The Upper Tribunal has given guidance on the procedure and three-stage analysis to apply when the First-tier Tribunal considers making a costs order under rule 13(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 on account of a party's alleged unreasonable behaviour in bringing, defending or conducting proceedings.
The court heard three conjoined appeals against costs orders made under rule 13(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 (“the Rules”) on account of a party's unreasonable behaviour in bringing, defending or conducting proceedings.
All three of the appeals arose out of disputes over service charges between leaseholders and management companies. The First-tier Tribunal had found that:
- the first appellant management company had behaved unreasonably in bringing proceedings against the leaseholder without having complied with a contractual procedure;
- the second appellant's conduct in failing to pay her service charge, in defending herself on what it considered to be spurious grounds and in generally behaving unreasonably, also justified an award under rule 13; and
- the third appellant, who had been unrepresented, had acted unreasonably by not withdrawing proceedings earlier.
The issues were the scope of the First-tier Tribunal (Property Chamber)’s jurisdiction to award costs under rule 13(1)(b) and, in the instant cases, whether the tribunal had been correct at first instance to award costs under that rule.
The Upper Tribunal allowed the appeals:
- When considering where behavior is “unreasonable” the Upper Tribunal considered as follows:
- An assessment of whether behaviour was unreasonable required a value judgement on which views might differ, but the standard of behaviour expected of parties in tribunal proceedings ought not to be set at an unrealistic level.
- There was no reason to depart from the guidance on the meaning of "unreasonable" in Ridehalgh v Horsefield  Ch 205.
- Unreasonable conduct included conduct that was vexatious and designed to harass the other side rather than advance the resolution of the case. It was not enough that the conduct led to an unsuccessful outcome. The test could be expressed in different ways by asking whether a reasonable person in the position of the party would have conducted themselves in the manner complained of, or whether there was a reasonable explanation for conduct complained of.
- Tribunals ought not to be over-zealous in detecting unreasonable conduct after the event and should not lose sight of their own powers and responsibilities in the preparatory stages of proceedings.
- The first stage of the analysis was an objective decision about whether a person had acted unreasonably. If so, at the second stage, a discretionary power was engaged and the tribunal had to consider whether it ought to make a costs order. If so, the third stage was the terms of the order.
- Further, there was no general rule in the tribunal that the unsuccessful party would be ordered to pay the successful party's costs. The fact that a party was unrepresented was relevant at the first stage. The behaviour of a unrepresented party with no legal knowledge should be judged by the standards of a reasonable person who did not have legal advice. It was relevant to a lesser extent at the second and third stages; the tribunal should consider mitigating circumstances, but without excessive indulgence or allowing absence of representation to become an excuse for unreasonable conduct. The tribunal at the second and third stages had to have regard to all the circumstances. The nature, seriousness and effect of the unreasonable conduct would be important factors. Unlike wasted costs, no causal connection between the conduct and the costs incurred was required.
- Rule 13(1)(a) and (b) should be reserved for the clearest cases and it was for the party claiming costs to satisfy the burden of demonstrating that the other party's conduct had been unreasonable.
- An application should be determined summarily, preferably without the need for a further hearing, and after the parties had had the opportunity to make submissions.
- In a relatively modest dispute, an unwillingness to mediate by a party that considered themselves to have a strong case was not necessarily evidence of unreasonableness. A genuine willingness to mediate, even if unreciprocated, was an example of reasonable behaviour that should be encouraged.
When considering each of the appeals, the Upper Tribunal held that:
- In the first appellant's case, the tribunal had accorded too much weight to the fact that the first appellant had lost at the substantive hearing, and the tribunal had applied a standard of reasonableness that fell well below the applicable threshold.
- In the second appellant's case, the tribunal's decision was procedurally unfair as she had been given no proper opportunity to respond to the case against her, and no proper opportunity to defend the reasonableness of her conduct. Further, the grounds relied on were not capable of amounting to unreasonable conduct. The mere fact that an unjustified dispute over liability for service charge had given rise to the proceedings could not itself be grounds for a finding of unreasonable conduct; only behaviour relating to the conduct of the proceedings themselves could be relied on at the first stage of the rule 13(1)(b) analysis.
- In the third appellant's case, it had been legally wrong to treat his withdrawal of the claim as unreasonable conduct. In tribunal proceedings, there was no imputation that a discontinued claim was doomed to fail or should never have been brought, McPherson applied.
This is an important case that ought to be borne in mind by anyone involved in applications being dealt with by the First-tier Tribunal (Property Chamber). Much of the hope that the FTT would become a costs-shifting jurisdiction will no be eroded by this decision, which suggests orders awarding costs under rule 13 will not be the norm.
The following procedure (or three-stage assessment) is how the tribunal ought now to consider any application for costs under rule 13:
(1) The First Tier Tribunal must first assess (as a value judgement and not as the exercise of discretion) whether the conduct complained of is sufficient to meet the objective standard of conduct threshold;
(2) Second, the Tribunal must consider whether, in the exercise of its discretion, and taking account of all relevant factors, it is appropriate to make a costs award; and
(3) Third, the Tribunal must, as a further exercise of discretion, consider the form and quantum of the costs award.