduct may properly be regarded as the primary cause of the issue between Zoran and the CPA as to whether he had testamentary capacity when he made the 1988 and 1989 Wills. It would, of course, be absurd to blame Bane in any moral sense for the mental illness which had overtaken him by the mid 1980s, or for the various manifestations of that illness in his behaviour and his relationship with members of his family. But his delusions were so far-reaching, and manifested at times in such strange behaviour, and such bizarre correspondence, that a challenge to his testamentary capacity after his death was all but inevitable.

However, as the case law shows, it can be a very difficult question to determine the precise point at which eccentricity shades into incapacity as formulated in Banks v Goodfellow, and the extent to which established delusions may affect particular testamentary dispositions. That is particularly so where, as in the present case, the testator has not sought treatment for his mental illness, with the result that there is no medical evidence of any significance based upon examination of him as a patient during his lifetime, and where the testator’s behaviour and intellect are apparently normal and unimpaired in many every day contexts, including the management of his business and financial affairs. Resolution of the question in a case of this nature will depend on a detailed examination of all the available evidence and an assessment of the opinions of expert psychiatrists, who will themselves need to be supplied with all the relevant material before they can express a concluded view.

In these circumstances, and subject to consideration of the CPA’s state of knowledge, my preliminary view is that the CPA was fully justified in investigating the issue of Bane’s testamentary capacity once Zoran’s claim to challenge the 1989 Will had first been advanced on a formal basis in a letter from his solicitors, Allen & Overy, dated 17 January 2006, and that the CPA’s costs of investigating the claim should come out of the estate at least down to the stage where a realistic assessment of the merits of the claim could first properly be made.

I must now consider whether this preliminary conclusion is altered in any way by the CPA’s state of knowledge, either actual or imputed, during Bane’s lifetime. The conclusion which I have reached is that it should not, for the following main reasons.

For these reasons, I see no cause to modify the preliminary view expressed in paragraph 25 above, and the next question I have to consider is the stage down to which I should order the CPA’s costs to be paid out of the estate. At this point I remind myself that the CPA is not propounding either of the disputed Wills as an executor, and that its interest in the dispute is as a beneficiary, albeit for the ultimate benefit of the Conservative Party. Furthermore, the CPA has had the benefit of skilled legal advice from at least January 2006 onwards. Against this background, I consider that the costs of the trial itself, at the very least, should follow the event in the usual way. The CPA, acting on advice, and with the benefit of Professor Howard’s expert report, took the view that Bane did have testamentary capacity, and persisted in that view despite the very strong opposing evidence in support of Zoran’s case, and although the burden lay upon the CPA to prove that Bane did have testamentary capacity, not upon Zoran to prove the contrary. This was in my opinion an essentially commercial decision, and one which in the modern world cannot expect to attract any special treatment of the costs incurred by either side in consequence of it. As in Twist v Tye, the CPA took a view, in its own financial interests, which the court has found to be mistaken.

In my view the cut off date for payment of the CPA’s costs out of the estate should be fixed at a fairly early stage in the litigation, when the nature of Zoran’s case and the evidence in support of it had been explained to the CPA, and the CPA had had an adequate opportunity to consider its position, to gather information, and to decide whether or not to contest the proceedings. Various possible dates were canvassed before me in argument, and I do not propose to review them in detail. The date which I have selected is 18 October 2006, that being the date of a Consent Order for disclosure, exchange of witness statements, expert evidence and listing of the case for trial, after the withdrawal of Zoran’s application for summary judgment on 9 October.

By that stage, the following events had taken place:

By this stage, the CPA can in my judgment have been in no reasonable doubt about the general nature and strength of Zoran’s case, and the CPA had also had enough time to consider its position, to review the sources of factual evidence that were likely to be available, and to seek expert medical advice, albeit on a provisional basis which might require reconsideration as and when further material became available. However, Zoran had in my judgment acted unreasonably and over-hastily in making an application for summary judgment before the CPA had even filed its Defence, and in persisting with the application over the summer and early autumn of 2006. In my view a case of the present type is intrinsically unsuited to summary determination, as it will turn on a careful review of all the available evidence, including the medical evidence, at trial. I therefore take the view that the application for summary judgment was misconceived, and it was also prosecuted by Zoran and his solicitors in an unnecessarily aggressive fashion. Accordingly, if I had selected an earlier cut off date for the CPA’s costs to come out of the estate, I would in any event have ordered Zoran to pay the CPA’s costs of the abortive summary judgment application.

Having decided on a cut off date for costs to come out of the estate, I must now consider whether costs should follow the event from 19 October 2006 onwards or whether there is an intermediate period which falls within the second exception in Spiers v English and in respect of which I should leave each side to bear its own costs.

The conclusion which I have come to is that the second exception should be treated as applicable down to 26 February 2007, that being the date on which the expert reports of Dr Reveley and Professor Howard were exchanged. From then onwards, I think it is reasonable to regard the CPA as having taken a stand on the basis of Professor Howard’s opinion. Furthermore, by that date the witness statements of the witnesses of fact had been exchanged (at the end of January), and nearly all of the material which was before the Court at trial was available, including such important documents as Bane’s diary and the domicile questionnaire which had been disclosed (together with a large amount of other material) in December 2006 by the solicitors acting for the administrators pending suit. Before Professor Howard had produced his report, and the CPA had decided to rely upon it, I am persuaded that it is reasonable to regard the investigative phase of the case as still continuing. Thereafter, however, and subject to the specific points of detail which I will mention below, costs should in my view follow the event in the usual way.

Mr Simmonds QC argued that, if the CPA were to be ordered to pay costs at all, the appropriate date would be 18 June 2007, that being the date on which the Amended Defence was served in response to Zoran’s Amended Particulars of Claim which had been served (together with his second Part 18 response to a request for further information) on 15 June. Mr Simmonds submitted that Zoran’s case had gone through a number of developments, and it was only with the service of the Amended Particulars of Claim and the two responses to Part 18 requests in May and June 2007 that the case which the CPA had to meet had finally become clear. There is some substance in this submission, but not enough to persuade me to fix the cut off point at such a late stage. Zoran’s case was in my judgment a very strong one, even before the Particulars of Claim were amended, and most of the main points which ultimately weighed with me in deciding the case in Zoran’s favour were already present in the un-amended Particulars of Claim: see in particular sub-paragraphs 8(16), (21), (23) and (24). Furthermore, the onus was at all times on the CPA to establish that Bane had testamentary capacity, and not on Zoran. The CPA’s contention that the 1988 and 1989 Wills were explicable on the basis that Bane had good reason to be disappointed with his son, and he had made adequate provision for him during his lifetime, was in my judgment always an optimistic one, even though Professor Howard endorsed it. Professor Howard’s endorsement may explain why the CPA persisted in defending the case to trial, but it cannot absolve the CPA from facing the usual consequences in costs when the defence failed.

I now turn to Zoran’s submission that his costs should be paid on the indemnity basis, together with interest at a penal rate, from 29 May 2007. That was the date on which Penningtons rejected an offer contained in a letter dated 9 May 2007 from Allen & Overy. The offer was to the effect that, if the CPA accepted the invalidity of the 1988 and 1989 Wills and the 1984 Codicil, and if Zoran succeeded against the Attorney General, the CPA’s costs to date, including the costs of considering the letter of 9 May, should be paid out of the estate. The letter warned that if the offer was not accepted costs would be sought on the indemnity basis together with interest at 10% above base rate, pursuant to CPR Part 36 or Part 44.3(4)(c).

I am unable to accept this submission for a number of reasons. First, as Miss Montgomery QC accepted, the letter of 9 May did not conform to the requirements of CPR 36.2. She submitted that it should nevertheless be given equivalent effect pursuant to CPR 44.3(4)(c), which provides that the court must have regard to any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which Part 36 applies. However, while I do not doubt that I should have regard to the letter of 9 May, the fact remains that the only “offer” made in it was an offer that the CPA should abandon its entire case in return for being paid its costs out of the estate. There was no offer on the substantive claim at all, not even an offer that the CPA should take a relatively small amount (say £100,000) out of the estate in settlement of its claim that the 1989 or 1988 Wills were valid.

The decision of the Court of Appeal in Mitchell v James [2004] 1WLR 158 establishes that terms as to costs do not fall within the scope of a Part 36 offer. One of the reasons given by the Court for reaching this conclusion was that there would be a real risk of abuse if a term as to costs could be included in a Part 36 offer. As Peter Gibson LJ said in paragraph [33]:

In my view there is no reason, apart from the letter of 9 May, why the CPA should be ordered to pay Zoran’s costs on the indemnity basis. From the end of February 2007 onwards this was in my judgment ordinary adversarial litigation, and although the CPA lost there was nothing unreasonable in the CPA’s conduct of the case and nothing to take the case out of the normal category. In particular, it would be difficult to say that the CPA acted unreasonably in taking the case to trial when they had the support of an expert of the calibre of Professor Howard. Accordingly, although I have regard to the letter of 9 May, I will order the CPA to pay Zoran’s costs from 27 February 2007 on the standard basis.

In conclusion, there are a few relatively minor points that I need to deal with.

Zoran has agreed that the Attorney General should be paid £21,000 out of the estate in respect of her costs, and seeks an order that an equivalent sum should be added to the costs payable by the CPA, either directly or by way of a payment into the estate. However, I can see no reason why the CPA should pay the Attorney General’s costs, and I decline to make any such order. As Mr Simmonds pointed out, the Attorney General independently required Zoran to prove his case on the issue of incapacity, and it was also Zoran’s decision to combine the probate and construction issues in a single set of proceedings, although in the event it was agreed on all sides in July that the probate issue should be determined first. The CPA cannot therefore be blamed for the involvement of the Attorney General in the action, or for the limited role which the Attorney General played at the hearing in July.

I record that it was agreed in correspondence by an exchange of letters dated 1 and 5 June 2007 that Zoran would pay the CPA’s costs thrown away by the consequential amendments to the Defence in any event.

The background to this is briefly as follows. In January 2007 Penningtons served Professor Wood’s witness statement. In May Zoran was invited to agree it, but refused. In June Penningtons served a hearsay notice in respect of the statement, but in response Allen & Overy said that they intended to call Professor Wood for cross-examination pursuant to CPR 33.4 and enclosed draft documentation to that end. Further correspondence ensued, in which Penningtons tried unsuccessfully to persuade Allen & Overy that it was unnecessary for Professor Wood to give oral evidence, given that he had made clear in his statement he had no recollection of meeting Bane, he was now retired and living in Scotland, and his evidence was unlikely to be of much importance as the experts had agreed a diagnosis of Bane’s mental disorder. Zoran nevertheless persisted with his application, even though Professor Wood had by now himself written to Allen & Overy pointing out that his attendance was unlikely to assist the Court. On the day before the hearing of Zoran’s application, 5 July 2007, Allen & Overy identified the two paragraphs in his statement to which Zoran objected, namely paragraphs 8 and 9, and said that if they were excised they would consent to the remainder being put before the Court. It was then agreed that the longer of the disputed paragraphs, paragraph 9, should be deleted, and that the costs of the application should be reserved to the trial judge. On 6 July a Consent Order to this effect was made by Briggs J, subject to a direction that Professor Wood’s agreement be obtained to the excision of paragraph 9.

It is in my view regrettable that so much time and effort should have been devoted to such a minor matter. In the light of the agreed medical evidence, and Professor Wood’s lack of any personal recollection of his meeting with Bane, I think it should have been obvious to Allen & Overy that it would be disproportionate to require him to attend court for cross-examination. On the other hand, the speculations in paragraph 9 of his statement were of little, if any, probative value, and it was in my view reasonable for Allen & Overy to wish to have them removed. The agreement that was then reached represented a sensible, if belated, compromise. In all the circumstances, I think that each side was partly responsible for this storm in a teacup, and I propose to make no order as to the costs of the application.

The decision of Ormerod J in Re Howlett [1950] P 177 is authority for the proposition that any additional costs thrown on the estate by the appointment of administrators pending suit should be ordered to be paid by the unsuccessful party in a probate action: see 181-2. In the present context, such additional costs would be so much of the costs, expenditure and remuneration of the administrators as does not relate to work which would anyway have had to be done by professional persons in the administration of the estate if the CPA had accepted the invalidity of the 1988 and 1989 Wills. Mr Simmonds did not dispute this general principle, but argued that it should only apply from the date on which any adverse order for costs was made against the CPA. In my judgment, however, it should apply from the date on which the CPA ceased to be entitled to its costs out of the estate, i.e. from 19 October 2006. From then onwards I think it is right that the estate should not be out of pocket in respect of any additional costs incurred by reason of the CPA’s continuing defence of the claim, and I will make an order directing payment of any such costs by the CPA into the estate.

For the reasons which I have given, the principal orders for costs which I propose to make fall into three stages:

When this judgment is handed down, I will hear argument on the question whether the first and second defendants should make a payment on account of costs, bearing in mind their entitlement to costs out of the estate under (a) above, and also on the costs of the hearing on 2 November. Meanwhile, I would be grateful if Counsel would as far as possible agree a Minute of Order.