Neutral Citation Number: [2012] EWCA Civ 1589
Case No: A1/2012/0318
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT sitting at
LIVERPOOL COUNTY COURT
His Honour Judge Gore QC
9LV52085
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 06/12/2012
Before :

LORD JUSTICE MUMMERY

LORD JUSTICE TOMLINSON
and
LORD JUSTICE DAVIS
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Between :

	Andrew Connell	Appellant	
	- and -		
	Mutch t/a Southey Building Services & Anr	Respondent	

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(Transcript of the Handed Down Judgment of
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Richard Bradley (instructed by Connell Associates) for the Appellant
David Berkley QC (instructed by James Murray Solicitors) for the Respondents

Hearing date : 20 November 2012
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Judgment

Lord Justice Tomlinson : 
1.	The Appellant, Andrew Connell, Second Claimant below, appeals against an order for costs made by His Honour Judge Gore QC in the Technology and Construction Court sitting at Liverpool.  This is yet another in the depressing series of construction disputes where the costs incurred on both sides can confidently be expected to be out of all proportion to the amount ultimately recovered.
2.	The Respondent is a building contractor.  By an oral agreement evidenced partly in writing by a priced Schedule of Works the Respondent agreed to perform building works at Flat 1, 72 Rodney Street, Liverpool.  The price originally agreed was £59,140 but after the work began in February 2003 there were numerous oral variations to the scope of the work, including one involving the replacement of the existing concrete roof with a roof made of Spanish slates.
3.	The work was completed in June 2003 but in July damp became evident in the ceilings.  For the next almost six years the parties were in dispute, with the principal questions being whether the roof works were defective, whether the Respondent had been overpaid for the contract works or whether, as the Respondent contended, the employer had underpaid by reference to the priced Schedule of Works and the agreed variations thereto.  Meanwhile remedial works to the roof were carried out in early 2008.
4.	72 Rodney Street is and was at all material times owned by the Appellant.  Flat 1 is a residential unit on the top floor.  The lower floors are let to a dental practice.  However, when the parties reached the stage of a letter before action, in January 2008, it was asserted on the employer’s side that the contract had been concluded not between the Appellant and the Respondent but between Connell Property Holdings Ltd and the Respondent.  In April 2009 a claim form was issued in the name of Connell Property Holdings Ltd as the sole claimant.  Paragraph 1 of the Particulars of Claim asserted, as was not in fact the case, that Connell Property Holdings Ltd owned Flat 1, 72 Rodney Street, albeit that it was occupied as a residential unit by the Appellant.  The Particulars of Claim went on to assert that the contract had been concluded by the limited company with the Respondent.  The Appellant is and was at all material times one of two directors in the eponymous company and the sole shareholder therein. 
5.	The claim against the Respondent was twofold.  First, it was asserted that, had the work been satisfactorily carried out by him, the amount payable would have been £87,447.61.  Since £90,650 had been paid, the return of an overpayment in the sum of £3,202.39 was claimed.  Secondly, it was alleged that the roof works were defective.  £36,633.33 was claimed as the cost of the remedial works and associated matters, including the cost of alternative living accommodation for the Appellant whilst the remedial works were carried out.
6.	In June 2009 the Respondent put in his Defence and Counterclaim.  He admitted that Connell Property Holdings Ltd owned the property and that the contract had been concluded with that company, although he noted at paragraph 10 that the decision to replace the main roof coverings was that of the Appellant.  He denied that the roof work was defective, denied the overpayment and, on the contrary, counterclaimed £14,323.44 as outstanding from the Claimant as the unpaid balance due in respect of the work performed.  
7.	In October 2010 the Respondent served a Request for Further Information which we were told “tangentially” raised the issue whether Connell Property Holdings Limited might not be the correct contracting party.  We were not shown the document.
8.	On 18 September 2011 Amended Particulars of Claim were served.  This document acknowledged that the Appellant owned 72 Rodney Street, but asserted that Connell Property Holdings Limited had acted as managing agent for the Appellant in respect of the property including Flat 1 and maintained the position that the contract with the Respondent had been made by the company in its own right as contracting party.  However now it was asserted in the alternative that the contract was with the Appellant.  By an Amended Defence and Counterclaim served on 18 October 2011 the Defendant declined to plead to the agency relationship of which he had no knowledge but denied that his contract was with Connell Property Holdings Limited.  It was, he asserted, with the Appellant with whom at all material times he had dealt.
9.	The matter proceeded to trial over five days in January 2012.  At the end of the trial the judge gave a lucid and comprehensive extempore judgment of which we have an approved transcript.  No complaint is made about any of the judge’s conclusions.
10.	The judge dealt first with the contracting parties.  He found the Respondent a straightforward and impressive witness, although he did not accept all of his evidence.  He found the Appellant neither straightforward nor impressive.  He found him argumentative and prone to serious exaggeration.  Parts of his evidence were, the judge concluded, “designed to confuse, if not, frankly, to mislead” although he acquitted him of dishonestly hiding behind a potentially impecunious corporation so as to avoid a potential adverse costs liability.  The judge did not reject all of the Appellant’s evidence.  
11.	The judge found that the contract was between the Appellant and the Respondent.
12.	The judge next dealt with the amount due for the work done.  Some of the variations involving additional work had had the result that some of the work specified in the original Schedule of Works was not done.  There was a dispute about the extent of these “omissions”.  Expert valuation evidence was tendered which the judge found unhelpful because partisan.  On plumbing the Appellant contended for a deduction of £5,000 and the Respondent for a deduction of £3,500.  The judge allowed a deduction of £4,000.  On a second “omission” issue the Appellant was successful in securing a deduction as sought in the sum of £643.
13.	There was then dispute about the entitlement of the Respondent to charge for four items of the additional works, although during the course of the hearing the Appellant conceded one item.  The Respondent succeeded on the remaining three items in the amount which he claimed, which was £5,500 together with whatever was the amount in dispute in relation to skips, which does not appear from the judgment.  The Respondent failed to recover an additional charge, which the judge found related not to the original work but to investigatory and repair efforts made after the Appellant complained that the new roof leaked.
14.	The upshot was that (a) the Appellant’s claim to recover an overpayment of £3,202.39 failed and (b) the counterclaim for £14,3023.44 succeeded in the sum of £9,600.41, a recovery of 67%. 
15.	The judge turned next to the “major issue” in the case, although he was able to deal with it quite shortly.  There was no dispute that the roof leaked but a dispute as to the extent of the leak.  Both the battens to which the slates were to be fixed and the headlap, a dimension by reference to which the slates were to be laid, failed to comply to the applicable British Standard.  In addition to the extent of the leak, there was dispute as to whether the leak was rectified by the addition of first, felt covering and secondly, lead flashing, dispute as to the reason or reasons for the leakage of the roof and dispute as to whether the area in which 72 Rodney Street stands should be regarded as “worse than moderately exposed,” a question relevant to the extent of the required headlap.  There was also a dispute as to the reasonable cost of repair.
16.	On these issues again the judge heard expert evidence including the evidence of roofers.  The Appellant’s roofing expert was impressive, the Respondent’s roofing expert unimpressive.  In one respect the latter was found to be partisan.  On these issues the Appellant was successful in establishing that he was entitled to the cost of re-covering the roof.  However he was unsuccessful in his claim for consequential losses, some such as disturbance of plaster work being occasioned by poor workmanship on the part of the roofing contractors who carried out the repairs.  Likewise the judge found that the Appellant’s having moved out of the property was not necessitated by any breach by the Respondent.  The upshot was that the claim for £36,633.33 succeeded in the amount of £22,336.50, a recovery of 61%.
17.	Setting off the counterclaim against the claim as the judge found to be the Respondent’s pleaded entitlement, the net outturn as the judge called it was recovery by the Appellant in the sum of £12,736.09.  The judge concluded his judgment in this way:-
“As a matter of formality, however, the claim against the Defendant by the First Claimant is dismissed.  There is judgment for the Second Claimant on the claim for £22,336.50 but there is judgment for the Defendant on the counterclaim for £9,600.41.”  (Paragraph 31.)
18.	After further argument the judge added a further £1,623.86 as interest on the net sum due to the Appellant, entering judgment for £14,359.94.
19.	The judge then heard argument on costs.  At the conclusion of that argument he pronounced the following order, in which he referred to Connell Property Holdings Limited as the First Claimant and to the Appellant as the Second Claimant:-
“1. The claim of the First Claimant is dismissed.
2. Judgment for the Second Claimant on the claim in the sum of £14,350.94 (being £12,736.09 plus $1,623.86 interest) net of set off.
3. Judgment for the Defendant on the Counterclaim against the Second Claimant.
4. The First Claimant pay the Defendant’s costs of First Claimant’s action against the Defendant, claim and counterclaim.
5. The Defendant pay the Second Claimant’s costs of the Second Claimant’s claim against the Defendant.
6. The Second Claimant pay the Defendant’s costs of the Defendant’s Counterclaim against the Second Claimant.
7. Costs to be the subject of detailed assessment on a standard basis if not agreed.
8. The Claimant’s application for permission to appeal the costs order and the entry of judgment for the Defendant on the Counterclaim refused.
9. The sum ordered to be paid at paragraph 2 herein shall be paid by 4.00pm on the 10th February 2012.”
20.	It is plain from paragraph 31 of his substantive judgment that the judge originally intended to make separate awards upon the claim and upon the counterclaim and to allow for mutual set off of the judgement sums.  However the counterclaim was pleaded as a set off and the judge was right to give effect to it as an equitable set off which operated as a partial defence to the Claimant’s claim.  The judge did so having been reminded of the decision of the Court of Appeal in Hanak v Green [1958] 2 QB 9.  It is common ground that the judge was wrong to enter judgment for the Defendant on the counterclaim.  Notwithstanding the counterclaim had succeeded in diminishing the claim, the appropriate order was that the counterclaim be dismissed or, perhaps, that there be judgment thereon for the Second Claimant, since there was no amount for which judgment could be given in favour of the counterclaiming defendant.
21.	There has been some equivocation and uncertainty on the question whether an appeal is pursued by the First Claimant, Connell Property Holdings Limited, but at the hearing before us it was finally confirmed that an appeal is pursued only by the Second Claimant and now Appellant.  It was the case of Mr Bradley for the Appellant that the judge erred in the exercise of his discretion in failing to award to the Appellant both the costs of the claim and the costs of the counterclaim.  In other words, submitted Mr Bradley, the judge should simply have awarded to the Appellant the costs of the action to be paid by the Respondent.  The judge had, he suggested, fallen into error as a result of adopting the wrong starting point for the exercise of his discretion on costs.  He was wrong to enter judgment for the Defendant on the counterclaim, and this led him to overlook that the Appellant was the overall winner in whose favour “the cheque was to be written” at the end of the case.  The costs order made by the judge was, pointed out Mr Bradley, mutatis mutandis, the very type of order which had been overturned by the Court of Appeal in Hanak v Green.  In the alternative, submitted Mr Bradley, if it was appropriate for the Respondent’s partial success on the counterclaim to be reflected in any way in the costs order, which of course Mr Bradley denied, the judge should have made an order requiring the Defendant/Respondent to pay only a proportion of the Appellant’s costs, but nonetheless a “high percentage”.  In his skeleton argument Mr Bradley had referred, merely by way of an example, to an award of 80% of the costs of the action which might have been made in his client’s favour, citing in support Burchell v Ballard [2005] EWCA Civ 358 where in not dissimilar circumstances an award of 60% was made where the claim succeeded in an amount greater than the counterclaim.  The judge had, Mr Bradley suggested, overlooked CPR 44.4(7) which directs that a court minded to make an order that a party pay costs relating to a distinct part of the proceedings only, in modern parlance an issue based order, should instead, if practicable, make an order that one party must pay a proportion of another party’s costs, or pay costs incurred from or until a certain date only.  The rationale underlying that direction is undoubtedly that it is desirable to avoid satellite litigation at the stage of assessment of costs directed to the ascertainment of costs referable to a particular issue in the litigation.
22.	Reliance upon Hanak v Green in the costs context only takes Mr Bradley so far.  Having established the principle that the counterclaim should have been treated as an equitable set off Morris LJ, who alone addressed the point, spent little time in his judgment on the question of the appropriate costs order.  Having noted that the defendant was there the victor by £10 odd after the successful counterclaim at £84 had defeated the successful claim in the sum of £74 he simply stated that the fair order was that the defendant should recover the costs of both claim and counterclaim.
23.	I agree that the starting point of the judge’s consideration had to be that the Appellant was the successful party whose costs should be paid by the unsuccessful party, which is in effect what Morris LJ said in Hanak v Green and as is now enshrined in CPR 44.3(2)(a):-
“(2) If the court decides to make an order about costs –
(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but . . .”
Sub-paragraph (b) then goes on to provide that “the court may make a different order”.  As Jackson LJ pointed out in Naseem v Kang [2011] EWCA Civ 737, yet another building dispute:-
“It is undoubtedly the case that the courts have adopted a more flexible approach to costs since the introduction of the Civil Procedure Rules than was formerly the case.” (Paragraph 38)
24.	The judge did not give a separate formal judgment on costs but his reasons emerge from the transcript of the argument.  It is apparent therefrom that the judge had in front of him CPR 44.3 and was well aware that the starting point was that costs follow the event and that here the Appellant was the successful party.  Nonetheless, the judge thought that the circumstances of the case justified a departure from that approach to reflect the Respondent’s success in the counterclaim.  The judge went through the checklist in CPR 44.3(4), noting that he had to take into account admissible offers.  He had regard to the non-exhaustive definition of conduct in CPR 44.3(5).  Most of the argument seems in fact to have been devoted to counsel for the Defendant’s attempt to persuade the judge to reduce the costs recoverable by the Appellant in respect of the claim on account of exaggeration and his failure on hotly contested issues relating to the roof repairs.  As to that, addressing the then counsel for the Defendant, Mr Bennett, the judge said this:-
“. . .  There was an awful lot of argument and evidence about the causes of the water ingress and about the, as I have characterised them, non-compliances, wants and defects in the workmanship and whether that necessitated reasonably the re-covering of the roof or would have been adequately dealt with simply by way of repair, and that has really been what has taken most of the time in this case.  Some time has been taken, for the reasons that you allege, I accept that.  What troubles me, despite my instinct, which is to penalise for disproportionality in this case because I really do not see why this case should have taken five days and effectively it has now, but at the moment I am not persuaded that those are points that demand a 44.3 adjustment as opposed to being points that you are still perfectly able to take on detailed assessment, including on matters of conduct, enable you to say the claimants’ recovery of what Mr Bradley impliedly concedes to be an eye-watering sum of money in relation to costs is not justified, and you have got all of those points available to you on detailed assessment.  That is why I stand back from this and look at it from the point of principle.  I am with you that principle demands some form of recognition in the order that I make that, whereas the second claimant denied that he owned you any money at all and indeed sought to argue that you owed him money before one even got to the question of defective workmanship, you nonetheless have succeeded in establishing that he owned you a significant sum of money and I am persuaded at the moment that you have to have an opportunity to benefit from that issue-based finding, and it seems to me that the way in which to procure your ability to benefit from that is to say, despite the net outturn on Hanak v Green being a net judgment for the claimant for 12,000-odd, that the defendant nonetheless is entitled to the costs of the counterclaim, and you can argue on detailed assessment what those costs might be.”
25.	The judge plainly thought that the costs actually recoverable by the Defendant would be modest and that it was “ultimately a matter for the detailed assessment whether there are any significant apportionable costs on the counterclaim that the Defendant is entitled to recover . . .”   - see the transcript of the argument at page 87E.  A little earlier on the same page the judge said this:-
“. . . The event in those circumstances in the light of Hanak v Green  is that the judgment, and therefore, prima facie, 44.1, the costs follow it and the claimant (that is the second claimant) is entitled to the costs of the action.  Subject to anything that Br Bradley may say, I am inclined to the view that the defendant nonetheless would remain entitled to the costs of the counterclaim because he has succeeded in establishing it in a contest, but, although it is a matter for argument at the detailed assessment, what commonly transpires in these cases is that much of the cost is really referable to the claim and not severably identifiable as referable to the counterclaim, and his success on the counterclaim costs is likely to be modest.  It will include things like the pleading, the Part 20 formalities, but you cannot differentiate, for example, the global cost of the expert evidence and separate it as between claim and counterclaim.  It would all have to have been incurred on the claim anyway, for which the report charges and there will be difficult points for the defendant in seeking to sever such items.”
The trial judge has therefore given very considerable guidance to the costs judge as to the manner in which the assessment should be conducted.  Mr Bradley expressed his concern that an attempt might be made at the assessment to suggest that the costs of the quantity surveyors were not recoverable as costs of the claim but recoverable only as costs of the counterclaim, but the judge appears to have foreclosed or at any rate attempted to foreclose that argument.  He did not differentiate between the experts and I note from the substantive judgment that Mr Walter gave evidence in relation to both claim and counterclaim, and I have no reason to think that Mr Earl did not do likewise.
26.	I would accept that most judges would have dealt with this situation by simply awarding the Second Claimant/Appellant a proportion of his costs.  I also consider that that is best practice as is reflected by CPR 44.5(7).  It would have been preferable had the judge adopted that course.  On the other hand the situation was confused to some extent by the failure of the First Claimant to establish the primary case.  It is acknowledged by Mr Bradley that the judge had a discretion to depart from the starting position that the successful claimant was entitled to the costs of the action and it is accepted also by Mr Bradley that, if the judge felt minded so to depart, it would have been appropriate for him to have deprived the successful claimant of a proportion of his costs.  The judge thought that the Respondent’s partial success had to be reflected in some way and he decided that the justice of the case which he had tried over the previous five days was better served by making the order which he did, combined with the guidance which he gave to the costs judge as to the limited nature of the recovery by the Defendant of his costs of the counterclaim which he envisaged.  The judge was uniquely well placed to make this assessment.
27.	Mr Bradley submitted that the effect of the judge’s order is that the Appellant will be deprived of all almost of his costs.  That is plainly not what the judge intended and in the light of the judge’s observation in the substantive judgment that the question of the roof leak was the major issue in the case, and his observation in the course of the argument about costs that it was this issue which had taken most of the time in the case, I regard such an outcome as inconceivable.  It is still less likely, if that is possible, given the guidance which the judge has given to the costs judge.  Mr Bradley then submitted that were the order expressed rather in terms that the Appellant should recover 70% of his costs that would be likely to result in a greater recovery than would the present order.  He was unable to say whether the same result would follow if the order were that the Appellant should recover 60% of his costs.  This simply demonstrates to my mind the extreme danger in our interfering with the judge’s order in a manner which might well lead to a recovery by the Appellant less generous than the judge intended.
28.	Since as it happens I was the single Lord Justice who granted permission to appeal on the paper application, I can with some confidence agree with Mr Berkley QC’s submission for the Respondent that it is unlikely that permission to appeal would have been granted in this case had not the judge awarded judgment to the Defendant on the counterclaim.  Although we were not told what they amount to, as I indicated in paragraph 1 above the costs incurred in these proceedings are, no doubt, out of all proportion to the sum ultimately recovered, and this is sadly typical of this class of litigation.  We cannot safely or sensibly substitute for the judge’s order a proportionate recovery order which will reliably carry through his assessment of the manner in which the relative levels of success and failure should be reflected in the incidence of costs.  It would be a costly exercise to remit the matter to the judge for him to receive further argument and to craft such a substituted order, and it was not suggested that we should do so.  Moreover, that would set a bad precedent.  I would reiterate and re-emphasise that it would in my judgement have been the better course for the judge to make an order of the type contemplated by CPR 44.3(6)(c), i.e. an order that the Second Claimant/Appellant recover only a proportion of his costs and to have made no order for costs in favour of the Defendant/Respondent.  Such an order is usually likely to prove in the interests of both parties as minimising the need for further argument at the assessment stage.  But I consider that we would do neither these litigants nor litigants in general any service were we to interfere with the judge’s order.  No encouragement should be given to appeals of this nature.  We cannot in my judgment conclude that the judge’s approach fell outside the ambit of reasonable decision making.
29.	I should finally add that Mr Bradley relied on two offers of settlement made by Connell Property Holdings Limited as corroborative of his point that the case was simply about money and in particular which party would end up paying the cheque at the end of the case.  He did not suggest that the judge’s exercise of his discretion was vitiated by a failure to give proper weight to those offers as required by CPR 44.3(4)(c) and accordingly I need say no more about them.
30.	I would dismiss the appeal.
Lord Justice Davis :
31.	I agree.
Lord Justice Mummery :
32.	I also agree.