Crehan v Inntrepreneur Pub Co Ltd & Anor

Lord Hoffman, in his opinion in the House of Lords dated 19 July 2006 [2006] UKHL 38, summed up these long running proceedings in the following way:

“15.

The proceedings have been long and complex but only a brief sketch is needed to explain the point which the House has to decide. A full and admirably lucid narrative is given in the judgment of Park J [2003] EuLR 663. In 1991 the claimant Mr Crehan entered into agreements to take leases of two public houses in Staines from the defendant Inntrepreneur Pub Company (CPC) (“Inntrepreneur”). They were in standard form containing ties which obliged him to buy his beer from Courage Ltd (“Courage”) at its list prices. Both businesses failed because, as the judge found, Mr Crehan could not compete with other public houses who were able to buy their beer at lower prices and he therefore did not do enough trade to cover the rent he had agreed to pay. Mr Crehan surrendered his two leases in March and September 1993, having lost a substantial sum of money.

16.

In 1993 Courage sued Mr Crehan for £15,226 outstanding on the beer account and Mr Crehan counterclaimed against Courage and Inntrepreneur for damages, alleging that his losses had been caused by a tie agreement which was unlawful under what was then article 85 and is now article 81 [of the EC Treaty] …”

Before Park J Mr Crehan’s case failed. The Judge found there was no infringement of Article 81(1). In the Court of Appeal, however, to which Mr Crehan appealed, the Court found that the Judge had been wrong not to follow the Commission’s opinion expressed in the recitals to its decision in an earlier case involving Whitbread. The Court of Appeal decided [2004] EuLR 693 that, on the facts of the case, sincere co-operation required the Judge not to entertain a submission that the view of the Commission in Whitbread had been wrong.

In order to understand the tenor of the various judgments the meaning of “Delimitis 1 and 2” must be borne in mind. It is explained by Lord Hoffman at paragraph 26 of his opinion:

“26.

… In Delimitis v Henninger Bräu AG (Case C-234/89) [1991] ECR I 935, 995 the Court of Justice had given authoritative guidance, in the context of a German beer supply agreement, on the conditions which had to be satisfied for article 81 to apply:

“A beer supply agreement is prohibited by article 85(1) of the … Treaty if two cumulative conditions are met. The first is that, having regard to the economic and legal context of the agreement at issue, it is difficult for competitors who could enter the market or increase their market share to gain access to the national market for the distribution of beer in premises for the sale and consumption of drinks. The fact that, in that market, the agreement in issue is one of a number of similar agreements having a cumulative effect on competition constitutes only one factor amongst others in assessing whether access to that market is indeed difficult. The second condition is that the agreement in issue must make a significant contribution to the sealing-off effect brought about by the totality of those agreements in their economic and legal context. The extent of the contribution made by the individual agreement depends on the position of the contracting parties in the relevant market and on the duration of the agreement.”

27.

These two conditions are commonly called “Delimitis 1” and “Delimitis 2”. Inntrepreneur took the view that neither condition was satisfied: they considered that, in the upheaval which had been caused by the Beer Orders (and their own undertakings to the Secretary of State), it was not difficult to gain access to the market (in the common shorthand, the market was not “foreclosed”) and if it was, their agreements did not make a significant contribution. But the Commission was unwilling to hear argument on these points. Nor was it impressed by the submission that the agreements fell within the block exemption order.

28.

The Commission was however sympathetic to granting an individual exemption under article 81(3). On 30 July 1993 it published a notice pursuant to article 19(3) of 17/62. The notice described the market and said (in paragraph 6):

“As a result of the above characteristics, foreign brewers or indeed new brewers who own few or no on-licensed premises still have difficulty selling substantial quantities of draught or bottled beer independently in the United Kingdom”

29.

It went on to say that many foreign brewers therefore licensed major UK brewers to brew and distribute their products. That might be taken as expressing the opinion that the market was foreclosed. The notice ended by saying that the Commission intended to grant a retroactive exemption pursuant to article 81(3).”

On 19 July 2006 the other Law Lords agreed with Lord Hoffman’s opinion that:

“The Judge was right in deciding that he could decide Delimitis 1 for himself and the Court of Appeal was wrong to reverse his decision on the ground that he should have followed the Commission.”

72.

… Mr Crehan, wished to challenge the judge’s findings before the House. But the Court of Appeal gave Inntrepreneur leave to appeal which was limited to the issues on Delimitis 1 and 2, the block exemption and the type of loss falling within Article 81. They gave Mr Crehan leave to appeal on the measure of damages. Neither side petitioned the House for leave to argue any other points and the transcripts and other materials which would have been needed for dealing with a full appeal on fact were not made available to the House. Your Lordships therefore declined to hear argument on the facts. It follows that the judge’s finding on Delimitis 1 must stand and the appeal must be allowed. ...”

On 31 January 2007 the House of Lords made a further order on the question of costs:

“It is ordered … that [the Claimant Bernard Crehan] do pay to [the Defendants] their costs in this House and in Her Majesty’s Court of Appeal, the amounts of such costs if any to be paid by [the Claimant Bernard Crehan] and to be paid out of the Community Legal Service Fund … to be determined by a Costs Judge for those costs incurred in Her Majesty’s Court of Appeal, in each case in accordance with Section 11 of the Access to Justice Act 1999 and the Community Legal Service (Cost Protection) Regulations 2000: and it is further ordered that the costs of [the Defendants] in Her Majesty’s Court of Appeal be taxed in accordance with the Access to Justice Act 1999: and it is further ordered that as regards costs in the High Court of Justice Chancery Division, paragraphs 4 to 7 of the Order of Mr Justice Park in the High Court of Justice Chancery Division apply, the said order having been affirmed by the order of his House of 19 July 2006. And it is also further ordered, that there be no order as to the costs of the Interveners.”

On 23 April 2007 the Defendants made an application pursuant to Section 11 of the Access to Justice Act 1999 and/or Regulations 9 and/or 10 of the Community Legal Service (Costs) Regulations 2000 in respect of the Defendants’ costs in the proceedings in the Court of Appeal finalised by the Court of Appeal’s Order of 1 July 2004 as amended by the House of Lords, in the judgment on the 19 July 2006 and/or their Order of 31 January 2006. On the same date a similar application was made to the House of Lords in respect of the costs of the proceedings in the House of Lords. That application has yet to be heard.

It is common ground between the parties that the Claimant’s liability under the Court of Appeal Costs Order should be assessed at nil in the light of his means (he has been unemployed for 12 years and is in receipt of benefits).

It was further agreed that the instant hearing should be confined to whether or not any order should be made against the Commission. The assessment of any costs ordered to be paid to take place on another occasion. The total claimed by the Defendants in respect of costs in the Court of Appeal is £886,784.54. In the House of Lords the costs claimed total £1,171,544.25.

The original legal aid certificate in these proceedings was issued on 23 July 1993 to Mr Crehan. The combined effect of Articles 5(1)(c) and 8 of the Access to Justice Act 1993 (Commencement No.3 Transitional Provisions and Savings) Order 2000 is that for most purposes the law governing legally aided cases, where a certificate had been granted before April 2000 remains unaffected by the coming into force of the 1999 Act. The procedure applying to applications for costs against an assisted party, or the Legal Aid Board/Legal Services Commission, is however subject to the new regime. The relevant law for the purposes of this application is therefore contained in Section 18 of the Legal Aid Act 1988, which so far as relevant provides:

“Costs of Successful Unassisted Parties

18(1) This section applies to proceedings to which a legally assisted person is a party and which are finally decided in favour of an unassisted party.

(2)

In any proceedings to which this section applies the court by which the proceedings were so decided may, subject to sub-sections (3) and (4) below, make an order for the payment by the Board to the unassisted party of the whole or any part of the costs incurred by him in the proceedings.

(3)

…

(4)

An order under this section in respect of any costs may only be made if –

(a)

an order for costs would be made in the proceedings apart from this act;

(b)

as respects the costs incurred in a court of first instance, those proceedings were instituted by the assisted party and the court is satisfied that the unassisted party will suffer severe financial hardship unless the order is made; and

(c)

in any case the court is satisfied that it is just and equitable in all the circumstances of the case that provision for the costs should be made out of public funds.

…”

Under the Transitional Provisions any application for an order under Section 18 of the 1988 Act must be determined in accordance with Regulations 2 and 9 to 13 of the Community Legal Service (Costs) Regulations 2000.

Regulation 5(6) of the Community Legal Service (Cost Protection) Regulations 2000 requires the court to have regard to the resources of the non funded party. However those Regulations do not apply in the present circumstances.

In the light of the above the issue to be decided is whether the Defendants can establish that it is just and equitable in all the circumstances that provision for their costs should be made out of public funds.

Mr Morgan calls attention to the opinion of Lord Bingham, in this case in the House of Lords:

“2.

The sharpness of the issue between the parties to this appeal tends to conceal the bedrock of common ground which underlies the case …”

Mr Morgan points out that there is no difference between the parties on the facts, and very little difference between them on the law. He suggests that it is a difference in emphasis which is ultimately a question of “feel”. He puts his case under three heads:

Mr Morgan argues that the combined effect of the authorities, particularly Davies v Taylor (No.2) [1974] AC 225 and Din v Wandsworth (No.2) [1982] 1 WLR 418, is that there is an untrammelled discretion. In Davies, Lord Dilhorne stated (at 231B):

“… I am not in favour of any gloss or limitation being put on the words of the Act. They confer on the courts a very wide discretion to do what is just and equitable in all the circumstances. The courts are entitled to have regard to any relevant circumstances. In some cases the conduct of the applicant may be relevant. … In some, and perhaps the majority, of cases the conduct of the legally aided litigant is also relevant.”

Based on these authorities Mr Morgan argues that there is no “normal rule or presumption” that costs should be awarded against the Commission.

Mr Pooles’ position is that the decision of the Court of Appeal in R (Gunn) v Secretary of State for the Home Department [2001] EWCA Civ 891; [2001] WLR 1634, is an up to date and accurate guide to the law, and that the guidance given by me, with the approval of the Master of the Rolls following that decision (White Book 2007 48.14.9 ff), is still relevant advice. The decision in Gunn, however, contains the kernel of the dispute between the parties. At paragraph 46 of the judgment in Gunn the Court quoted from the decision of Lord Woolf MR in In Re: O (Costs: Liability of Legal Aid Board) [1997] 1 FLR 465 at 470:

“If the court comes to a conclusion that in those circumstances it would make the hypothetical order for costs” – what is now a Section 11(1) order – “then in the case of an appeal the court will usually conclude in the absence of some special circumstances that for the purposes of Section 18(4)(c) [of the 1988 Act] it is just and equitable to make an order …”

This led the Court of Appeal in Gunn to state:

“50.

We consider that the practice laid down in In Re: O should be followed by Costs Judges when applications are made to them for costs against the Commission following a Court of Appeal decision in favour of non funded parties even if they are Government Departments. Costs Judges should proceed on the premise that it is just and equitable that the Commission should stand behind their “client”, by definition under the Regulations the individual who receives funded services, unless they are aware of facts which render that result unjust or inequitable.”

Mr Pooles points out that in Gunn the Court of Appeal were responding to an argument by Mr Morgan on behalf of the Commission that In Re: O was no longer good law, and that the introduction of the relevance of the successful parties’ means (under Regulation 5(6) of the Cost Protection Regulations) had altered the position to make it harder for the receiving party to satisfy the court that it was “just and equitable” to make an order against the Commission.

Lord Phillips MR, when giving the judgment of the Court, stated:

“48.

We do not agree that the now well established meaning of “just and equitable” in this context requires change by reason of the introduction of [Regulation 5(6)]. Its relevance to the exercise required by Regulation 5(3)(c) is obvious as is the newly introduced requirement under Regulation 10(3)(b) of the Costs Regulations to provide a statement of resources. Resources could in some circumstances, be of relevance to the “just and equitable” test and it would have been curious, as a matter of drafting, if the paragraph 6 requirement had not been extended to Regulation 5(3)(d). It does not however follow that the requirement was intended to modify the practice based on the authorities already cited in relation to applications in courts other than courts of first instance.

49.

It seems to us that this practice reflects reasoning that it will normally be just and equitable that, when a costs order is made against a party who has been supported by public funds, the costs covered by the order should, in so far as they cannot be recovered from the funded party, be defrayed out of public funds.”

In Mr Morgan’s submission these Court of Appeal dicta were made per incuriam in ignorance of binding decisions of the House of Lords. In Gunn the Court was not referred to the House of Lords decisions in Saunders v Anglia Building Society (or Gallie v Lee (No.2)) [1971] AC 1039; Davies v Taylor or Din v Wandsworth LBC. Since Mr Morgan appeared for the Commission in Gunn he was able to explain that he had been “too economical” with his authorities, assuming that he would get home on his interpretation of the new Regulations. He does however rely on the first sentence of paragraph 48 of Gunn, quoted above. He suggests that the correct approach has not been changed and that the earlier House of Lords authorities are binding.

Mr Morgan argues that the discretion of the Court is a very wide one to do what is just and equitable in all the circumstances. He relies on the dicta in Saunders v Anglia Building Society and in Davies v Taylor in support of that contention. In Saunders Lord Reid stated (at 1047f):

“The first condition is that we must be “satisfied that it is just and equitable in all the circumstances” that the successful unassisted party should get relief. I think that “just and equitable in all the circumstances” is a single composite phrase conveying one idea, and that it would be useless and might well be misleading to seek to split up the phrase. It directs the court to consider all the circumstances and to decide on broad lines. …”

Lord Dilhorne stated (at 1050h):

“A very wide discretion has been entrusted to the courts in determining whether in all the circumstances it is just and equitable to make an order.”

Mr Morgan goes on to argue that it would not be in accordance with the statute for orders to be made as of course for payment out of public funds whenever a non funded party is successful. He relies further on Lord Wilberforce in Din v Wandsworth:

“Their Lordships do not consider it necessary to restate the principles which should govern such applications: they have been sufficiently explained by the House in [Saunders v Anglia Building Society] … and Davies v Taylor (No.2) … as well as in several cases before the Court of Appeal.

They wish however to make it clear that the practice whereby orders for costs are provisionally made, subject to an opportunity being given to the Law Society to make representations with regard thereto, does not imply that such provisional orders against the legal aid fund are made as of course whenever an unassisted party is successful. Such a procedure placing, as it would, the onus upon the Law Society of showing why such an order should not be made would not be in accordance with the terms of Section 13 [of the Legal Aid Act 1974], as interpreted in the cases referred to. The House in fact has to consider, and does consider, in each case, whether it is just and equitable that such a provisional order should be made, the fact that the unassisted party has succeeded being only one of the circumstances to be taken into account. For this reason information is sought from the parties as to such circumstances including their financial resources. Their Lordships have no doubt that the Court of Appeal acts upon the same principles.”

Mr Morgan accordingly submits there is no rule that something more than mere success is required to make it just and equitable to make an order that the Commission should bear the defendants’ costs, although he acknowledges that success is “a very important circumstance”. He argues, however, that it is obvious from the fact that there is a discretion that mere success is not inevitably a passport to an order against the Commission.

Mr Pooles accepts that, following Saunders v Anglia Building Society and Davies v Taylor, there is a wide discretion to do what is just and equitable in the circumstances where an application is made against the Commission for costs in the appellate courts. With regard to Din v Wandsworth he suggests that this is authority for the proposition that the court has to consider in each case whether it is just and equitable that an order should be made. The fact that the unassisted party has succeeded being only one of the circumstances to be taken into account.

Mr Pooles referred to Maynard v Osmond (No.2) [1979] 1 WLR 31 CA, in which the dictum of Lord Reid in Saunders v Anglia Building Society was applied. Lord Denning MR said this (at 35A):

“When a point of law has to be elucidated like this between litigants, and it goes up to the Court of Appeal or the House of Lords, it is not right that costs should fall on an individual or a concern. They should fall on the legal aid fund. The fund is particularly appropriate to deal with matters of this kind. That was the position in [Saunders v Anglia Building Society]. It was a case about the principle of non est factum. Lord Reid said, at page 1048:

“In this case it enabled the whole vexed matter of non est factum to be re-examined. This seems to me a typical case where the costs of the successful respondent should come out of public funds.”

The same applies here to the costs of the Hampshire Police Authority. It is just and equitable in this case that the costs should come out of the legal aid fund.

But I would not confine it to cases which involve important points of law. I think the principle should be extended so as to be of general application. It seems that whenever the legal aid fund takes up cases for assisted persons and brings another party before the courts then if the case fails, it is often just and equitable that the legal aid fund should pay the costs of the unassisted party.”

Maynard v Osmond was referred to in the judgment in Gunn (paragraph 43 – 44). Mr Pooles submits that Gunn is the only authoritative guidance as to how the relevant provisions are to be approached in terms of when it is “just and equitable” to make an order out of public funds, namely that it will “normally be just and equitable” to make an order against the Commission in circumstances such as the present, on an appeal where costs cannot be recovered from the funded party.

He refers to Lord Dilhorne in Davies v Taylor (at 231H):

“For an application under the Act to be made the unassisted litigant must have succeeded. That is a sine qua non. In some cases it may be that that alone suffices to render it just and equitable to make an order, or to put it as I did in [Saunders v Anglia Building Society] in the converse way, unjust and inequitable not to do so. It would in my view be wrong to limit the exercise of the court’s discretion by laying down the general rule … that success alone can never suffice.”

Mr Pooles submits that the existence of a wide discretion for the court to determine whether an order is just and equitable, is not inconsistent with the proposition that it will normally be just and equitable to make an order against the Commission as the funder of the unsuccessful assisted party on an appeal, to the extent that its costs cannot be recovered from the assisted party.

Mr Morgan argues that although Maynard v Osmond was before the Court of Appeal in Gunn, if any point arising in any of the other authorities was not in Maynard, it could not be said that the Court of Appeal had taken that other authority into account. In Maynard the only passage cited from Saunders v Anglia relates to “the whole vexed matter of non est factum”. Lord Denning MR goes no further than to say (at 35C):

“It is often just and equitable that the legal aid fund should pay the costs of the unassisted party.”

This, says Mr Morgan, is far from laying down the normal outcome, nor can it be said that there is any presumption that such an order will be made. In Mr Morgan’s submission the decisions in both In Re: O and Gunn show an incremental shift away from the untrammelled discretion towards the suggestion that such an order should normally be made, which in his submission is inconsistent with the dicta of the House of Lords. He suggests that the Court of Appeal has put an impermissible gloss on the principle, and introduced impermissible trammelling of the court’s discretion.

Mr Morgan accepts that in Saunders there was no difference of judicial opinion that the non funded party’s means were potentially relevant, but that there was a difference as to whether they would always be so. In Saunders Lord Reid stated (at 1047G):

“It was argued that it cannot be just and equitable to give relief to a wealthy person to whom the loss ought to seem a trifling matter. But it must be observed that, when dealing with costs at first instance, the Act brings in the means of an assisted person, whereas there is no suggestion of a means test when dealing with costs on appeal. I do not say that it can never be relevant to consider the means of an assisted person – in unusual circumstances it might be – but in general and in the present case I see no reason to take into account the amount of the assets of this society.”

Lord Dilhorne (at 1051D) stated:

“… A wide discretion is given to the courts and, although in relation to costs in the appellate courts the question of severe financial hardship is not required by the Act to be considered, nevertheless that does not in my opinion mean that the financial position of the unassisted litigant is not one of the circumstances to which regard may properly be had.”

And Lord Pearson (at 1054G) said:

“Another circumstance which I think is admissible under sub-section (2), though not conclusive under that sub-section as it might be under sub-section (3), is that the building society have very large resources, so that their recovery of these costs or failure to recover them will not materially affect their financial position.”

Mr Morgan points out that Lord Reid was, on this issue, in a 2:1 minority of the Judges who gave reasoned judgments. In his submission details of the financial resources of the non funded party were part of the information sought under the old practice, precisely because they were a relevant circumstance (see Din v Wandsworth at 419C).

Mr Morgan submits that the Defendants’ assets have been and are more than sufficient to meet their costs of this litigation. The details of the Defendants’ means are set out in the statements of Mr Rupert Croft, the solicitor instructed on behalf of the Commission who had the conduct of the case on behalf of the Claimant, Mr Crehan, and of Mr Colin Redford, who is a director of the Grand Pub Company, the holding company whose subsidiaries include the First Defendant, Inntrepreneur. There is no dispute between the parties that the Defendants have a substantial cash balance still available, having made provision in their accounts over the years to cover the cost of this litigation. See for example exhibit RLC12 at pages 86, 87 where the notes to the accounts for the year ended September 30^th 1997 set out the position with regard to contingent liabilities arising from the litigation. The note concludes:

“Based on this advice the Board has concluded that it is not appropriate to make provision for damages which would be payable if the tenants were to succeed in their claim. However, provision is made in these financial statements for the costs of defending these claims.”

Later accounts have similar statements (see for example exhibit RLC12 at page 171) until 2004 when no further provision was made.

At paragraph 28 of his statement of 11 July 2007 Mr Croft suggested that in the mid to late 1990s Inntrepreneur had publicly announced that sufficient assets had been “ring fenced” to pay damages and costs to the tenants of Inntrepreneur in the event that their defence to the claim under Article 81 was unsuccessful. In his statement of 17 July 2007 Mr Redford stated that Inntrepreneur did not at any time “ring fence” money to pay potential damages and costs. He continues:

“On the contrary the company relied on legal advice that the claims including Mr Crehan’s were remote and speculative and no provision was made. However my fellow directors and I took their obligation as directors very seriously and money was kept in the bank until the litigation was concluded. This of course prevented us from using it more profitably elsewhere.”

In my judgment this may be more a difference in emphasis, rather than a conflict of evidence, in that money kept in the bank may well be thought to be ring fenced. It is, however, clear from the accounts that provision was made over the years so that the company would be in a position to meet its liability for costs should the need arise. Mr Morgan agreed that this was sensible management, and that he was not suggesting any criticism of the company for doing this.

Mr Pooles suggests that Mr Morgan’s submissions in respect of the Defendants’ means are no more than an effort to re-introduce the severe financial hardship test (which applies in respect of first instance cases) by the back door. Mr Pooles submits that there is no requirement for the Defendants to prove that they would suffer hardship if they had to pay their costs themselves, but points out that Mr Redford in his statement of 17 July 2007 suggested that the litigation “threatened the existence of the company”. Although Mr Crehan lost before Park J, the Judge had found that he would have been entitled to £1.3 million if successful; given that there were approximately 600 other claims the potential impact on the company is clear. In the Court of Appeal Mr Crehan’s damages were reduced to £130,000.

A further difficulty for the company was that a substantial number of its tenants stopped paying their rent on the public houses on the basis that they were entitled to set-off their future damages against their rent, they also stopped buying their beer from Courage. This diminished cash flow and caused problems for the company, which was required to pay off large loans for which it used the rents which it received. The company’s purpose was to receive the rents and commission on beer sold by Courage. If those income streams ceased the only income of the company would disappear, and the company would be unable to continue. In Mr Pooles’ submission this was not a company which was so rich that the outcome of the litigation would not have made much difference to it, on the contrary the litigation “meant everything to it”. Had the company been unsuccessful, and been found to be in breach of Article 81, it would inevitably have faced large fines in addition.

As a sub-text to the relevance of the Defendants’ means Mr Morgan also introduced the question of the Commission’s resources. He makes the uncontroversial point that there are considerable pressures upon the legal aid budgets, as a result of which there have been reductions in the scope of legal aid and new forms of contracting have been introduced to control costs, as recommended in Lord Carter’s report. There is also a limit on the extent of funding for future major multi party actions in the Lord Chancellor’s directions to £3 million per year. Mr Morgan relies upon these facts to suggest that in the circumstances it would not be just and equitable for these limited resources to be spent indemnifying the Defendants against the legal costs which have, in his submission, “predictably resulted from their commercial decision”. This is a topic to which I shall return.

Mr Pooles points out correctly that there is no reference in the Act, or in the Regulations, to the Commission’s resources. In his submission if those resources are a relevant factor in exercising the discretion, they cannot be a central factor since otherwise the matter would have been specifically brought into account by the legislation. He submits that the Commission is protected by the severe financial hardship requirement at first instance, in addition to which there is no evidence before me of the Commission’s finances or how it chooses to spend its money.

Mr Pooles points out that the Commission has had effective financial control of this litigation from the outset. By the end of the Court of Appeal hearing, in June 2004, the Claimants’ costs were already £2.5 million (see Mr Redford’s statement, 17 July 2007, paragraph 15). The Commission continued to grant funding to resist Inntrepreneur’s appeal to the House of Lords. The Commission must have known, he submits, that were the Claimant to lose, the Commission could well be ordered to pay the Defendants’ costs. This possibility must, he suggests, have been taken into account by the Commission in deciding to fund the litigation.

Mr Pooles goes on to argue that the fact that the Commission’s resources are not unlimited could be used as a reason why they should not pay costs in unsuccessful appellate proceedings in every case.

Mr Morgan points out that the House of Lords has not invariably awarded costs out of public funds in both the House of Lords and the Court of Appeal where, as in this case, the parties have had mixed results on the way to ultimate success, although it appears that costs have always been awarded in the House of Lords, but not necessarily in the Court of Appeal. In both Saunders and Din the Court of Appeal costs were not awarded. In Saunders Lord Reid stated (at 1048A):

“I think we must consider separately costs in this House and costs in the Court of Appeal. Cases can only come before this House with leave, and leave is generally given because some general question of law is involved. In this case it enabled the whole vexed matter of non est factum to be re-examined. This seems to me a typical case where the costs of the successful respondent should come out of public funds.

But different considerations apply to the respondent’s costs in the Court of Appeal. When the use of public funds in affording legal aid has been the direct cause of the unsuccessful assisted party having to incur additional costs, there appears to me to be a very strong case for holding that it is just and equitable that such additional costs should be made good to him out of public funds. But in the present case the respondents were not taken to the Court of Appeal by their legally aided opponent. They had to go to that court because the decision at first instance was against them. They may say that the action would never have started if Mrs Gallie had not had legal aid from the beginning. But that appears to me to be too remote. Although the respondents have ultimately succeeded they cannot recover their costs at first instance because they are not impecunious. I cannot see any sufficient reason why they should recover from public funds costs which they chose to incur in appealing against an adverse decision at first instance.”

Mr Morgan urges similar considerations should be applied in this case.

Lord Dilhorne, also in Saunders (at 1051A) set out a number of instances which might affect the award of costs out of public funds:

“In some cases perhaps a case where the hearing of an appeal has taken a long time and so involves a large amount of costs, it may be just and equitable to order that some part or the whole of the unassisted litigant’s costs of the appeal should be paid out of the legal aid fund. The circumstances of each case will differ. I do not think the fact that the respondent had to appeal to the Court of Appeal to obtain judgment in their favour suffices in this case to establish that it is just and equitable to make such an order in relation to their costs in the Court of Appeal. One circumstance which has to be borne in mind is the fact that the respondents can add their costs in the High Court and the Court of Appeal to their security. In most cases the successful unassisted litigant in an appeal will not be able to obtain reimbursement of his costs in the High Court.”

And Lord Pearson (at 1054F):

“The court before making an order for payment of costs of an assisted party out of the fund, must be “satisfied that it is just and equitable in all the circumstances that provision for those costs should be made out of public funds”. In my opinion this requires something more than the building society succeeding in their appeal. All the circumstances have to be considered. One circumstance is the innocence of the building society: they have not behaved wrongfully or negligently or oppressively. Another circumstance which I think is admissible … is that the building society have very large resources so that recovery of these costs or failure to recover them will not materially affect their position. Another circumstance is that they were not taken to the Court of Appeal by the legally aided plaintiff. They themselves took the plaintiff to the Court of Appeal. I think this circumstance is entitled to some weight, but it is far from being decisive against the building society on the present issue, because it was legal aid which enabled the plaintiff to gain the judgment in the first instance in her favour and the building society had to appeal in order to get the judgment reversed. There is another circumstance to which I think some weight should be given … The building society are being allowed to add their costs to their security. It is likely that all or most of their costs of the trial at first instance will be recovered by realisation of the security … Thus the building society are in a favourable position in comparison with most other applicants for orders under this act. Having regard to all the circumstances which I have mentioned, I am not satisfied that it would be just and equitable that provision for the building society’s costs of the appeal to the Court of Appeal should be made out of public funds.”

Their Lordships made an order for the building society to receive its costs in the House of Lords, but not in the Court of Appeal.

In Din there is merely the statement:

“In the present case their Lordships are of opinion taking all the circumstances into consideration that the respondent’s costs of the appeal in this House, but not in the Court of Appeal, should be borne by the legal aid fund.”

No reason is given.

Mr Pooles points out that Saunders was very different from the present case, because the building society could recover its costs from the assisted person by adding the cost to its security. In the case of Din there is no explanation why costs were not ordered against the Commission in the Court of Appeal in that case. He further points out that in Saunders, it was the building society which had brought the appeal in the Court of Appeal, whereas in the present case it was the assisted party who chose to appeal and the Commission who decided to fund it. In his submission the Commission is therefore the direct cause of the defendants’ costs in the Court of Appeal.

Based on his arguments that the House of Lords does not always allow costs of successful unassisted parties in the Court of Appeal as well as the House of Lords, Mr Morgan recognises that the Court might feel that it would be just and equitable for there to be some provision for the costs of both appeals from public funds, but that not all should be so provided. Mr Morgan’s primary submission is that the Defendants have not shown that it is just and equitable that their costs should be paid by the Commission, but appears to be suggesting that if that contention did not succeed the just and equitable test might be satisfied by awarding the Defendants a percentage only of their costs. Mr Pooles submits that any decision to make a partial order must necessarily flow from the conclusion that it is just and equitable to make an order of some sort. In his submission a partial order would have to be founded on some conduct or impropriety on the part of the Defendants, but on the facts of this case there is no basis for such an order.

Mr Morgan acknowledges that the Defendants’ ultimate success represents a “very important circumstance” to be taken into account in their favour in this application. Mr Pooles, relying on Lord Dilhorne in Davies v Taylor (at 231G), submits that this is a case in which success alone suffices to render it just and equitable to make an order, or to make it unjust and inequitable not to do so. He points out that the Defendants have already had to bear their first instance costs of more than £3 million despite being successful. If the Defendants were then unable to recover their costs in the Court of Appeal from the Commission, without whose financial support the appeal could never have proceeded, and in a case where the Defendants were ultimately vindicated in the House of Lords on the very same point that Park J had determined in their favour at first instance, there would be obvious injustice.

Mr Morgan, however, argues that there are a number of factors which should dissuade the Court from deciding that an order for payment of costs by the Commission would be just and equitable in all the circumstances. Briefly those points are:

The history of the litigation is set out in the witness statement of Mr Croft at paragraphs 4 to 12, and in what Lord Hoffman calls the “full and admirably lucid narrative in the judgment of Park J”.

In respect of the lease Mr Morgan makes the following points:

Thus, Mr Morgan argues, the litigation was the almost inevitable result of the commercial decision of Inntrepreneur to adopt leases in this form, coupled with the particular balance of rents and beer prices which went with them. Although he accepts that the Defendants were ultimately successful, having regard to the position of the European Commission and the decision of the Court of Appeal, he argues that this is not a case in which the challenge could be said to be hopeless, without foundation or ill-judged. It was, in his submission, clearly in the public interest that the challenge be mounted.

Mr Pooles relies on the judgment of Park J, particularly at paragraph 44:

“I do not know what caused things to go so wrong for Inntrepreneur in these respects. Notwithstanding the beliefs of some of the most disaffected tenants, I do not accept the thesis that Inntrepreneur set out to impose harsh terms on the tenants and did not care when large numbers of them failed … I accept that the general policy of the top management of Inntrepreneur was to set affordable rents, that the large number of business failures which Inntrepreneur tenants suffered was not what the top management had wanted or expected and that the failures and adverse publicity were a major concern for the company. I do not go along with the belief of many tenants that Inntrepreneur did not care about the failure level among its tenants.”

With regard to Mr Morgan’s points listed above, Mr Pooles submits:

As Mr Redford says in his statement, the Defendants would not willingly promote this situation where rents were withheld and commission lost, with a consequential reduction in the company’s cash flow. In Mr Pooles’ submission the litigation was concerned with the operation of Article 81, and was not the inevitable consequence of the Defendants’ lease. He resists any suggestion that the Defendants brought this litigation on their own head, and he relies on the judgment of Park J at paragraph 44 which I have quoted above.

As to Mr Morgan’s point that the legal costs “have predictably resulted from [Inntrepreneur’s] commercial decision” Mr Pooles argues that this cannot survive the judgment of Park J. He relies on Park J’s comments about the company’s intentions, and the fact that the Claimant was proved wrong to pursue the litigation by its outcome. In spite of the 600 Claimants there were a large number of successful Inntrepreneur tenants which enabled the company to remain in business. It would be absurd for directors of the company to adopt a business plan which was designed to fail. Finally, Mr Pooles suggests that even if the litigation was “inevitable” it could not be said to be inevitable that the Claimant would appeal, or that the LSC would fund such an appeal. In his submission where the Legal Services Commission agrees to fund litigation, the Commission must, in making that decision, factor in the risk of exposure to adverse costs. The burden of those costs should not be visited upon the Defendants, who, having been successful at first instance, then had no option but to go to the Higher Courts.

Mr Morgan argues that the LSC does not put its case as the Defendants suggest. He says there is no suggestion of conduct or culpable misconduct on behalf of the Defendants. He relies on the Defendants’ decision to introduce a different form of lease as a commercial and profitable exercise. The difficulties which arose for Mr Crehan and other tenants were inherent in the lease terms, beer prices etc. He does not say that the Defendants were deliberately trying to make the businesses fail. The introduction of the new lease was a commercially innovative decision (see Park J, paragraphs 45 to 47), but he submits the lease cannot be considered away from the rents and beer prices which imposed a squeeze on the tenants and led to a high rate of failures. This was not as a result of deliberate company policy, but the new lease was designed to make substantial profit for the company and led to the litigation. Therefore, in his submission, the litigation is the inevitable result of the new lease.

The suggestion that the proceedings were clearly in the public interest was raised at paragraphs 13 to 17 of Mr Croft’s statement. He points out that the Court of Appeal was unanimous in giving permission to appeal to the House of Lords to both sides. The case was one of approximately 600 similar claims, and the damages awarded to Mr Crehan were a fraction only of the company’s potential liability. Mr Croft suggests that the public interest of the case went beyond the claims against Inntrepreneur, and concerned the recoverability of damages for infringement of competition law. Mr Morgan suggested that this was the use of private law litigation to enforce public competition law. He referred to the OFT’s discussion paper dated April 2007 (OFT 196) “Private actions and competition law: effective redress for consumers and business”, in particular paragraphs 2.3 setting out the policy objective and 3.4 dealing with costs. These paragraphs do not, in my view, advance his case. He also referred to the letter from the DCA dated 5 April 2005 to Mr Croft (exhibit RLC11 page 36) informing Mr Croft that the Department had authorised the Commission to make a grant of funding, and he points to the criteria which had to be met for exceptional funding. Those criteria are:

“● the case raises a significant wider public interest; or

● the case is of overwhelming importance to the client; or

● it would be practically impossible for the client to bring or defend the proceedings or the lack of public funding would lead to an obvious unfairness in the proceedings.”

He submits that funding was granted because those criteria were met, and this case was about testing an important point of competition law.

Mr Morgan referred to the case of Baxendale Walker v The Law Society [2007] EWCA Civ 233, in which the decision of Moses LJ in the Divisional Court was upheld by the Court of Appeal:

“In considering an order of costs against a public regulator the court must consider on the one hand the financial prejudice to the particular complainant, weighed against the need to encourage public bodies to exercise their public function of making reasonable and sound decisions without fear of exposure to undo financial prejudice, if the decision is successfully challenged.”

In respect of this Mr Pooles submits that if private anti trust litigation was to be subject to a different regime Parliament would have introduced legislation to deal with it. He suggests, and I agree, that Baxendale Walker contains no guidance which will assist me in this case.

In any event, argues Mr Pooles, the fact that this case raised issues of more general public importance, not just in relation to the large number of Inntrepreneur tenants with pending claims, but also the wider constitutional question of the proper approach for the National Court to take to the views of the European Commission is a factor in favour of making an order for costs against the Commission. There was at the time no guidance from the Court of Appeal on the constitutional issue at stake. He therefore relies on Lord Pearson in Saunders (at 1055):

“This was the plaintiff’s appeal and leave was given for it because it involved important general questions of law. It is not fair or equitable that a substantial part of the expenses of elucidating the law should be thrown upon the successful respondents.”

He argues that the Court should not impose a duty on the other party (Inntrepreneur) to self fund, because the LSC deems the case to be in the public interest. He submits that there is no element of fault or culpable conduct on the part of the Defendants which might be thought to disentitle it to an order for costs where the Defendants have succeeded at trial, and ultimately on appeal to the House of Lords; appeals initiated by the Claimant, with the assistance of the LSC, without which the Claimant would undoubtedly have been unable to proceed further.

The House of Lords authorities Saunders v Anglia Building Society, Davies v Taylor and Din v Wandsworth make it clear that the courts have a very wide discretion to do what is just and equitable in all the circumstances. As Lord Dilhorne said in Davies, the court is entitled to have regard to “any relevant circumstances”. This would include both the conduct of the applicant, and, in the majority of cases, of the legally assisted person. That discretion is, as Mr Morgan submits, untrammelled. It seems that those authorities were so well known that Lord Phillips MR in Gunn was able to refer to “the now well established meaning of “just and equitable”” and he expressed the view that that meaning did not require any change by reason of the introduction of the new Regulations.

The Court has always had a very wide discretion in relation to the award of costs, not only in S11 of the Access to Justice Act 1999 cases, but also in respect of the costs of litigation generally. The “English Rule” that costs follow the event is the normal starting point rather than the finishing point. See for example, Lord Woolf MR in A.E.I.Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR1507 CA, where he explains the correct approach to the award of costs under the CPR. Following the introduction of the CPR the courts are more ready than previously to depart from the costs follow the event rule but the House of Lords, in the cases cited by Mr Morgan found no reason to depart from it, nor do I find any reason to do so in this case.

With regard to Mr Pooles’ submission that the existence of a wide discretion is not inconsistent with the proposition that it will normally be just and equitable to make an order against the Commission in such circumstances it is certainly arguable, but, in my judgment, it is not necessary for me to decide in the circumstances of this case whether or not there is a presumption that it will normally be just and equitable to make an order against the Commission; or indeed to decide whether the decisions of the Court of Appeal in Re: O and Gunn were given per incuriam. The statute under which I have to decide this issue is the Legal Aid Act 1988. In Gunn the Court of Appeal was dealing with Section 11 of the Access to Justice Act 1999. The question whether it is just and equitable in all the circumstances for the Defendants to receive their costs from the Commission is one which can be decided on the particular facts of this case, in the light of the principles laid down in the House of Lords authorities which I have quoted.

The Defendant company sensibly made provision to cover the costs of these proceedings, and accordingly has assets which are sufficient to meet their costs. That of itself is not, in my judgment, sufficient to reach the conclusion that it would be unjust and inequitable for them to recover some or all of their costs from the Commission. It is well known that the resources of the Commission are strained, and that the Government is making strenuous efforts to contain the legal aid budget. This has been a problem over many years. The question of the legal aid budget is essentially a political one. It is for the Government to decide to what extent it is prepared to finance the Legal Services Commission and to decide what level of protection it wishes to provide to the Commission against adverse orders for costs. At the moment the Commission is protected at first instance by the severe financial hardship requirement, and in the appellate courts by the fact that any costs ordered to be paid by the Commission will have been assessed and will be no more than is reasonable and proportionate in all the circumstances.

In my judgment the different provisions relating to the recovery of costs from the Commission at first instance and on appeal provide a clear indication of Parliament’s intention as to the relevance of the means of the applicant and the LSC in all but exceptional cases. At first instance no application against the LSC is possible unless (since 2003) the successful defendant is an individual who has suffered financial hardship. Thus a successful defendant such as Inntrepreneur is prevented from recovering its costs. On appeal a successful unassisted party may, provided it is just and equitable for it to do so, recover its costs unless the application is made late or there is an order for the assisted party to pay.Thus, at first instance poverty does not normally assist a defendant such as the defendant in this case (and post 2003, will never assist them) whilst, on appeal, strong solvency has never, by itself, prevented the making of an order against the LSC.

Although it is clear that the House of Lords has, on occasion, been persuaded not to award a successful unassisted party its costs in the Court of Appeal, whilst awarding them in the House of Lords, the two authorities cited, Saunders and Din, do not in my judgment greatly assist. In Saunders the building society was able to add its costs to its security, added to which it was the building society which had initiated the appeal in the Court of Appeal. In Din no indication is given in the note as to the reason why costs in the Court of Appeal were not awarded.

As Mr Pooles points out the Defendants in these proceedings were Respondents in the Court of Appeal, and were originally Defendants before Park J; and indeed had tried to resolve the matter outside the litigation by approaching the European Commission.

I do not accept that the terms of the Inntrepreneur lease led inevitably to this litigation. The squeeze put on the tenants by the terms of the new lease was exacerbated by the recession. The judgment of Park J makes it clear that large numbers of tenants were interested in the lease, and that a significant number made a success of the business. I accept Mr Pooles submission (at paragraphs 67 and 68 above) that, even if it could be said that the claim at first instance was the inevitable result of the new lease, the same cannot be said for the appeals to the Court of Appeal, or indeed the House of Lords.

For the reasons I have given, taking into account all the circumstances, I am of the view that it would be unjust and inequitable if Inntrepreneur were not to recover their reasonable costs in the Court of Appeal from the Commission. The Defendants were Respondents in the Court of Appeal, and had originally been Defendants before Park J at first instance. They had attempted to avoid the litigation by engaging (unproductively) with the Commission (see judgment of Park J at 47 (ii)). There has been no sustainable criticism of the Defendants’ conduct. The Defendants’ ultimate success was based on exactly the same grounds on which they were successful at first instance.

Given the decisions which I have set out, there is no basis for the making of a partial order in respect of the costs of the Court of Appeal.