Villa Agencies v Kestrel Travel Ltd

Costs after trial are discretionary. Appellate intervention is justified for an error of principle, a significant matter wrongly included or omitted, or a plainly unjust result. In proceedings involving a claim and counterclaim, the party who ultimately recovers a net sum is ordinarily the overall successful party and the starting point for costs, although that is not necessarily the end of the assessment. Substantial success by the other party on the counterclaim may significantly reduce the starting-point entitlement. The court must assess the overall dispute rather than treating the counterclaim as the whole case. Part 36 offers and other circumstances affect the result only where they properly engage the Civil Procedure Rules.

Villa Agencies sued Kestrel Travel Ltd for the balance of rent due for an October 2009 villa letting. Kestrel admitted liability in principle but relied on set-off and counterclaimed for losses arising from air-conditioning problems during an earlier August letting, including a settlement paid to its subtenant.

The Mansfield County Court awarded Villa Agencies €9,344 on the claim and Kestrel €5,844 on the counterclaim. It ordered Villa Agencies to pay two-thirds of Kestrel’s costs. Villa Agencies appealed, arguing that the recorder had erred in principle by treating the proceedings as being about the counterclaim. Kestrel defended the exercise of discretion. The central issue was how costs should be approached where claim and counterclaim produce a net recovery.

1. The appeal was allowed. The Court of Appeal exercised the costs discretion afresh and substituted an order that Kestrel pay 25 per cent of Villa Agencies’ costs below, while Kestrel was to bear its own costs.
2. Under rule 44.3 of the Civil Procedure Rules, the unsuccessful party ordinarily pays the successful party’s costs, but the court may make a different order and must consider all the circumstances. Relevant matters include conduct, partial success and admissible settlement offers. The statutory demand was irrelevant. The Part 36 offers attracted no weight because neither party had made an effective offer exceeding the other party’s ultimate recovery.
3. Costs orders are highly discretionary. The appellate court should ordinarily intervene only for an error of principle, the wrongful inclusion or omission of a significant matter, or a plainly unjust outcome. The recorder had erred in principle and reached a plainly wrong conclusion.
4. In proceedings which are, in substance, a net-entitlement dispute, the party who ultimately recovers a net sum is ordinarily the overall successful party. That is the starting point for costs, not necessarily the final result. This approach was consistent with the general principle identified in Multiplex Construction Limited v Cleveland Bridge UK Limited [2008] EWHC 2280 and the guidance applied in Naseem v Kang [2011] EWCA Civ 737.
5. The recorder wrongly categorised the proceedings as being about the counterclaim alone. The fact that most of the evidence concerned the counterclaim did not displace Villa Agencies’ overall success in recovering €3,500. Kestrel’s tactical decision to withhold admitted rent and rely on set-off carried costs risk. Its substantial, though incomplete, success on the counterclaim justified a significant reduction in Villa Agencies’ costs, but not an order in Kestrel’s favour.
6. The court noted Square Mile Partnership Limited v Fitzmaurice McCall Ltd [2006] EWHC 236 as an exceptional decision on special facts. An issues-based costs order was not appropriate: it had not been sought and courts are generally reluctant to adopt that approach.

• Court of Appeal (Civil Division) — The appeal was allowed and the costs order was substituted: [2012] EWCA Civ 219.
• Mansfield County Court — Following trial, judgment was entered for Villa Agencies for €9,344 on the claim and for Kestrel Travel Ltd for €5,844 on the counterclaim. Villa Agencies was ordered to pay two-thirds of Kestrel’s costs.