Appeal No. UKEAT/0082/12/RN

EMPLOYMENT APPEAL TRIBUNAL
FLEETBANK HOUSE, 2-6 SALISBURY SQUARE, LONDON, EC4Y 8JX

	At the Tribunal
	On 20 March 2012
                                                                                Judgment handed down on 17 August 2012

Before
THE HONOURABLE MRS JUSTICE SLADE DBE
MS V BRANNEY
MR T STANWORTH

MRS D RAGGETT	APPELLANT

JOHN LEWIS PLC	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MS CLAIRE DARWIN 
(of Counsel)
Bar Pro Bono Unit	
For the Respondent	MISS HAYLEY McLORINAN 
(of Counsel)
Instructed by:
John Lewis Partnership 
Legal Services
4th Floor, Partnership House
Carlisle Place
London
SW1P 1BX	

SUMMARY

PRACTICE AND PROCEDURE – Costs

In determining the amount of costs to be awarded having decided that the bringing of an unfair dismissal claim was misconceived and that a costs order should be made against the Claimant  paying party, applying Barnsley Metropolitan Borough Council v Yerrakalva [2012] IRLR 78 to the exercise of their discretion as to the amount of costs to be awarded under the Employment Tribunal (Constitution and Rules of Procedure) Regulations 2004 rule 40, an Employment Tribunal should look at the whole picture of what happened in the case and identify what effects the Claimant’s misconceived claim had on the proceedings and associated costs.  Applying respectively Barnsley and Kopel v Safeway Stores plc [2003] IRLR 753 the ET can take into account the receiving party’s unreasonable litigation conduct and an unreasonable refusal by the Claimant of a settlement offer.  In both cases, findings of fact are needed to support such conclusions.  In this case the ET did not err in the assessment of the amount of costs they ordered the Claimant to pay the Respondent save that the Claimant’s appeal from the inclusion of an amount of VAT in such costs succeeded.  VAT should not be included in costs ordered to be paid under rule 40 if the receiving party is able to reclaim VAT as input tax.  Although the detailed provisions of the CPR do not apply to proceedings before ETs their general principles do (Neary v St Albans Girls’ School [2010] ICR 473 per Smith LJ paragraph 47).  Costs are compensatory not punitive.  This principle is reflected in paragraph 5.3 of the Costs Practice Direction 5.3.

Award of costs reduced to exclude a sum in respect of VAT.

  

THE HONOURABLE MRS JUSTICE SLADE DBE

1.	The Claimant appeals from the decision of an Employment Tribunal (‘ET’) by a judgment sent to the parties on 4 November 2011 (‘the judgment’) by which she was ordered to pay the Respondent’s costs of £2,655.72 which included VAT in the sum of £442.62.  The Claimant does not appeal the finding of the ET that it was appropriate to make a costs order.  The appeal is from the amount of the costs order.  The appeal concerns the factors which should, and may be taken into account by an ET in exercising their discretion as to the amount of costs to be awarded once they have decided that the paying party’s conduct falls within the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004 (‘ET Rules’) rule 40(3) and that it is appropriate to make a costs order.  The second ground of appeal raises the question of whether a sum in respect of VAT should be included in the costs to be paid when the receiving party is able to reclaim it as input tax.  The parties will be referred to as Claimant and Respondent, their titles before the ET.  References to paragraph numbers are to paragraphs in the judgment unless otherwise indicated.

The grounds of appeal 
2.	Ms Darwin on behalf of the Claimant advanced two grounds of appeal.  These were:

“(1) The Employment Tribunal failed to consider what costs were incurred by the Claimant’s conduct, and failed to apply the principle that an award of costs must, at least broadly, reflect the effect on costs of the conduct in question (McPherson v BNP Paribas [2004] ICR 1398, Barnsley Metropolitan Borough Council v Yerrakalva [2011] EWCA Civ 1255).
(2) The amount of costs awarded (£2,655.72) included Value Added Tax (‘VAT’) of £442.62.  The Employment Tribunal erred in law by ordering the Claimant to pay any VAT incurred on the Respondent’s counsel’s fees or travel expenses.”

Outline facts
3.	The Claimant was employed by the Respondent as a sales assistant from 15 August 2006 until her summary dismissal for gross misconduct on 7 June 2010.

4.	As a benefit of employment the Claimant was the holder of a Partner discount card.  The Claimant applied for an additional discount card for her husband.  The Respondent’s policy restricts purchases to:
a)	the cardholder for their own use,
b)	the cardholder for the benefit of those living at the same address,
c)	the cardholder when purchasing a gift for anyone else and which is not a business arrangement, or providing a refund to the cardholder.  In other words a genuine gift.

The Claimant signed a declaration stating:

“I understand that if I or my additional cardholder breach discount rules it is taken very seriously and my discount entitlement could be suspended, removed or I could be dismissed.”

5.	On 17 December 2009 two purchases were made at John Lewis, Milton Keynes using the Claimant’s additional discount card for which she was responsible.  They were for a PlayStation 3 valued at £244.65 and a toy car valued at £59.95.  The Claimant was not present at the time of the transaction.  That evening a Mrs C Hall telephoned the store to say that another store was offering a better deal selling a PlayStation 3, including a free game.  A couple (not the Claimant and her husband), came into the store following up the reported under-sale.

6.	The Respondent suspected that the Discount Card had been used by someone other than the Claimant’s husband.  An investigation took place.  At the first investigatory meeting the Claimant denied any knowledge of Mr and Mrs Hall but stated that in any event, her husband had made the purchases.  A further investigatory meeting with the Claimant took place.  The Claimant brought a grievance about the handling of the investigatory process.

7.	Disciplinary proceedings were taken against the Claimant.  Following a disciplinary hearing the Claimant was summarily dismissed.  The ET held that the Respondent had sufficient grounds to come to that decision.

8.	The Claimant appealed from the decision to dismiss her.  On appeal the Respondent decided that since the Claimant had probably not been personally involved or aware of the transaction, the sanction of dismissal should be reduced to a final written warning.

9.	Six weeks later the Claimant wrote to the Respondent rejecting the imposition of a final written warning and suggesting that she should return with a written warning.  The Respondent did not reply and the Claimant subsequently resigned.  She had obtained alternative employment.

10.	By an ET1 lodged on 25 August 2010 the Claimant claimed unfair dismissal arising out of her dismissal on 7 June 2010, notice pay and holiday pay.  By a further ET1 lodged on 2 December 2010 after the sanction of dismissal was reduced to a final written warning and her letter of resignation received on 16 November 2010 the Claimant claimed unfair dismissal arising from an alleged constructive dismissal on 16 November 2010, notice pay and holiday pay.  The Claimant accepted that re-instatement following the success of her appeal “nullified her dismissal for which reason she has withdrawn the first set of proceedings”.  In her second ET1 the Claimant claimed constructive unfair and wrongful dismissal.  

11.	By letter dated 14 March 2011 to the Claimant, the Respondent informed her of their position that there was no evidence to support her claim of constructive dismissal.  Their view was that her case was misconceived and had no reasonable prospect of success.  The Respondent informed the Claimant that if her claim was unsuccessful they would be seeking an award of costs against her and that they reserved the right to produce their costs warning letter to the ET in support of their application.  They stated that the cost of their counsel preparing for and attending the hearing would be “upwards of £2,500 plus VAT”.  They were prepared not to seek an award of costs if the Claimant were to withdraw her claim by 4pm of 25 March 2011.

12.	The Claimant did not withdraw her ET1 and asked the Respondent to make her an offer.  By letter dated 27 April 2011 the Respondent asked the Claimant for a Schedule of Loss including all earnings (including all benefits) she had received since resigning from their employment.

13.	On 11 May 2011 the Claimant’s then counsel telephoned the Respondent’s legal department and without prejudice, settlement discussions started.  The Claimant’s then counsel’s attendance note shows that the Respondent accepted that wages were owed for June to September but there were no figures from which to calculate losses.  The note reads:

“Prepared to pay.  Commercial settlement.”

On 12 May 2011 in another telephone call with the Claimant’s then counsel the Respondent made a without prejudice offer of £1,984.81 gross in respect of wages from 7 June to 17 September 2010 and £500 for an overall full and final settlement making a total of £2,484.81.  Repeated in the skeleton argument before us on behalf of the Claimant is the assertion that the Respondent accepted that they owed the Claimant wages in respect of the period between June and September 2010.  The Claimant’s then counsel’s attendance note of a conversation with the Respondent on 13 May 2011 records that a counter offer of £6,500 made on behalf of the Claimant was rejected.

14.	The hearing before the ET took place on 16 and 17 May 2011.  Both parties were represented by counsel.  The ET identified the issues to be determined in deciding the constructive dismissal claim.  At paragraph 1.7 the ET record that:

“…in respect of the breach of contract claim, the parties agree that the Claimant is entitled to a refund of deductions in salary from 8th June 2010 to 17th September 2010, in addition to accrued holiday entitlement for that period, less earnings from alternative employment which final figure they have agreed in the sum of £2,274.37.”

 In response to a question from Ms Darwin, who appeared on behalf of the Claimant before us but did not represent her in the ET, asking when the amount in respect of notice and holiday pay were agreed, counsel who acted for the Claimant before the ET wrote in an email of 1 March 2012 exhibited to the skeleton argument on behalf of the Claimant:

“(i) the amounts were not agreed until the tribunal retired to make a decision on liability.”

15.	The ET held that the acts for which the Claimant was dismissed justified that decision.  Accordingly reducing the sanction to a final written warning was not in any way a fundamental breach of contract.  The ET dismissed the Claimant’s claim for constructive unfair dismissal.

The Judgment of the ET on costs
16.	The parties made written representations to the ET on the Respondent’s application dated 14 June 2011 for costs.  The Respondent sought costs of £2,655.72 made up of, the brief fee of their counsel for the two day hearing, travel expenses and VAT on these sums.

17.	The ET held at paragraph 4.2 that the Claimant’s bringing of and conducting of her constructive dismissal claim was misconceived and that rule 40(3) of the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004 (‘ET Rules’) applied.  They did so for the reasons set out in paragraph 4.2:

“4.2. We do, however, find that the Claimant’s bringing of and conducting of her constructive unfair dismissal claim was misconceived and that therefore Rule 40(3) applies.  We do so for the following reasons:-
(a) The Respondent’s policy in respect of misuse of the discount card was crystal clear.  It was self-evident that, firstly, it mattered not whether the Claimant was involved or otherwise in the misuse and, secondly, that such misuse could result in dismissal.
(b) It was obvious from the Claimant’s own evidence at the Hearing that she understood fully the Respondent’s policy, including the fact that the Respondent had the option to dismiss her.  There also clearly had been misuse of the card.
(c) Therefore, the bringing of the claim, based on an apparent wilful ignoring by the claimant of the above facts, must, in out view, be misconceived.”

There is no appeal from this finding.

18.	Further the ET found that a costs order was appropriate in this case.  There is no appeal from this finding.

19.	The ET held in paragraph 4.3:

“(a) While we note that costs orders are the exception rather than the rule, we consider that it is appropriate to make an exception in this case, as the Claimant’s ignoring of the basic facts of her case in respect of the misuse of the discount card was entirely wilful.
(b) …the factors that resulted in the claim failing were not ‘legal concepts’, as argued by the Claimant, but clear cut and readily apparent facts which we find any lay person, without legal advice, would have understood.
(c) In the circumstances it was unwise for the Claimant to reject the settlement offered to her (particularly being aware of the threat of a costs application), in that she would have secured a greater amount than was subsequently awarded…”

The ET then considered and dismissed an argument that if the Respondent considered the claim to be misconceived they should have sought to have it dismissed at a pre-hearing review.  The ET held that this was not a case:

“…where the nature of the evidence would not be apparent to the Claimant until the hearing and therefore dictating that a hearing was essential for her to understand the evidence; all the relevant facts were known and nothing of any new significance emerged at the hearing.”

20.	The Claimant does not appeal from the decision to make a costs award but does challenge the amount of the award made.

21.	The ET at paragraph 4.3(e) turned to the amount of costs to be ordered.  They had regard to her earnings and apparent lack of savings and her means.  At paragraph 4.3 they held:

“We find that the appropriate amount of the costs order is the £2,655.72 claimed by the Respondent, on the basis that we can find no rationale to reduce that figure, as it pertains only to the costs incurred at the hearing and we have already found that such costs are reasonable for a hearing of that length.”

The relevant statutory provisions
The Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004 Schedule 1:
Rule 38:

“(3) For the purposes of these rules ‘costs’ shall mean fees, charges, disbursements or expenses incurred by or on behalf of a party, in relation to the proceedings.”

Rule 40:

“(2) A tribunal shall consider making a costs order against a paying party where, in the opinion of the tribunal, any of the circumstances in paragraph (3) apply.  Having so considered, the tribunal may make a costs order against the paying party if it considers it appropriate to do so.
(3) The circumstances referred to in paragraph (2) are where the paying party has in bringing the proceedings, or he or his representative has in conducting the proceedings, acted vexatiously, abusively, disruptively or otherwise unreasonably, or the bringing of the proceedings by the paying party has been misconceived.”

Rule 41:

“(1) The amount of a costs order against the paying party shall be determined in any of the following ways- 
(a) the tribunal may specify the sum which the paying party must pay to the receiving party, provided that sum does not exceed £10,000.
(b) the tribunal may have regard to the paying party’s ability to pay when considering whether it should make a costs order or how much that order should be.”

Civil Procedure Rules (‘CPR’) Costs Practice Direction:

“5.3. VAT should not be included in a claim for costs if the receiving party is able to recover the VAT as input tax.”

The submissions of the parties
Ground 1
22.	Ms Darwin on behalf of the Claimant contended that the ET erred in failing to consider the effect of bringing and conducting the unfair dismissal claim on the amount of the costs claimed.  Ms Darwin referred to the explanation by Mummery LJ in Barnsley Metropolitan Borough Council v Yerrakalva [2012] IRLR 78 at paragraph 41 of observations made by him in McPherson v BNP Paribas [2004] ICR 1398 paragraph 40 on the relevance of causation in the exercise of discretion to submit that the ET failed to award the costs properly to reflect the fact that the Claimant’s two breach of contract claims succeeded at the hearing.  Because those claims had not been conceded before the hearing it was submitted that some of the costs incurred for representation at the hearing were not attributable to the unfair dismissal claim which was found to have been misconceived.  Ms Darwin contended that the ET erred in failing to look at the whole picture in awarding the Respondent the entirety of the costs attributable to the hearing.

23.	Further it was submitted that the ET erred in taking into account two irrelevant considerations in the amount of costs awarded.  It was said that the ET erred in having regard to the fact that the Claimant had not beaten the settlement offer made to her before the hearing.  Also the ET should not have taken into account their view that it was unwise for the Claimant to reject the settlement offer.  In taking into account such considerations the ET failed to apply Kopel v Safeway Stores plc [2003] IRLR 753 in which the EAT held at paragraph 18 that:

“…it does not follow that a failure by an appellant to beat a Calderbank offer should, by itself, lead to an order for costs being made against the appellant.”

(A ‘Calderbank’ offer has been described as an offer of settlement in matrimonial proceedings marked without prejudice save as to costs.)  Ms Darwin submitted that when applying Kopel the ET must first conclude that the conduct of a Claimant in rejecting an offer was unreasonable before its rejection becomes a relevant factor in the exercise of the ET’s discretion under rule 40.  There was no such finding in this case.

24.	Ms Darwin also referred to what she contended was a factor which should have been taken into account by the ET: the conduct of the litigation by the Respondent.  The Respondent knew they owed the Claimant money yet they tried to compel the Claimant to accept an offer of less than was owed in return for not seeking an order for costs against her.

25.	Further, Ms Darwin contended that the ET erred in considering that the costs sought were ‘appropriate’ as they were only the costs of attending the hearing.  By reason of rule 38(3) the Respondent could not have recovered in-house legal expenses.  Accordingly they did not forgo anything by not seeking costs in respect of expenses incurred before the hearing.

26.	Further, Ms Darwin contended that the ET should have decided for themselves the reasonableness of the counsel’s fee.  It was submitted that only the refresher fee of £650 and travel expenses of £31.55 in respect of her attendance on the 17 May 2011 could be said to reflect the effect of or to have been caused by the bringing or conducting of the constructive dismissal claim.

Ground 2
27.	Ms Darwin contended that applying the judgment of Smith LJ at paragraph 47 of Neary v St. Alban’s Girls’ School [2010] ICR, the amount of costs ordered under rule 41 should be governed by the same general principles as in the civil courts.  Section 5 of the CPR Costs Practice Direction provides that VAT should not be included in a claim for costs if the receiving party is able to recover the VAT as input tax.  This rule is consistent with the compensatory rather than punitive principle on which costs are ordered.

28.	The Respondent is registered for VAT and was able to recover as input tax the VAT element of counsel’s fees and expenses paid by them.  Under the CPR in the civil courts the Respondent would not be able to recover VAT on its costs.  The ET erred in not applying the same general principles, and by including VAT of £442.62 when assessing the costs which they ordered the Claimant to pay.

29.	Miss McLorinan on behalf of the Respondent did not dispute the arguments advanced by Ms Darwin in support of the appeal from the inclusion of £442.62 in respect of VAT in the costs the Claimant was ordered to pay to the Respondent.  However she did not go as far as to concede ground 2 of the Notice of Appeal.

30.	Miss McLorinan contended that the challenge to the amount of the costs order, the subject of ground 1 of the Notice of Appeal, was one of perversity.

31.	In resisting the challenge to the amount of costs ordered Miss McLorinan made three general points.  First the ET did not fail to take into account the causal relationship between the misconceived claim and the costs incurred.  Second, the Claimant did not raise before the ET any of the arguments which she has relied upon on appeal.  Third, if the Claimant had raised the arguments now relied upon they would have failed.  

32.	Miss McLorinan contended that where a claim is found to be misconceived all costs relating to that claim are causally related to the Claimant’s conduct in bringing the claim.  It is clear from the judgment of Mummery LJ in Barnsley that in determining the amount of costs to be ordered, a precise causal link between pursuing a misconceived claim and specific costs does not have to be established.  However, in this case, all the evidence and submissions at the hearing related to the misconceived unfair dismissal claim.  The relevance of causation was not disputed but the “whole picture of what happened in the case” must be taken into account.  The unfair dismissal claim was wholly without merit.

33.	Miss McLorinan submitted that it had not previously been suggested that the costs claimed did not relate to the unfair dismissal claim.  At the hearing the Respondent did not dispute that they owed the Claimant wages for the period between the original dismissal and the termination of employment and related holiday pay but could not agree the amount.  The amount payable was affected by the Claimant’s earnings from her new employment during that period.

34.	Miss McLorinan contended that the ET did not err if they took into account the history of offers of settlement made by the Respondent before the hearing and their rejection by the Claimant.  The judgment of the EAT in Kopel makes it clear at paragraph 16 that whilst the rule in Calderbank v Calderbank does not apply to Tribunal proceedings an offer of a Calderbank type is a factor which the ET can take into account in assessing the amount of costs.  The timing of the offer to settle the contract claims was irrelevant in this case as the brief fee would have been incurred in any event since the unfair dismissal claim was to be contested.

35.	Miss McLorinan did not accept that an ET is required to consider the conduct of the receiving party when assessing the amount of costs ordered to be paid by that party.  In any event Miss McLorinan submitted that, on the evidence before them, the ET would have been entitled to conclude that the Respondent’s settlement offer of 11 May 2011 was reasonable.  Unreasonable conduct on their part could not be inferred from the evidence.  The offer was fair to the Claimant.  Based on the figures available to them the Respondent had calculated her loss of wages and had offered an additional £500 as a commercial settlement of all claims.

36.	The ET did not err in law or come to a perverse conclusion in ordering the Claimant to pay to the Respondent costs in the sum of £2,655.72.

Discussion and conclusion
Ground 1
37.	The Claimant does not challenge the conclusion of the ET that her constructive unfair dismissal claim was misconceived.  Nor is there any appeal from the conclusion of the ET that, applying ET rule 40(2), it was appropriate to make a costs order against the paying party.  The Claimant alleges that the ET erred in law in determining the amount of the costs she was ordered to pay to the Respondent.

38.	Mummery LJ in Barnsley gave words of caution about the dangers of adopting an over-analytical approach to the exercise of a broad discretion in making a costs order when conduct within rule 40(3) has been established.  Mummery LJ explained that it was never his intention in McPherson to rewrite rule 40:

“40. …or to add a gloss to it, either by disregarding questions of causation or by requiring the ET to dissect a case in detail and compartmentalise the relevant conduct under separate hearings such as ‘nature’ ‘gravity’ and ‘effect’.”

He held that:

“41.  The vital point in exercising the discretion to order costs is to look at the whole picture of what happened in the case and to ask whether there has been unreasonable conduct by the Claimant in bringing and conducting the case and, in doing do, to identify the conduct, what was unreasonable about it and what effects it had.  The main thrust of the passages cited above from my judgment in McPherson was to reject as erroneous the submission to the court that, in deciding whether to make a costs order, the ET had to determine whether or not there was a precise causal link between the unreasonable conduct in question and the specific costs being claimed.  In rejecting that submission I had no intention of giving birth to erroneous notions, such as causation was irrelevant or that the circumstances had to be separated into sections and each section to be analysed separately so as to lose sight of the totality of the relevant circumstances.”

39.	Mummery LJ in Barnsley held that included in the relevant circumstances could be criticisms made by an ET of the receiving party’s conduct.  He held at paragraph 50 that the ET in that case had erred in that they:

“…failed to factor into the exercise of its discretion the significant criticisms voiced by it of the council’s litigation conduct and the effect of that conduct on the costs incurred by the council and claimed by it from the Claimant.”

The Court of Appeal held that the ET erred in not taking such conduct into account in determining the amount of costs and that if they had done so the ET would have awarded 50% not 100% of costs incurred by the Council. 

40.	The approach in Barnsley is consistent with the principle that it is costs caused by the paying party’s conduct within rule 40(3) which are recoverable.  As with taking into account the paying party’s conduct findings of fact must support any decision to take the litigation conduct of the receiving party into account in assessing the amount of a costs order.  Depending on the findings of fact made by them, it may be material for an ET to take into account the litigation conduct of the receiving party in deciding the amount of a costs order.

41.	The litigation conduct of a Claimant may also be taken into account in assessing the amount of a costs order.  In Kopel v Safeway Stores plc [2003] IRLR 753 the EAT held that:

“16. There is no doubt…that an offer of the Calderbank type is a factor which the employment tribunal can take into account under rule [40].”

The EAT held at paragraph 18:

“From those decisions and from a reading of the rule itself, it does not follow that a failure by an appellant to beat a Calderbank offer should, by itself, lead to an order for costs being made against the appellant.  The employment tribunal must first conclude if rejecting the offer was unreasonable before the rejection becomes a relevant factor in the exercise of its discretion under rule [40].”

42.	The Civil Procedure Rules (‘CPR’) do not apply directly to proceedings before an ET.  Parliament has determined that the ET Rules apply to such proceedings.  However, in Neary v St Albans Girls’ School [2010] ICR 473, Smith LJ held at paragraph 47 that “it is one thing to say that the employment tribunals should apply the same general principles as are applied in the civil courts and quite another to say that they are obliged to follow the letter of the CPR in all respects.”

43.	The following principles can be derived from the authorities set out above:
(1)	ETs are not required by ET rule 40 to identify the particular costs caused by particular conduct within rule 40(3).  The ET should look at the whole picture of what happened in the case and the effects of such conduct in deciding whether to make and the amount of a costs order;

(2)	The conduct of the litigation by the applicant for a costs order can be taken into account in determining the amount of costs ordered to be paid;

(3)	The conduct of a Claimant in rejecting a ‘Calderbank’ type offer of settlement can be taken into account in assessing the amount of costs ordered against them provided that the conduct of the Claimant in rejecting the offer was held by the ET to be unreasonable;

(4)	Although the CPR do not apply directly to ET proceedings, ETs should exercise their powers under the ET Rules in accordance with the same general principles which apply in the civil courts but they are not obliged to follow the letter of the CPR in all respects.

44.	It is clear from paragraph 1.7 of the liability judgment that the parties were agreed:

“that the Claimant is entitled to a refund of deductions in salary from 8th June - to 17th September 2010, in addition to accrued holiday entitlement for that period, less earnings from alternative employment.”

The amount due depended upon the Claimant’s earnings from other employment during the relevant period.  That sum was agreed on the second day of the hearing shortly before the ET retired to consider their decision.

45.	It has not been suggested that at the hearing before the ET there was an issue between the parties as to whether pay and holiday pay were due to the Claimant.  There was an issue as to the amount of such payment.  It was the unfair constructive dismissal claim which rendered instructing counsel to attend a hearing necessary.  It appears from paragraph 4.1 that a two day time estimate had been given for the hearing.  In our judgment there is no basis on which the ET could have properly concluded either that the need for a hearing was not caused by the misconceived unfair dismissal claim or that, since it was contended on behalf of the Claimant that only the ‘refresher’ fee should have been awarded, only one day was required to hear and determine that claim.  The decision of the ET to base the award of costs to the Respondent on the amount of the brief fee for the two day hearing was not reached in error of law or perverse.

46.	Applying Kopel and the authorities referred to by the EAT in that case, in the absence of a finding of fact that the Claimant had been unreasonable in rejecting the Respondent’s settlement offer, the ET would have erred if they had taken into account in determining the amount of an order for costs the Claimant’s failure to beat the offer because in their view the rejection of the offer was unwise.  However, the observation by the ET in paragraph 4.3(c) which is relied upon by Ms Darwin in support of such an argument, was made at the stage of their reasoning in which the ET were considering whether to make an award for costs.  They turned to consider the amount of such an award in paragraphs 4.3(e) and (f).  On a fair reading of the judgment, the Claimant’s failure to beat the offer and the observations of the ET as to the lack of wisdom in rejecting the Respondent’s offer was not relied on by them in determining the amount of the costs award.

47.	The ET made no finding that the litigation conduct of the Respondent was to be criticised.  Accordingly there was no factual basis for a conclusion that the amount of costs to be awarded should be reduced to reflect the Respondent’s conduct.

48.	In our judgment there is no basis for challenging the decision of the ET to make a costs award in the sum of counsel’s fee for the two day hearing rather than making an award of just the refresher fee of £650 for the second day together with travel expenses.

49.	The first ground of appeal is dismissed.

Ground 2
50.	The editorial note to the CPR in the White Book Volume I paragraph 47.14.4 refers to the well established principle that: 

“Costs as between party and party are given by the law as an indemnity to the person entitled to them; they are not imposed as a punishment on the party who pays them, or given as a bonus to the party who receives them.” (Harold v Smith [1860] 5 H&N 381)

Paragraph 5.3 of the Costs Practice Direction which supplements part 43 of the CPR provides:

“VAT should not be included in a claim for costs if the receiving party is able to recover the VAT as input tax.”

51.	Whilst the detailed provisions of the CPR do not apply to the costs regime in ETs, as explained by Smith LJ in Neary the same is not to be said of the general principles there set out.  The indemnity principle on which costs are awarded between parties to litigation is well established.  There is nothing in the ET Rules which displaces that principle.  Indeed rule 38(3) defines ‘costs’ in terms of expenditure incurred by or on behalf of a party.  If part of that expenditure is VAT which is recoverable as input tax the receiving party has not incurred expense in that sum.  There is no reason why the principle of indemnity as set out in the Costs Practice Direction should not be applied in making awards of costs under the ET Rules.  Indeed there is every reason why it should.

52.	The Respondent is registered for VAT and is able to recover the VAT on counsel’s fees and travel expenses as input tax.  To award costs which include VAT would give a bonus to the Respondent over and above compensating them for the costs incurred.  It would also represent a penalty on the Claimant.  The order for the Claimant to pay costs to the Respondent of a sum equivalent to VAT on counsel’s fees would infringe the general indemnity principle which applies to costs awards in civil litigation.  The ET erred in including a sum equivalent to VAT on counsel’s fees and travel expenses in the costs order.  

53.	Our conclusions on ground 2 are not to be taken as applying to all expenses which a receiving party may recover from a third party.  They are limited to the question of whether recoverable VAT expenditure is to be included in a costs order made by an ET.  The CPR Practice Direction 5.4 is clear, consistent with general principle and compatible with the ET Rules.

54.	Ground 2 of the Notice of Appeal succeeds.

Outcome
55.	The order of the ET that the Claimant pay the Respondent’s costs in the sum of £2,655.72 is set aside.  It is replaced by an order that the Claimant pay the Respondent’s costs in the sum of £2,213.10.