National Westminster Bank plc v Kotonou – recovery of funding-related costs [2009] EWHC 3309 (Ch)

The bank sought to enforce a guarantee against the defendant in proceedings (the Guarantee Claim). Mr and Mrs Kotonou charged their family home as security for the guarantee (the mortgage). Mr Kotonou defended the Guarantee Claim and tried to release equity from his home in order to obtain funding for the proceedings. A dispute arose with the bank about the sum guaranteed by the mortgage and the Kotonous began Part 8 proceedings against the bank seeking declarations as to the true construction of the mortgage (the Mortgage Claim).

The Kotonous negotiated an agreement with the bank which preserved the bank’s arguments in the Mortgage Claim, whilst giving the Kotonous a further mortgage enabling them to fund the Guarantee Claim. They incurred considerable legal fees in these negotiations (the funding-related costs).

The Kotonous won the Mortgage Claim and were awarded their costs. Mr Kotonou succeeded in part in defending the Guarantee Claim. The judge in the Guarantee Claim ordered both parties to pay 50% of the other’s costs but made no order concerning costs of pre-trial applications concerning the trial of both claims which had been reserved to the trial judge/ Mr Kotonou unsuccessfully appealed these orders. At detailed assessment, an issue arose as to whether the bank should pay the funding-related costs. The costs judge held that they were part of the costs of the Part 8 Claim and so payable by the bank. The bank appealed from this decision.

The judge applied the following principles:

1 The costs of a claim do not include costs incurred by a party in seeking funding for either its prosecution or defence.

2 Pre-litigation costs incurred in the reasonable negotiation of interim solutions to problems arising between the parties in connection with issue to be decided in contemplated or pending litigation are recoverable as costs of the proceedings. In this case, applying the first principle, the funding-related costs could not form part of the costs of the Guarantee Claim. However, applying the second principle, they were properly recoverable as costs of the Mortgage Claim even though they arose in the context of a funding negotiation.

Comment: the principles concerning the recovery of pre-action costs are of general and increasing importance given the scale of pre-action expenditure on legal fees in most cases. The limits on the scope of what constitutes costs “of and incidental” to the proceedings under s51 of the Senior Courts Act 1981 have been debated several times since the introduction of the CPR.

Abandoned claims One important limit for defendants concerns recovery of pre-action costs relating to heads of claim abandoned by the claimant before he begins proceedings. The defendant cannot generally recover his costs relating to abandoned heads of claim (McGlinn v Waltham Contractors Ltd). To do otherwise would penalise the claimant for abandoning claims which the defendant has demonstrated are not going to succeed, which is the very thing which the protocol was designed to achieve.

Related proceedings A difficult question arises when deciding whether preparation for proceedings of one type can properly be regarded as giving rise to costs “of and incidental to” subsequent proceedings of a narrower scope. In Re Gibson the court held that costs can be recovered where earlier disputes "are in some degree relevant to the proceedings as ultimately constituted, and the other party’s attitude made it reasonable to apprehend that the litigation would include them”. Such costs were recoverable in Newall v Lewis, a case concerning the meaning of a settlement agreement, where the proceedings ultimately brought by the claimant beneficiaries against the trustees of family settlements were more confined in scope and form than those originally threatened. A recent attempt to recover expert costs in related aborted proceedings failed in Crest Nicholson Operations Ltd v Apex Roofing Services since the issue to which the evidence had been directed in the related proceedings would have never have been in issue in the proceedings in question.

Inquests Where civil proceedings follow an inquest, a claimant can recover costs incurred in relation to the inquest as “costs of and incidental to" the civil proceedings in so far as the costs relate to gathering evidence for the subsequent proceedings (Roach v Home Office). This is so even though coroners have no jurisdiction to award costs. It makes sense that the costs of attending the inquest to note their evidence should be recoverable as incidental costs when this course might well be cheaper and more effective than interviewing the witnesses after the inquest.