National Westminster Bank v Kotonou

This is an appeal against the decision of Master Campbell sitting as Costs Judge on a preliminary issue arising in a detailed assessment of the costs incurred in two closely related proceedings between the same parties, which were in the event tried together by Mr Jules Sher QC sitting as a deputy High Court judge, in 2006.

By the first proceedings (“the Guarantee Claim”) National Westminster Bank plc (“the Bank”) sought to enforce a guarantee purportedly given by Mr Angeli Kotonou in July 2001 in respect of a loan by the Bank to Olympic Resources Services plc, a company of which Mr Kotonou was a director.

Mr Kotonou and his wife Mrs Deborah Kotonou had in July 2001 charged their family home known as “Domani”, Mount Park Road, Harrow on the Hill, Middlesex (“the Property”) as security for Mr Kotonou’s liability under the Guarantee, by way of a second charge (“the Mortgage”).

For the first year after its commencement in April 2004, Mr Kotonou defended the Guarantee Claim mainly as a litigant in person. In April 2005 he instructed solicitors Messrs Hugh Cartwright & Amin to act for him. One of the early tasks which he gave his solicitors was to negotiate, if they could, a means whereby he and his wife could release equity from the Property, notwithstanding the Bank’s Mortgage, for the purposes of funding his defence to the Guarantee Claim. Mr Kotonou had by then been trying for some time to achieve that objective, but without success.

An issue arose at a very early stage in that correspondence, between the Kotonous’ solicitors and the Bank, as to whether the Mortgage secured merely the principal sum guaranteed of £425,000 (as the Kotonous claimed) or, in addition, interest together with the Bank’s charges, expenses and legal costs incurred and to be incurred in the enforcement of the Guarantee, thereby increasing the amount recoverable under the Mortgage by at least a further £200,000, with the prospect of a substantial further increase as the Guarantee Claim proceeded.

On 28 ^th April 2005 Mr and Mrs Kotonou issued a Part 8 Claim seeking declarations as to the true construction of the Mortgage, for the purposes of resolving the issue which I have described. I shall refer to it as “the Part 8 Claim”. The existence of this dispute between the Kotonous and the Bank as to the extent of the security afforded by the Mortgage bedevilled the Kotonous’ attempts to release equity from the Property for the purposes of funding Mr Kotonou’s defence to the Guarantee Claim. There was at the time a first charge of some £230,000 and the Property had been valued at between £1.75 and £2 million, so that there was, on any view as to the extent of the Bank’s security, substantial equity available in theory. Nonetheless, an uncertainty whether the Bank’s Mortgage secured a fixed amount, or an indefinite and potentially ever-increasing amount, plainly affected the Kotonous’ prospects of obtaining funding by way of a third charge.

The Kotonous’ response to this difficulty was to make a number of applications seeking to defer the trial of the Guarantee Claim and accelerate the determination of the issues raised by the Part 8 claim, while at the same time continuing negotiations (between the parties’ solicitors) with a view to negotiating an equity release acceptable to the Bank. The first limb of that strategy did not in the event need to be pursued, so that the Guarantee Claim and the Part 8 Claim were eventually ordered to be tried together by Pumfrey J, by an order made on 1 ^st July 2005, in the event by agreement.

This was because in the meantime the second limb of the strategy had succeeded, in that the Kotonous negotiated with the Bank a sensible agreement under which they were permitted to obtain £1 million by a new third party mortgage in priority to the Bank’s Mortgage, and to use that sum first to pay off the first mortgage, secondly to pay £425,000 into court to abide the outcome of the Guarantee Claim, and thirdly to use the balance to fund the litigation. The Bank’s disputed claims to additional security under the Mortgage beyond £425,000 were thus preserved, but subject to the Kotonous’ new mortgage for £1 million. It was this agreement which secured a consensual way forward in the litigation, as reflected in the order for a combined trial made on 1 ^st July 2005.

The Kotonous had incurred substantial legal fees in the negotiation of this agreement with the Bank, between April and July 2005. They have come to be known as the “funding-related costs”, and do not include the parties’ conveyancing costs occasioned in the implementation of that agreement, for which the Kotonous agreed to be responsible.

Both claims proceeded to trial in 2006. The Kotonous succeeded on the Part 8 Claim, and were awarded their costs of that claim. Mr Kotonou also succeeded in defending the Guarantee claim but, because he had lost on a number of allegations, including allegations of fraud, the costs order in the Guarantee claim was that each party should pay 50% of the other party’s costs. The costs of the various applications before Pumfrey J which concluded with the consent order made on 1 ^st July 2004 had all been reserved to the trial judge, and Mr Sher QC decided that no order as to costs should be made in respect of any of them, there having been no clear winner, and the issues to which they related having in the end been resolved by agreement. The costs of and occasioned by those applications therefore lay where they fell.

Mr Kotonou was dissatisfied with the costs orders made by Mr Sher QC, and appealed both the costs order in the Guarantee Claim, and Mr Sheer’s decision to make no order as to costs in relation to the applications before Pumfrey J. The appeal was dismissed by the Court of Appeal in February 2007, with costs.

The present appeal is concerned solely with the funding-related costs. After hearing full argument, Master Campbell decided on 27 ^th November 2007 by way of preliminary issue that those costs were part of the costs of the Part 8 Claim, so that they were payable by the Bank to the Kotonous. In so deciding, he rejected the alternative submissions of the Bank, to the effect that:

Since costs incurred in negotiating funding for proceedings are not costs in proceedings, the funding costs were not costs of either the Part 8 Claim or of the Guarantee Claim;

the negotiations were unnecessary because the Kotonous could have re-mortgaged the Property earlier, by other means;

they were not costs of the Part 8 Claim, because that Claim could not in any event have achieved the re-mortgage which the Kotonous in the event obtained by agreement with the Bank, and because that Claim in any event proceeded to trial;

if the funding-related costs were costs of any proceedings at all, they were costs of the Guarantee Claim.

Master Campbell’s reasons, given in a succinct extempore judgment, may be summarised as follows:

The principle that the costs of negotiating funding for litigation are not part of the recoverable costs of the litigation did not apply where the negotiations in question had to take place with the other party to that litigation.

Alternative funding, subject to the uncertainty as to the amount which might be recoverable under the Bank’s Mortgage might have been available, but would have been substantially more expensive, so that the funding-related negotiation had a real purpose.

Similarly the Part 8 Claim had a real purpose of its own, connected with obtaining funding for the defence of the Guarantee Claim, namely the resolution of the uncertainty as to the amount capable of being recovered by the Bank under its Mortgage.

The funding-related costs arose from a negotiation which followed upon the Bank’s denial that the Mortgage was security only for £425,000, such that the Kotonous’ costs of negotiating and obtaining an alternative agreed basis for funding which accommodated the Bank’s challenge were both costs in respect of which the Bank was on risk, and costs sufficiently connected with the Part 8 Claim to be part of the costs of that claim.

By its appeal, for which permission was given by Evans-Lombe J in April 2008, the Bank challenges Master Campbell’s decision on three grounds:

As was fairly acknowledged by Mr Andrew Post who appeared for the Bank on this appeal, the first ground of appeal was not an argument advanced before Master Campbell. Mr Simon Browne for Mr and Mrs Kotonou submitted that it should not therefore be permitted to be argued by way of appeal, since that would amount more to a rehearing than to a review of the decision below.

In my judgment the fact that, unless the court orders otherwise, an appeal is by way of review does not necessarily preclude the consideration of fresh legal argument. In the present case, all the factual material upon the basis of which the first ground of appeal is sought to be advanced was available to the Costs Judge, and no unfair prejudice would be occasioned to the Kotonous by permitting the Bank to raise this additional argument.

Mr Post’s main point, as deployed in oral argument, was that the reasons given by Mr Sher QC for making no order as to costs of the applications before Pumfrey J would have applied equally to the funding-related costs, so that the deputy judge’s decision that the Bank should pay the costs of the Part 8 Claim could not have been intended by him to include those funding-related costs.

This point appeared to gain some added momentum from Lord Justice Chadwick’s description of the applications before Pumfrey J as “those funding proceedings”, the implication being that those applications were as much as to do with the Kotonous’ efforts to fund the litigation as were the funding-related costs themselves. I have no doubt that this was a correct description of those applications.

Nonetheless I have concluded that there is nothing in this point. Mr Post very fairly accepted that the costs actually reserved by Pumfrey J (described in his order of 1 ^st July 2005 as “costs of and occasioned by the application by notice … in the Guarantee Claim” and “the costs of and relating to the hearings in relation to the Mortgage Claim”, did not include the funding-related costs. In consequence, the funding-related costs did not themselves fall within the Order by Mr Sher QC that the costs reserved by Pumfrey J should lie where they fell. In fact, neither Pumfrey J nor, therefore, Mr Sher QC were invited to address the question as to the incidence of the funding-related costs, as a distinct body of costs, separate from the costs of the Guarantee Claim or the Part 8 Claim.

It follows in my judgment that neither Pumfrey J nor Mr Sher QC had any occasion to address the discrete question whether the funding-related costs formed part of the costs of either claim or, for that matter, part of the costs of what Chadwick LJ described as the funding proceedings.

I consider it probable that, if either party had directed the attention of Pumfrey J and Mr Sher QC to the funding-related costs as a specific body of costs calling for distinct treatment, Pumfrey J would have reserved them to the trial judge, and Mr Sher QC would have ordered that they should fall where they lay. The reasoning for both of those orders in relation to the costs of the funding proceedings would, on the fact of it, apply powerfully to the funding-related costs.

It commonly happens however that costs which might have been made the subject of an application for separate treatment are not sought to be dealt with in that way, so that, if otherwise they constitute costs of the proceedings, they are swept up in any order for the costs of the proceedings as a whole, made at the end of the trial.

It seems to me that when the parties omitted (whether by conscious decision or otherwise) to invite either Pumfrey J or Mr Sher QC to deal with the funding-related costs as a specific body of costs justifying separate treatment, they all took the risk that those costs might or might not be subsequently identified as costs of one, or of the other, of the two Claims. If not so identified, the funding costs would lie where they lay. Otherwise, they would be payable in accordance with the order made in the Claim to which, on assessment, they were held to relate.

In his skeleton argument under this first ground of appeal, Mr Post submitted that a conclusion that the funding-related costs formed part of the costs of the Part 8 Claim was inconsistent with Mr Sher QC’s decision because, if they did, it would have been unnecessary for him to make any separate order about the costs of the funding proceedings. If the funding-related costs were part of the Part 8 Claim, then so must the costs of the funding proceedings.

Again, as it seems to me, there is nothing in this point either. The applications to Pumfrey J were made in relation to both Claims, since they sought case management orders in relation to each of them. The decision of Pumfrey J that their costs should be reserved did not mean that they were not costs of those Claims, but only that their incidence should be specifically decided by the trial judge. It would have been open to Mr Sher QC to order that the costs reserved should form part of the costs of the Claims (or of one or other of them) but, for good reason, he dealt with them separately. It does not even begin to follow that costs (namely the funding related costs) with which neither he nor Pumfrey J were asked to deal with separately, and which it is accepted do not form part of the reserved costs, should therefore be regarded as not being capable of forming part of the costs of either of the two Claims.

Turning to ground two, it was common ground both before Master Campbell and on this appeal that there is a general principle that the costs of a claim do not include costs incurred by a party in seeking funding either for the prosecution or for the defence of that claim. Nothing in this judgment is intended to cast doubt on that general principle.

Mr Post submitted that it was an error of law for Master Campbell to conclude that the funding-related costs were an exception to this principle, merely on the ground that the funding negotiation in question took place between the Kotonous and the Bank, rather than merely with an unconnected third party. Taken in the abstract, I agree. It is conceivable that a defendant to a claim may seek funding from the claimant, in circumstances where the matters arising in the funding negotiation have nothing whatsoever to do with the dispute raised by the claim. Indeed, as will appear, that analysis may well explain why the funding-related costs form no part of the costs of the Guarantee Claim. The dispute in that Claim concerned the validity of the Guarantee, and had nothing to do with the terms of the Mortgage. By contrast, the negotiations which led to the incurring of the funding-related costs had everything to do with the dispute about the terms of the Mortgage, and nothing whatsoever to do with the validity or otherwise of the Guarantee. There was, quite simply, no sufficient nexus between the issues raised by the Guarantee Claim, and the issues raised by the funding negotiations.

In sharp contrast, there is an obvious and very close nexus between the issues raised by the funding negotiations and the issues raised by the Part 8 Claim. As Pumfrey J put it, in a passage in his judgment on 1 ^st July 2005, and as quoted by Chadwick LJ in the Court of Appeal:

It was in fact a funding proposal made by the Kotonous’ solicitors to the Bank in April 2005 which brought to light the fundamental difference between the parties as to the meaning and effect of the Mortgage, and which thereafter led immediately to the commencement of the Part 8 Claim. Thereafter the funding-related costs were incurred in negotiating (successfully as it turned out) an interim solution to the Kotonous’ funding problem that did not require a decision on the issues as to the meaning of the Mortgage raised by the Part 8 Claim, those issues having by then assumed an importance to the parties that went well beyond funding issues.

I consider that the true analysis of the relationship between the funding-related costs and the Part 8 Claim is as follows. First, as I have said, the Part 8 Claim arose out of a dispute which emerged at the beginning of the funding negotiations, and the existence of which was fundamental to the outcome of those negotiations.

Secondly, the Part 8 Claim was launched with a view to improving the Kotonous’ prospects of funding Mr Kotonou’s defence to the Guarantee Claim, albeit that they were pursued also for the important purpose of limiting Mrs Kotonou’s exposure, through her interest in the Property, to any liability which Mr Kotonou might turn out to have under the disputed Guarantee.

Thirdly, the negotiations which thereafter continued in relation to funding were designed as an interim solution to the impasse between the parties about the meaning of the Mortgage, which, in view of the Bank’s attempt to rely upon the background matrix of fact pursuant to which both the Guarantee and the Mortgage were entered into, was unlikely to be capable of being determined ahead of, or separately from, the Guarantee Claim.

Fourthly, the funding negotiations were thereafter pursued to a satisfactory conclusion, as an interim solution to that impasse, which realistically preserved both parties’ competing claims in relation to the meaning of the Mortgage.

Fifthly, the Kotonous’ success in the Part 8 Claim demonstrated, albeit after the event, that those negotiations were largely necessitated by the Bank’s wrongful assertion that the Mortgage was security for than £425,000, which formed the basis of its rejection of the Kotonou’s funding proposal in April 2005.

The question of principle thrown up by that analysis is whether costs incurred in the pursuit of negotiations designed to provide an interim solution to issues forming the subject matter of pending (or contemplated) litigation while leaving the issues to be finally determined at a later date, can (subject to the usual questions of proportionality and reasonableness) form part of the costs of those proceedings.

The need to negotiate interim solutions to difficulties thrown up by contemplated or pending claims is a common feature of civil litigation. They include questions as to security for costs, questions as to the liberty of the defendant to use his assets (or assets claimed from him in the proceedings) for his own purposes pending trial, including for the purposes of funding the litigation, and issues as to the interim custody of, and dealings with, property the subject matter of the claim. Such issues are very frequently resolved without either party having to make an interim application, for example during pre-action stages, or by solicitors’ correspondence and oral negotiations shortly after the commencement of a claim.

In the context of the litigation environment created and encouraged by the CPR and the Woolf Reforms, it seems to me obvious that such negotiations as to the resolution of interim issues should be encouraged, and that, therefore, the costs regime should accommodate the costs of such negotiations as part of the costs of the litigation, subject to the usual considerations of reasonableness and proportionality.

It has for many years been part of the court’s analysis of the question whether pre-litigation costs are costs of the proceedings to ask whether those costs related to the creation of materials “ultimately proving of use and service in the action” or as being costs the incurring of which was “proper for the attainment of justice” in the case: see Frankenburg v. Famous Lasky Film, Service Ltd [1931] 1 Ch 428 at 436 per Lord Hanworth MR, and Re Gibson’s Settlement Trusts [1981] 1 Ch 179 at 185-187 per Sir Robert Megarry V-C. In my judgment costs incurred in the reasonable negotiation of interim solutions to problems arising between the parties in connection with issues to be decided in contemplated or pending litigation clearly fall within those principles.

Does it make any difference that the underlying objective, the pursuit of which led to the discovery of the fundamental disagreement between the Kotonous and the Bank about the meaning of the Mortgage, and which necessitated both an interim and a final solution, consisted of the obtaining of funding for the Guarantee Claim? In my judgment, save to demonstrate that the funding-related costs are not part of the costs of the Guarantee Claim, it makes no difference at all. The casus belli and the need for the Part 8 Claim arose in the context of a funding negotiation, but the Part 8 Claim generated costs which are not disabled from being costs in that claim, merely because they arose out of a funding dispute in relation to other proceedings. The point may be tested by asking what the position would have been if the Guarantee Claim had been brought against the Kotonous by an unrelated third party, and that, during a negotiation with the Bank for the purpose of releasing equity for the funding of their defence, the issues as to the meaning of the Mortgage had then emerged, and made the subject of litigation. In those circumstances it could not be doubted that the principles as to the negotiation of interim solutions to which I have referred would be fully applicable, in relation to the costs of litigation about the meaning of the Mortgage.

My analysis of the second ground of appeal provides the answer to the third ground, pursuant to which the Bank sought by way of alternative to suggest that the funding-related costs were part of the costs of the Guarantee Claim. It is in my view clear that they were not. There was no sufficient nexus between the issues the subject matter of those negotiations and the issues raised in the Guarantee Claim itself. Thus, even though they were issues between substantially the same parties (albeit that Mrs Kotonou was not formally a party to the Guarantee Claim) this is insufficient of itself to afford the necessary link between those negotiations and the Guarantee Claim.

In any event, my conclusion that the funding-related costs were part of the costs of the Part 8 Claim, due to the nexus between those negotiations and that Claim which I have described, necessarily precludes a conclusion that they were part of the costs of the Guarantee Claim.

For those reasons, this appeal is dismissed. I have in my consideration of this appeal been considerably assisted by advice from and discussion with my Assessors. Nonetheless, the content of, and responsibility for, this judgment is entirely mine.