Costs liability on discontinuing a claim

It is not uncommon for a claimant to decide to discontinue his claim after he has issued proceedings. If this is done then clearly the costs consequences set out in Civil Procedure Rule 38.6 (1) will apply.

CPR 38.6(1) provides: ‘Unless the court orders otherwise, a claimant who discontinues is liable for the costs which a defendant against whom the claimant discontinues incurred on or before the date on which notice of discontinuance was served on the defendant.’

The Court of Appeal recently considered a challenge to the above rule in the case of Messih v McMillan Williams & Ors [2010] EWCA Civ 844.

The claimant was a tenant of ­commercial premises and engaged the first and second defendant solicitors to advise on the lease. The claimant incurred financial losses as a result of a dispute with the landlord. The claimant now argued, among other things, that the first and second defendant had failed to advise him of various protections against the landlord which were available to him under the Leasehold Property (Repairs) Act 1938.

The claimant subsequently settled his claim against the first defendant. It was a term of the settlement agreement that the first defendant would discontinue its contribution proceedings against the second defendant, which was later done.

However, the second defendant refused to agree to the claimant discontinuing his claim against it with no order as to costs. The second defendant contended that the claim against it had always been unmeritorious and had no realistic prospect of success. Following the second defendant’s refusal to agree to settle on a ‘drop-hands’ basis, the claimant served a notice of discontinuance. The second defendant commenced detailed assessment proceedings in order to recover its costs.

The claimant’s solicitors argued that the saving of court time and cost in discontinuing the claim were appropriate factors for the claim to be discontinued with no order for costs.

First instance: rule set asideThe judge at first instance agreed with the claimant and found that there should be no order as to costs. The judge relied on the leading case of Re Walker Wingsail Systems plc [2006] 1 WLR 2194 CA, which is the authority for the exercise of the court’s discretion in setting aside the rule under CPR 38.6(1) in cases where circumstances of a case had changed.

In Re Walker Wigsail Systems, a ­liquidator served a notice of discontinuance in respect of misfeasance proceedings against directors on the grounds that the proceedings had become commercially worthless. The judge directed that there should be no order for costs.

The Court of Appeal allowed the defendant’s appeal on the basis that there had in fact been no change in the circumstances since the commencement of proceedings. The court concluded that although the figures had changed, the claim had always been commercially worthless in the sense that the costs outweighed any possible return for the creditors. The judge in Messih concluded that the settlement of the claim with the first defendant was a material change of circumstances of the kind envisaged by Lord Justice Chadwick in Walker Wingsail.

The judge placed great emphasis upon the benefits that the discontinuance would achieve: ‘…the court’s discretion in this case ought to be ­exercised in favour of disapplying the ordinary rule because of that change in circumstances which have saved costs, court time and, I would add as well, professional time on the part of the defendants who are solicitors…’

Court of Appeal: reinstating the ruleIn delivering the leading judgment of the Court of Appeal, Lord Justice Patten explained the approach which should be taken by the court when exercising its discretion in setting aside the general rule under CPR 38.6. He held: ‘... the correct approach is for the court to consider all the matters relied on as justifying the making of some alternative order for costs and then to decide whether they are sufficient to support such an order’.

Patten LJ acknowledged that the above assessment will inevitably depend on the facts of each case, and that it was impossible to attempt to provide a comprehensive summary of what might constitute a good reason for making a different costs order. One thing was clear: the avoidance of the costs of a trial is the necessary consequence of any discontinuance and cannot, of itself, justify a departure from the normal rule that the discontinuing party pays the other side’s costs up to the date of discontinuance. There must be something more than that to justify a departure from the general rule. It was clear that the claimant knew what the second defendant’s position was and that it wished to contest its liability for the claim. The claimant proceeded to ­discontinue his claim which meant the court was unable to determine what the outcome would be at trial. Therefore, the circumstances were the usual consequences of discontinuing: the claimant becomes liable for the defendant’s costs.

Points to considerIt is clear from Messih that:

• The general rule under CPR 38.6 will apply unless a claimant can demonstrate to the court that some other order should be made. This will be no easy task for a claimant;
• Although CPR 38.6 allows the court to exercise its discretion, that discretion must be exercised in the light of all the matters relied on as justifying the making of some alternative order for costs, and whether those matters are sufficient to support such an order; and
• Claimants should be advised from the outset and throughout the litigation process of costs generally but also, in particular, the risk of having to pay the defendant’s costs if the matter is discontinued at a later stage.

Masood Ahmed is a senior lecturer in law at Birmingham City University