National Westminster Bank v Kotonou

The general rule is that costs incurred in obtaining funding for litigation are not recoverable from the opposing party. However, costs of reasonably negotiating an interim solution to issues arising in contemplated or pending litigation may form part of the costs of that litigation, subject to reasonableness and proportionality.

The relevant question is whether there is a sufficient nexus between the negotiations and the issues in the proceedings. Funding negotiations concerning the meaning and extent of security were sufficiently connected with proceedings determining that issue, but not with separate proceedings concerning the validity of a guarantee.

The Bank appealed from a preliminary costs decision by Master Campbell in a detailed assessment. The dispute concerned legal costs incurred by Mr and Mrs Kotonou while negotiating with the Bank to release equity from their property to fund Mr Kotonou’s defence.

The parties were also litigating a guarantee claim and a Part 8 claim concerning the true construction of a mortgage securing the guarantee. Master Campbell held that the funding-related costs were costs of the Part 8 claim. The Bank argued that such costs were unrecoverable, inconsistent with earlier costs orders, or costs of the guarantee claim instead.

1. Appeal dismissed. The funding-related costs were properly treated as costs of the Part 8 claim.
2. The general principle that costs incurred in seeking funding for prosecuting or defending a claim are not costs of that claim was accepted. The fact that negotiations took place with the opposing party did not, by itself, create an exception.
3. The court distinguished between the guarantee claim and the Part 8 claim by examining the issues to which the negotiations related. The guarantee claim concerned the validity of the guarantee, whereas the negotiations concerned the meaning and effect of the mortgage. There was no sufficient nexus with the guarantee claim.
4. Costs incurred in reasonable negotiations aimed at resolving interim problems arising in connection with issues to be determined in contemplated or pending litigation may form part of the costs of those proceedings, subject to reasonableness and proportionality. The approach was consistent with the principles identified in Frankenburg v Famous Lasky Film, Service Ltd [1931] 1 Ch 428 and Re Gibson’s Settlement Trusts [1981] 1 Ch 179.
5. The negotiations arose from the dispute about the mortgage, were intended partly to improve the prospects of funding the guarantee defence, and provided an interim solution while preserving the parties’ competing claims. Those features supplied the necessary connection with the Part 8 claim. The earlier orders concerning reserved application costs did not determine the treatment of this distinct body of costs.

The appeal was from Master Campbell’s preliminary decision of 27 November 2007 in a detailed assessment of costs. Permission to appeal was granted by Evans-Lombe J in April 2008. This court dismissed the appeal.