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Commercial Law - Avoiding the Pyrrhic Victory - Costs under the Small Claims Track

By : Michael Wheater

This article discusses the various methods by which a successful party may claim costs in small claims thereby avoiding a potentially pyrrhic victory.

 

The small claims procedure has been in place since the early 1970s. Originally intended to provide a cheap, informal method of resolving low value claims, the strict rules of evidence and procedure were relaxed and parties were discouraged from engaging legal representatives by severely limiting the availability of costs.

The system was a great success and its jurisdiction was increased from its original £100 limit; first to £3,000 and then to £5,000. However the expansion of the court’s jurisdiction has been accompanied by a fundamental change in the commercial reality of small claims; few people can afford to regard a dispute in the value of £5,000 as “small”. The risk of losing a claim worth £5,000 encourages parties to seek legal representation in order that their case is presented properly thereby defeating one of the principal aims of the system.

The costs regime has not adapted to the current climate and many District Judges remain inflexible in their application of the costs rules. As a result, many parties are left with a pyrrhic victory, their case proved in law but dwarfed by legal costs.

Further, the current system echoes a phenomenon seen in the Employment Tribunals in that it encourages parties to “try their luck” bringing weak cases on the grounds that they are unlikely to be penalised if they lose. This in turn often forces innocent parties to settle cases that might otherwise be determined in their favour simply because the cost of fighting would be too great.

The recovery of small claims costs is an issue that affects all litigation departments. This article will review the availability of costs in the small claims track and seek to outline the categories of cases in which parties might legitimately seek to recover them.

Costs before allocation

In general, the rules relating to small claims costs will not apply until a claim is allocated to the small claims track, however once a case has been so allocated the rules will apply to work done before as well as after allocation1. Allocation itself does not affect any costs order that has already been made prior to allocation.

However, the fact that a hearing may take place before allocation does not prevent the Court from exercising its discretion to apply the small claims costs provisions.

The case of Voice and Script International Ltd v Alghafar2, was concerned with an application to set aside judgment. That Judgment had been entered in the sum of £9,140 but by the time that the application was heard, mistakes had been discovered that reduced the value of the claim to £4,002. The Defendant argued that the costs of the application ought to be limited to small claims costs. The District Judge held that the small claims rules did not apply “because it was never allocated to a track because judgment was entered”.

The Defendant successfully appealed, the Court of Appeal holding that, by treating the absence of allocation to a track as conclusive, the District Judge had misdirected himself. The Court of Appeal went on to state that the principle of proportionality must be considered whenever awards of costs are made. It has been suggested that, pursuant to the court’s general discretion on costs and the overriding objective, the general rule in cases below the small claims threshold should be that small claims costs apply.3

Fixed Costs

The general rule in small claims is that the Court may not order a party to pay the legal costs of another party save for those fixed costs set out under CPR part 45, attributable to the issue of the Claim 4. In practice, these costs are limited to the issue fee and fixed costs shown on the face of the Claim Form, together with the allocation fee where appropriate.

It should, however, be noted that the current costs rules do not automatically allow a successful part 20 Claimant to recover his costs.5

There is also one exception to the general rule in cases where an injunction is sought. In such cases a different fixed costs regime applies allowing solicitors to recover up to £260 in legal costs. However the rule for injunctions was originally intended to assist litigants seeking injunctive relief in disrepair cases. It is submitted that, as disrepair claims in excess of £1,000 are now routinely allocated to the fast track, this exception will rarely be of use.

Expenses

One crucial element of small claims costs that is often overlooked by legal representatives is the ability of the Court to make an award for witness expenses. The provision for an award of witness expenses is set out in CPR 27.14(3) as follows:

 

(3) The Court may also order a party to pay all or part of

(b) expenses which a party or witness has reasonably incurred in travelling to and from a hearing or in staying away from home for the purposes of attending a hearing

(c) a sum… for any loss of earnings by a party or witness due to attending a hearing or to staying away from home for the purpose of attending a hearing

(d) a sum… for an expert’s fees

 

The sum currently available in respect of loss of earnings is limited to £50 per party 6, or witness, and the sum currently available for experts’ fees is limited to £200 7. It should be remembered that expert witness evidence is not routinely available on the small claims track and that the permission of the court is needed before an expert may be instructed.

There is, however, no limit on the court’s power to award travel and accommodation expenses. This factor may be particularly relevant, and lead to a substantial award, in circumstances where one party has to travel a long distance in order to attend a court convenient to his opponent. Anecdotal evidence suggests that some courts have gone so far as to award flight costs and hotel accommodation to parties who have been required to return from overseas in order to attend the hearing. The possibility of obtaining such an order must therefore be in the mind of any representative attending a small claims track hearing.

Unreasonable Conduct

CPR 27.14(2)(d) empowers the Court to summarily assess costs in cases allocated to the small claims track in circumstances where “a party has behaved unreasonably”. Unfortunately, the CPR does not define unreasonable behaviour and there is little appellate authority on the subject.

It is thought commonly that the summary assessment of costs on the small claims track occurs rarely. However, the range of conduct, which has been held to be unreasonable, may surprise many and is potentially a powerful weapon in small claims litigation. The following is a non-exhaustive guide to conduct, which has been held to be unreasonable:

 

  1. Discontinuance of a Claim or Defence at a late stage

    It is well established that a party who discontinues proceedings at a late stage, whether on the day of trial 8, or after a substantial period of litigation 9, runs the risk of a costs penalty.
  2. Late admission of liability

    Similarly, the Court is likely to penalise a party who concedes liability, at a late stage, after considerable work has been carried out on the litigation. In Pilcher v Bates10, the court held that a late concession of liability was evidence that the Defendant had never intended to go to court and that therefore the filing of a defence was unreasonable.
  3. Late or inadequate offers to settle

    Following on from late admissions of liability, late or inadequate offers to settle can amount to unreasonable conduct. In Whybrow v Kentish Bus Company 11, it was held that there was no reasonable basis for the Defendant to have left the Claimant without his money for two years. There was no reason for the Defendant to deny liability and no reasonable basis for waiting until the day before the hearing to attempt to make settlement.
  4. Failing properly to communicate with one’s representatives

    There is also an apparent duty on parties to maintain contact with their advisers. In Istanikzai v Haque 12, a party was penalised for failing to maintain contact with his solicitors, which in turn delayed the acceptance of a settlement offer for almost twelve months.
  5. Misleading or Inconsistent comments in Witness Statements

    Evidence which is inconsistent with a party’s pleaded case may, in some circumstances, amount to unreasonable conduct 13 . However inconsistencies are common and it is suggested that only fundamental departures from the pleaded case will justify an award. Misleading or false statements will, of course, be treated far more seriously 14 and will often result in a substantial costs penalty.
  6. Claims brought dishonestly

    Similarly, claims that are found to have been brought dishonestly will, almost certainly, attract an order for costs. In Bashir v Hanson 15 a claim for personal injuries arising out of a road traffic accident was found to have been brought dishonestly as the evidence suggested that the Claimant was not present inside the vehicle at the time of the accident. It is submitted that in dishonest claims a costs order is likely to reflect the bulk, if not all, of the innocent party’s costs.
  7. Unreasonable rejection of part 36 offers

    Whilst the strictures of part 36 do not apply to small claims, it has been held that one of the fundamental principles of the CPR is to encourage parties to make offers and to resolve disputes rather than litigate them. With that objective in mind, it is a foolhardy litigant who simply dismisses a part 36 offer. In Abedin v Karim 16, the court held that the Claimant had acted unreasonably by failing to respond to a part 36 offer until 12 days before trial.
  8. Solicitor’s failure to seek proper instructions

    A party whose solicitors fail to seek proper instructions may be penalised in costs.17
  9. Delay

    It is well established that delay may be prejudicial to the innocent party. There have been several instances when delay, caused either by one of the parties and/or their legal advisers, has been considered unreasonable 18. It must be noted that, in some instances, inactivity before the issue of proceedings could amount to unreasonable conduct if the Claimant was left with no choice but to issue.
  10. Failure to adequately state case and/or inadequate particulars

    If the true nature of a party’s case is not revealed until the day of trial or if a party’s case is so vague that its true nature cannot be discerned, this may amount to unreasonable conduct.
  11. Pursuing a claim or defence with no real prospect of success

    This head potentially had the most wide ranging implications as it suggests that a party will be entitled to costs on the small claims track if he would have succeeded in a summary judgement application (applications for summary judgement are not excluded from small claims but are very rarely used). In Spearing v Jackson 19 it was held that persisting with an action which the Claimant must have know had little prospect of success amounted to unreasonable conduct.

    Conclusions

    This article was not intended to be a critique of the small claims costs regime. That reform is needed in order to reflect the commercial reality of small claims is clear. However the rules that are currently in place are still severely limited and many successful litigants will be left to bear the weight of their legal expenses.

    Properly prepared, however, legal representatives may be surprised at the frequency with which substantial awards can be obtained. Properly prepared, representatives can assist their clients in avoiding the Pyrrhic victory.

    This Article was first published in the Legal Executive Journal in March 2005

    Footnotes

     

    1. Costs Practice Direction paragraph 15.
    2. [2003] EWCA (Civ) 736
    3. Michael J Cook, “Cook on Costs”, 2004 Ed, Butterworths p 264.
    4. CPR 27.14(2)
    5. Hibbert v Bates CC [2002] 3 CL 57
    6. PD 27 para 7.3(1)
    7. PD 27 para 7.3(2)
    8. Mahmood v Watson [2001] CLY 170
    9. Newpoint Plumbing Services v Edmundson Electrical Ltd [2000] CLY 168
    10. [2001] CLY 171
    11. [1999] CLY 136
    12. ibid
    13. Murray v Sefton MBC [2002] 11 CL 15
    14. Owen v Burnham [2001] CLY 172
    15. [1999] CLY 135
    16. [2001] CLY 172
    17. Tinnion v Fogg [1999] CLY 136
    18. Haughey v G & G Waste Transport [2002] 11 CL 15
    19. [2000] CLY 169