Contractual entitlement to costs “properly incurred” indicates indemnity costs

A provision in a lease that required a tenant to pay costs “properly incurred” by the landlord in recovering arrears is consistent with the award of indemnity costs, the High Court has ruled.

The defendant in Criterion Buildings Ltd v McKinsey & Company Inc (United Kingdom) and Anor [2021] EWHC 314 (Ch) accepted in principle that they should pay costs, but the basis of assessment was not agreed.

The claimant relied on contractual provisions in the various lease documents, and also on the conduct of the defendants, to claim the indemnity costs basis.

Under the underlease, supplemental lease and further lease in question, the first defendant covenanted to pay all the lawyers’ costs of proceedings to recover arrears of service charge, but used slightly different terminology.

The underlease and further lease referred to expenses “properly incurred” by the landlord. The supplemental lease said there was no limitation to expenses properly incurred. Instead, the covenant was to pay “all costs, charges and expenses which the landlord may from time to time incur”. The latter only existed for just over six months and so the costs attributable to it were modest.

The claimant relied on the decision of the Court of Appeal in Macleish v Littlestone [2016] 1 WLR 3289, which held that the obligation on the lessee to pay “all costs and expenses… which may be incurred” was more akin to the indemnity basis.

This was followed in Alafco Irish Aircraft Leasing Sixteen Ltd v Hong Kong Airlines Ltd [2019] EWHC 3668 (Comm), where the covenant required the lessee to pay to the lessor on demand “all reasonable costs and expenses (including reasonable legal expenses) incurred by the lessor”. Moulder J said the presence of the word ‘reasonable’ did not preclude a conclusion that costs should be ordered on the indemnity basis.

The defendant argued that the wording in this case was indistinguishable from that considered in the decision of HHJ Esyr Lewis QC in Primeridge Ltd v Jean Muir Ltd [1992] EGLR 273, who held that costs should be awarded on the standard basis, because of the presence of the adjective ‘proper’ in the requirement to pay “proper costs”.

His Honour Judge Paul Matthews, sitting as a High Court judge, did not accept that the decision of the Official Referee in Primeridge should be binding, not least because it was pre-CPR.

“Secondly, the phrase ‘proper costs’ is not the same as ‘costs properly incurred’. Something may be a ‘proper cost’, in the sense that it would be appropriate in some circumstances to incur it, and yet not ‘properly incurred’, in the sense that the circumstances pertaining were not such as to make it appropriate to incur it.

“Thirdly, and with all respect to HHJ Esyr Lewis QC, I do not understand why the existence of the word ‘proper’ should make all the difference anyway. No improper cost can have been reasonably incurred, and yet the assessment of costs on the indemnity basis is restricted to costs which have been not unreasonably incurred.

“So the contract here is consistent with an indemnity costs award. In Macleish v Littlestone, Briggs LJ considered that the absence of a statement as to the reasonableness of costs made no difference. In Alafco, Moulder J agreed.”

What would have made a difference, as stated in Macleish, was a reference to proportionality – but there was not one, HHJ Matthews said.

“Accordingly, I regret to say that I consider that the decision in Primeridge Ltd v Jean Muir Ltd was wrong, and I decline to follow it.

“In my judgment, the terms of this lease are such that an award on the indemnity basis would best reflect the contract between the parties. That is not conclusive, but I see nothing here to justify a departure from that contract. I will therefore order indemnity costs.”

The judge added that, even if he was wrong about this, in the circumstances he would have ordered indemnity costs anyway on the basis of the defendant’s conduct.

Nicholas Trompeter and Alice Hawker (instructed by Simkins) for the claimant. Stephen Jourdan QC and Philip Sissons (instructed by CMS Cameron McKenna Nabarro Olswang) for the defendants.

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Costs News
Published date
18 Feb 2021

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