Tying The Tribunal's Hands

This article looks at whether, and to what extent, parties can make binding agreements in advance about how legal costs are to be allocated by a tribunal, and considers whether such agreements might have a (small) part to play in addressing some inefficiencies which affect the construction sector.

My conclusion is that what is presently an under-exploited loophole in section 60 of the Arbitration Act 1996 might offer employers a means of discouraging inflated, speculative adjudication and arbitration claims by contractors.

Costs in English court litigation

Section 51(3) of the Senior Courts Act 1981 says that: "[t]he court shall have full power to determine by whom and to what extent the costs are to be paid," these being the "costs of and incidental to proceedings in [the court]."

CPR 44.2 says that "[t]he court has discretion as to ... whether costs are payable by one party to another; ... the amount of those costs; and ... when they are to be paid." "If the court decides to make an order about costs the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party ... but the court may make a different order." And "[i]n deciding what order (if any) to make about costs, the court will have regard to all the circumstances ...".

A court may order that costs be paid either on the "standard basis" or the "indemnity basis." In both cases, the court will disallow costs which were "unreasonably incurred or unreasonable in amount." When costs are to be assessed on the "standard basis" the court will only allow costs which are "proportionate to the matters in issue," and costs which it was "reasonable to incur."

In the Courts and Legal Services Act 1990 (as amended) section 58A(6) says: "[a] costs order made in proceedings may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement." Section 58C says "A costs order made in favour of a party to proceedings who has taken out a costs insurance policy may not include provision requiring the payment of an amount in respect of all or part of the premium of the policy, unless such provision is permitted by regulations under subsection (2)" (Subsection 2 provides for regulations to allow the recovery of policy premiums in clinical negligence proceedings).

Agreements about costs in English court litigation

In the pre-CPR Court of Appeal case Gomba Holdings (UK) Ltd v Minories Finance Ltd (No.2) [1993] Ch. 171 mortgage deeds required the borrowers to pay on demand and on a full indemnity basis all costs, charges and expenses however incurred by the bank or by a receiver under the mortgage or in enforcing the security. The Court of Appeal held:

"An order for the payment of costs of proceedings by one party to another party is always a discretionary order ..."

"Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right."

In the post-CPR Court of Appeal case Venture Finance Plc v Mead [2006] 3 Costs LR 389 the Court of Appeal concerned guarantees under which the guarantors had promised: "I agree to pay you all costs and expenses (on a full indemnity basis) arising out of or in connection with the recovery of the monies due to you hereunder." At first instance, the guarantors had nonetheless been ordered to pay only 50% of the lender's costs. The Court of Appeal (Chadwick LJ) held:

"When deciding by whom costs should be paid - the court is exercising a discretion under CPR 44.3 [now CPR 44.2]and s 51(3) of the Supreme Court Act 1981 [now Senior Courts Act 1981]."

"... CPR 44.3(4) requires that when deciding what order (if any) to make about costs the court must have regard to all the circumstances; and those circumstances will include the fact, if it be the case, that there is a contractual obligation to pay costs."

"I would allow the appeal and set aside the judge's order. In its place I would order that each of the defendants pay the whole of the claimant's costs of the proceedings ..."

In the first instance case Astrazeneca UK Limited v International Business Machines Corporation [2011] EWHC 3373 (TCC) the parties had agreed:

"[IBM] shall indemnify AstraZeneca ... on demand from and against all Defence Costs incurred by AstraZeneca in connection with any Dispute in which judgment is given in AstraZeneca's favour."

There was a similar provision requiring AstraZeneca to indemnify IBM in respect of Defence Costs incurred by IBM in connection with any Dispute in which judgment is given in IBM's favour. "Defence costs" was defined so as to include: "reasonable attorney's fees and disbursements (calculated on a solicitor-own client basis)" - that is the same as the indemnity basis.

The court cited Gomba and ordered that IBM should pay 75% of Astrazeneca's costs (presumably since that was the degree to which Astrazeneca was considered to have been "successful") and these were to be assessed on the indemnity basis, saying (paragraph 46):

"... in exercising my discretion as to costs, I consider that where the parties have agreed the basis upon which costs are to be assessed, the court should ordinarily exercise its discretion so as to reflect those contractual rights and, in this case, should award costs on an indemnity basis."

Gomba and Venture Finance concerned asymmetric agreements to the effect that if the lender won, the borrower / guarantor was to pay the lender's costs on the indemnity basis. The Astrazeneca case is a symmetrical agreement - whichever side lost was to pay the winner on an indemnity basis - so would seem even less objectionable. Unsurprisingly, then, in Astrazeneca the court was prepared to exercise its discretion as to costs in accordance with what the parties had agreed.

It is common for companies' articles of association to provide that the company will indemnify its directors, officers and auditors against liability incurred by them in defending any proceedings in which judgment is given in their favour. Although the articles of association are a contract between the company and its members, the directors or auditors might argue that when the company appointed them to their office, the same provision was incorporated into their contract with the company, and so if the company sues them and loses, it must indemnify them for their costs. In John v PricewaterhouseCoopers [2002] 1 WLR. 953 certain companies owned by the musical artist Elton John had brought a claim against their auditors and lost. A claim by auditors based on such a provision in the articles of association was discussed, but dismissed on other grounds, with the question of whether the term from the articles of association was incorporated into the auditors' contract left unresolved.

In Renewable Power & Light Ltd v McCarthy Tetrault & Ors [2014] EWHC 3848 (Ch) auditors relied successfully on an express clause in their terms of appointment which required their audit client to indemnify them:

"From and against ... any and all ... costs ... (collectively "Losses") of whatever nature ... which are suffered or incurred by [auditor] ... and which relate to or arise from directly or indirectly [auditor's] engagement hereunder ... and [company] shall reimburse [auditor] ... for all costs, charges and expenses (including legal fees) as they are incurred by [auditor] ... in connection with investigating, dealing with or defending any claims (whether actual, pending, threatened or potential) which so relate or arise."

"Provided that the company will not be responsible for any Claims or Losses to the extent that they are found in final judgement by a court of competent jurisdiction to have resulted from a criminal or fraudulent act or the wilful default or negligence of [auditor] ..."

The court in that case, applying Gomba, ordered the company to pay the auditor's costs on the indemnity basis.

There is a distinct lack of case law about other "contractual rights to costs" in court litigation. For example, if the parties had agreed that each was to bear its own costs of any litigation, would the court exercise its discretion so as to "reflect that contractual right", and made no order as to costs? Such an agreement seems unobjectionable, particularly if made between commercial parties, and such an allocation seems to have been endorsed by parliament in other dispute resolution contexts (see the discussion of adjudication below). But there does not appear to be any authority on the point.

A court would probably be much more reluctant to give effect to an agreement that the costs of both parties were always to be borne by the party making the claim. On one view, the courts should respect freedom of contract, but the mere fact of having agreed to such a one-sided clause suggests an inequality of bargaining power, with the clause having been imposed for the sole purpose of discouraging or stifling claims. The practical effect of such an agreement would tend to be to oust the jurisdiction of the court and deny access to justice, at least for smaller claims, where the combined cost of pursuing the claim, plus the costs of the other side of defending the claim might well exceed the sum in issue. Public policy would probably mean that such an agreement would not be given effect.

There is also the question of what a court would do if faced with an agreement that the unsuccessful party was to indemnify the successful party as to any success fee or costs insurance policy premium which the successful party might incur.

In the "indemnity" cases discussed above, the court had a statutory discretionary power to award the costs that were being sought. The parties could not, by agreement, exclude that discretionary power, or fetter the court in its exercise of that power. But, when exercising that power, the court would take the agreement into account.

In the case of success fees and costs insurance policy...