“Collective enfranchisement and the statutory right to manage mean that lessee-managed blocks of flats are now a firmly established feature of the residential property scene. It is common for leaseholders collectively to assume responsibility for the provision of services and the collection of service charges from their neighbours. These three appeals … illustrate some of the difficulties which can be experienced in these situations”.
So wrote the Upper Tribunal, comprising Martin Rodger QC and Siobhan McGrath, in this first-of-its-kind appeal on the FTT’s power to award costs for unreasonable behaviour in bringing, defending or conducting proceedings before it.
That power arises under rule 13(1)(b) of the FTT rules.
The Upper Tribunal’s decision, which is divided into four sections, runs to a mere 38 pages. I plan to review it in four posts.
This first post, like the first section of the decision, begins with a snapshot of each case. It then dives into an analysis of rule 13(1)(b).
The next three posts will, following the structure of the decision, apply the rule to each of the three separate rule 13(1)(b) appeals that the Upper Tribunal heard together in March this year.
1) Was a service charge dispute;
2) Was a dispute between a lessee and a lessee-owned management company, and
3) Resulted in that lessee being ordered to pay more in costs than the actual amount in dispute.
A snapshot of each dispute
Willow Court Management Company (1985) Limited v Alexander
The management company here was no stranger to the FTT, which had, on several occasions, determined that it had not made contractually-compliant service charge demands.
Its application against Mrs Alexander for payment of £5,072 of service charges resulted in another determination that the terms of the lease had not been followed.
Under rule 13(1)(b), the FTT ordered the company to pay Mrs Alexander £13,095 plus VAT as a contribution towards her costs.
Sinclair v 231 Sussex Gardens Right to Manage Ltd
Mrs Sinclair contested her liability to pay £9,767 in service charges, but the FTT decided that she had done so on spurious grounds without enough evidence.
It found that her conduct had in general been unreasonable, and ordered her to pay £16,800 towards the RTM company’s costs under rule 13(1)(b).
Stone v 54 Hogarth Road London SW5 Management Limited
Mr Stone application for a determination as to whether the landlord was obliged to repay Mr Stone the difference between his on account payment and the actual costs incurred, or whether it was entitled to pay that surplus into the reserve fund.
The merits of this case were not determined, because Mr Stone withdrew the application just before the hearing date.
The FTT held that it was reasonable for Mr Stone to have made his application, but that he should however have withdrawn it earlier, once the landlord had made certain concessions.
It ordered him to pay £2,260.80 towards the landlord’s costs under rule 13(1)(b).
The LVT’s costs powers
The Upper Tribunal next turned to its bookshelves, and dusted down its history books.
It noted that the LVT, the FTT’s predecessor, had the power to order a party to pay up to £500 towards another party’s costs under paragraph 10(4) of Schedule 12 to the Commonhold and Leasehold Reform Act 2002.
That power could however only be exercised where a party had acted “frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with proceedings before it”.
The FTT’s powers in relation to costs generally
The FTT’s costs powers spring from two statutory sources:
- Section 29 of the Tribunals, Courts and Enforcement Act 2007, which bestows a costs power on tribunals, and
- Rule 13 of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 (the “FTT rules”), which governs the exercise of the powers in the FTT.
You can read the full text of section 29 here.
The power is quite widely expressed in the opening subsections of section 29, but subsection 29(3) closes it down, by making the exercise of the power to award costs subject to procedure rules.
The FTT rules are the procedure rules referred to in section 29(3).
Rule 13(1) sets out the conditions which must be satisfied before the FTT may make a costs order.
I cannot help thinking that the rules draftsman had rather a sense of humour bypass when he gave what is potentially the most controversial rule a number so redolent of superstition and the black arts.
The FTT must remember that, when applying the FTT rules, it must try to give effect to the overriding objective, which sets the context against which the FTT must exercise its powers.
Homing in on rule 13(1)
The FTT has power to decide a variety of disputes, from rent increases, through land registration, agricultural land and blight, to enfranchisement and service charges. Rule 13 applies differently to different types of dispute.
A costs order may be made in three situations:
- Under rule 13(1)(a), where “wasted costs” are justified. This applies to all cases;
- Under rule 13(1)(b), where a person has acted unreasonably in bringing, defending or conducting proceedings. This power is only available in residential property, leasehold and agricultural land & drainage cases, and
- Under rule 13(1)(c), in land registration cases, where the costs power is unrestricted and governed only by the overriding objective.
In this case, the Upper Tribunal was most interested in rule 13(1)(b), which applies to residential, leasehold and agricultural & drainage cases.
Rule 1 of the FTT rules explains that the “leasehold” category catches all cases “in respect of which the Tribunal has jurisdiction under any of the enactments specified in section 176A(2) of the Commonhold and Leasehold Reform Act 2002”.
Section 176A(2) lists the Landlord and Tenant Act 1985 amongst its enactments. Therefore applications for a determination of a service charge under section 27A of the Landlord and Tenant Act 1985 are susceptible to rule 13(1)(b).
A short word on rule 13(2)
Rule 13(2) also allows the FTT, in any case, to order that one side reimburses the fees paid by the other.
This is not so contentious a power because the amounts at stake are generally not as fearsome as the amounts under rule 13(1).
The FTT has an unfettered discretion to order the reimbursement of fees, provided that it does so in accordance with the overriding objective.
Rule 13(1)(a): Wasted costs
Technically, wasted costs are a separate field of consideration from unreasonable conduct costs.
All of the parties to the appeals however referred the Upper Tribunal to the leading authority on wasted costs, Ridehalgh v Horsefield  Ch 205.
The Upper Tribunal therefore felt that it was incumbent upon it to review the origin and scope of the FTT’s powers on wasted costs, which can be found in:
- Sections 29(4)-(5) of the Tribunals, Courts and Enforcement Act 2007, and
- Rule 13(1)(a) of the FTT rules.
Wasted costs are defined in section 29(5) as costs incurred:
“as a result of any improper, unreasonable or negligent act or omission on the part of a representative”.
Section 29(6) defines a “legal or other representative” as any person exercising a right of audience or a right to conduct proceedings on behalf of a party.
By rule 14 of the FTT rules, a person does not have to be legally qualified in order to represent a party.
It is against that representative, legally qualified or not, that the order is made, not against the party him/her/itself.
Unlike costs orders against a party under rule 13(1)(b), rule 13(1)(a) does not impose any conditions on wasted costs orders, although, as the Upper Tribunal observed:
“It goes without saying that the discretion must be exercised judicially and that, when exercising it, the FTT must have regard to the overriding objective”.
Section 51(7) of the Senior Courts Act 1981, which empowers the civil courts to make wasted costs orders in the civil courts, was the centre of attention in Ridehalgh.
Sir Thomas Bingham MR considered the expressions “improper, unreasonable or negligent”, the meanings of which, he considered, were not open to serious doubt:
“… means what it has been understood to mean in this context for at least half a century. The adjective covers, but is not confined to, conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalties. It covers any significant breach of a substantial duty imposed by a relevant code of professional conduct. But it is not in our judgment limited to that. Conduct that would be regarded as improper according to the consensus of professional (including judicial) opinion can be fairly stigmatised as such whether or not it violates the letter of a professional code.
“… also means what it has been understood to mean in this context for at least half a century. The expression aptly describes conduct which is vexatious, designed to harass the other side rather than advance the resolution of the case, and it makes no difference that the conduct is the product of excessive zeal and not improper motive. But conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result or because other more cautious legal representatives would have acted differently. The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting on a practitioner’s judgment, but it is not unreasonable.
“… was the most controversial of the three … We are clear that “negligent” should be understood in an untechnical way to denote failure to act with the competence reasonably to be expected of ordinary members of the profession.
“We were invited to give the three adjectives (improper, unreasonable and negligent) specific, self-contained meanings, so as to avoid overlap between the three. We do not read these very familiar expressions in that way. Conduct which is unreasonable may also be improper, and conduct which is negligent will very frequently be (if it is not by definition) unreasonable. We do not think any sharp differentiation between these expressions is useful or necessary or intended.”
Having cited the above, the Upper Tribunal noted that wasted costs in Ridehalgh:
- Focused of the conduct of professional lawyers;
- Examined the construction of the tri-partite expression “improper, unreasonable or negligent”.
Conversely, rule 13(1)(b) was concerned only:
- With the conduct of the parties, and
- With conduct which is “unreasonable”, and was otherwise unqualified.
How high is the bar?
“An assessment of whether behaviour is unreasonable requires a value judgment 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”, said the Upper Tribunal.
Electing to follow the guidance given in Ridehalgh, where, as they admitted, the context had been “slightly different”, they continued:
““Unreasonable” conduct includes conduct which is vexatious, and designed to harass the other side rather than advance the resolution of the case. It is not enough that the conduct leads in the event to an unsuccessful outcome”.
They declined to give examples of conduct that might be caught in the basket of unreasonable conduct, but made it clear that an order under rule 13(1)(b) was not likely to be a regular occurrence.
Instead, it stated the test for unreasonable conduct this:
- Would a reasonable person in the position of the party would have conducted themselves in the manner complained of, or
- Applying “acid test”, was there a reasonable explanation for the conduct complained of?
In relation to litigants in person, they observed:
“… for a lay person to be unfamiliar with the substantive law or with tribunal procedure, to fail properly to appreciate the strengths or weaknesses of their own or their opponent’s case, to lack skill in presentation, or to perform poorly in the tribunal room, should not be treated as unreasonable”.
The FTT’s case management role
The Upper Tribunal then moved into interesting territory,
- Underlining the FTT’s role in case managing proceedings before they reach a final hearing, and
- Emphasising the importance of the overriding objective, which as a matter of course would require parties to cooperate with each other in preparing the case for hearing.
“Tribunals should therefore use their case management powers actively to encourage preparedness and cooperation, and to discourage obstruction, pettiness and gamesmanship”, they concluded.
Unreasonable behaviour in other tribunal decisions
The advocates in the appeals had plainly done a considerable amount of research, and had come up with cases from other tribunals where the rules contain an equivalent costs awarding power.
Referring to that industry – and, frankly, to my relief – the Upper Tribunal expressed the view that they were sufficiently equipped to determine the appeals with:
- The wording of rule 13(1)(b);
- Ridehalgh, and
- Cancino v Secretary of State for the Home Department  UKFTT 00059 (IAC), a case from the Immigration and Asylum Chamber.
The Immigration and Asylum Chamber has its own procedure rules. Its rule 9(2) is identical to the FTT’s rule 13(1).
Cancino was an unreasonable conduct costs decision of the Chamber President of the Upper Tribunal (Immigration and Asylum Chamber), and the Chamber President of the First-tier Tribunal (Immigration and Asylum Chamber), in which the Tribunal emphasised “the fact-sensitive nature of the inquiry in every [unreasonable conduct costs] case”.
The application of rule 13(1)(b)
The element of discretion in rule 13(1)(b)
Rule 13(1)(b) provides that “the Tribunal may make an order in respect of costs only … if a person has acted unreasonably….”
This permissive and conditional language caused the Upper Tribunal to identify a three stage test. The first stage is objectively measured, and the second and third involve the exercise of the FTT’s discretion.
Stage 1: has there been unreasonable conduct?
Unreasonable conduct is measured against an objective standard. It does not involve the exercise of any discretion.
If there is no reasonable explanation for the conduct complained of, the behaviour will properly be adjudged to be unreasonable, and the threshold for the making of an order will have been crossed.
Stages 2 and 3: should an order be made, and if so, on what terms?
The Upper Tribunal held that unreasonable conduct provides a context in which the FTT should exercise its discretion having “regard to all relevant circumstances”:
- As to whether to make an order for costs, and, if that discretion is exercised,
- As to the terms of the costs order.
“The nature, seriousness and effect of the unreasonable conduct will be an important part of the material to be taken into account”, said Martin Rodger QC and Siobhan McGrath, “but other circumstances will clearly also be relevant.”
They proceeded to give guidance on four factors which had the potential to affect the exercise of the discretion:
- The effect of success;
- The position of unrepresented parties;
- Withdrawal from an application, and
They were however at pains to emphasise that those issues were “only some of the factors which it will be relevant to take into consideration in determining applications under rule 13(1)(b)”.
The effect of success
Section 29(2)-(3) of the Tribunals Courts and Enforcement Act 2007 provides that:
“the relevant tribunal shall have full power to determine by whom and to what extent the costs are to be paid”, subject to the tribunal’s procedural rules.
The Upper Tribunal reminded itself of the overriding objective, and concluded that it was not a given that an order for the payment of the whole of the other party’s costs would be appropriate in every case of unreasonable conduct.
The position of unrepresented parties
Unrepresented parties – or litigants in person as they are often known – may find themselves in a position where their conduct is – or could be – criticised.
Relevant to unreasonable behaviour
“In the context of rule 13(1)(b) we consider that the fact that a party acts without legal advice is relevant at the first stage of the inquiry,” held the Upper Tribunal, continuing:
“When considering objectively whether a party has acted reasonably or not, the question is whether a reasonable person in the circumstances in which the party in question found themselves would have acted in the way in which that party acted.
“In making that assessment it would be wrong, we consider, to assume a greater degree of legal knowledge or familiarity with the procedures of the tribunal and the conduct of proceedings before it, than is in fact possessed by the party whose conduct is under consideration.
“The behaviour of an unrepresented party with no legal knowledge should be judged by the standards of a reasonable person who does not have legal advice.
“The crucial question is always whether, in all the circumstances of the case, the party has acted unreasonably in the conduct of the proceedings”.
Relevant to the discretion too
The receipt of legal advice is also relevant, albeit to a lesser extent, to the exercise of the discretion on costs too.
That is perhaps an unsurprising view because the discretion must be exercised in the light of all relevant facts, including “any mitigating circumstances”.
The Upper Tribunal was however at pains to point out that lack of legal advice should not be treated with “excessive indulgence”, nor should it become an excuse for unreasonable conduct.
It then approved the following points from Cancino on the importance of striking the appropriate balance:
- “The conduct of litigants in person cannot normally be evaluated by reference to the standards of qualified lawyers;
- “The status of unrepresented litigants cannot be permitted to operate as a carte blanche to misuse the process of the tribunal;
- “Tribunals should be alert to the distinction between pursuing a doomed appeal in the teeth of legal advice and doing likewise without the benefit thereof;
- “Every unrepresented litigate must be permitted appropriate latitude;
- “The overarching principle of facts sensitivity looms large once again.”
Cancino also supported the conclusion that both wasted costs and unreasonable conduct costs orders should only be made “in the clearest cases”, where the burden of proof would lie squarely on the party seeking its costs.
The withdrawal of claims
The Upper Tribunal had this to say on the subject of withdrawals:
“It is important that parties in tribunal proceedings, especially unrepresented parties, should be assisted to make sensible concessions and to abandon less important points of contention or even, where appropriate, their entire claim.
“Such behaviour should be encouraged, not discouraged by the fear that it will be treated as an admission that the abandoned issues were unsustainable and ought never to have been raised, and as a justification for a claim for costs”.
The Upper Tribunal was fortified in this view by two cases.
McPherson v BNP Paribas  EWCA Civ 569
In McPherson v BNP Paribas  EWCA Civ 569, the Court of Appeal dealt with an appeal relating to a costs order made in an Employment Tribunal following a withdrawal.
In the courts, discontinuance is viewed as tantamount to an admission of defeat, from which it generally follows that the party discontinuing pays the non-discontinuing party’s costs.
In that case it emerged that withdrawal is a different animal to discontinuance.
“Notice of withdrawal might in some cases be the dawn of sanity”, observed Mummery LJ, “and the Tribunal should not adopt a practice on costs which would deter applicants from making sensible litigation decisions.”
On withdrawal, the Tribunal here said:
“Concessions are an important part of contemporary litigation, particularly in the overburdened realm of immigration and asylum appeals…. Occasionally a concession may extend to abandoning an appeal (by the appellant) or withdrawing the impugned decision (by the respondent).
“We consider that applications for costs against the representative or party should not be routine in these circumstances. [The costs rule] cannot be invoked without good reason. To do otherwise would be to abuse this new provision.”
If the FTT decides to make an order for costs, it must then determine the detail of the order.
It is at this stage that causation comes in to play. It is also at this stage that one of the key differences between the wasted costs and unreasonable behaviour costs becomes most apparent.
Causation and wasted costs
Ridehalgh highlights that in the wasted costs jurisdiction it is essential to demonstrate a causal link between the improper, unreasonable or negligent conduct complained of and the costs said to have been wasted.
In the tribunal context the need for such a link is apparent from the definition of “wasted costs” in section 29(5) of the 2007 Act i.e. that there are costs incurred by a party “as a result of” the relevant act or omission of the representative.
Causation and unreasonable behaviour
There is no such explicit causal connection between in the wording of rule 13(1)(b).
Once the Tribunal has decided to make an order, the amount payable does not have to be calculated by reference to the amount of extra cost that the innocent party has incurred because of the unreasonable conduct.
Rule 14 of the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2001 permits the making of an order for costs where a party, or its representative, has acted vexatiously, abusively, disruptively or otherwise unreasonably.
That rule and the question of causation fell under the spotlight in McPherson in the Court of Appeal.
This is what Mummery LJ had to say about it:
“In my judgment, rule 14(1) does not impose any such causal requirement in the exercise of the discretion. The principle of relevance means that the tribunal must have regard to the nature, gravity and effect of the unreasonable conduct as factors relevant to the exercise of the discretion, but that is not the same as requiring [the respondent] to prove that specific unreasonable conduct by the applicant caused particular costs to be incurred.
“… It is not, however, punitive and impermissible for a tribunal to order costs without confining them to the costs attributable to the unreasonable conduct. As I have explained, the unreasonable conduct is a pre-condition of the existence of the power to order costs and it is also a relevant factor to be taken into account in deciding whether to make an order for costs and the form of the order.”
In the Upper Tribunal’s view, those words was just as applicable to rule 13(1)(b), holding as it did that:
“The unreasonable conduct, its nature, extent and consequences are relevant factors to be taken into account in deciding whether to make an order for costs and the form of the order”.
A brief review
Before moving on to determine the individual appeals before it, the Upper Tribunal took stock. Its conclusions can be summarised in bullet points.
First, rule 13(1)(b) applications should:
- Not be regarded as routine;
- Not be abused to discourage access to the tribunal;
- Not be allowed to become major disputes in their own right;
- Not be encouraged at interim stages or before the decision is available. We consider that submissions are likely to be better framed in the light of the tribunal’s decision, rather than in anticipation of it;
- Identify clearly and specifically the conduct relied on as unreasonable, and
Second, the FTT should, on receipt of an application:
- Consider whether there is a case to answer;
- If so, give the respondent the opportunity to respond to the criticisms made and to offer any explanation or mitigation, and
- Determine the application summarily, preferably without the need for a further hearing, and after the parties have had the opportunity to make submissions.
Third, the FTT’s decision need not be lengthy, but if awarding costs, it should:
- Identify the conduct which the tribunal has found to be unreasonable;
- List the factors which have been taken into account in deciding that it is appropriate to make an order, and
- Record the factors taken into account in deciding the form of the order and the sum to be paid.
On to the appeals
The exercise of the rule 13(1)(b) power involves the exercise of the FTT’s discretion.
The Upper Tribunal reminded itself, before taking the plunge into the first appeal, that an appellate tribunal should exercise restraint when undertaking a review of a discretionary decision of a first-tier tribunal.
“It is not for us to substitute our own assessment”, they observed, “if that tribunal:
- “Properly directed itself on the applicable law;
- “Took into account all relevant matters;
- “Was not swayed by irrelevant matters, and
- “Did not reach a conclusion which is irrational”.
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