by Elizabeth Taylor

A reminder that costs are always discretionary

Whilst the general rule in the courts of England and Wales is that the loser pays the winner’s costs, it is important to remember that the court has a wide discretion when it comes to costs orders. Section 51 of the Senior Courts Act provides that the Court shall have “full power to determine by whom and to what extent the costs are to be paid”. It is for this reason that when considering the economics of funding applications, third party funders usually take no account of the possibility of recovering costs from the opponent.

On 24 April 2018 Hildyard J handed down his judgment in the case of Lehman Brothers International (Europe) (In Administration) [2018] EWHC 924 (Ch). This case dealt with the issue of costs in a tranche of the Lehman Waterfall proceedings. The basis of the substantive proceedings is not relevant for the purpose of this article, save to say that the joint administrators had applied to court for directions as regards the entitlement of creditors to payment of statutory interest prior to distribution of surplus funds.

There were six respondents in total represented by four sets of solicitors and counsel. The court accepted the arguments of the fourth respondent in the main proceedings who subsequently sought an order that his costs be paid as an expense of the administration. This was uncontentious. However, the issue to be determined was whether the costs of the other five respondents should also be paid as an expense of the administration, even though the arguments they put forward were ultimately unsuccessful.

Hildyard J noted that in the exercise of its discretion the court should be guided by the characterisation and substance of the proceedings, such that the discretion should be exercised with caution according to the circumstances of the particular case. In this instance the joint administrators had applied to court for directions on issues that they felt needed to be judicially determined before they could distribute surplus funds in the administration.

The respondents had been invited to put forward arguments on behalf of themselves and other creditors with similar interests and all the respondents had worked with the joint administrators to identify the issues that needed to be resolved.

Hildyard J drew a distinction between adversarial proceedings where costs should usually follow the event, and collaborative proceedings where all parties were acting together in the interests of the general body of creditors and other stakeholders. He found that these proceedings fell into the latter category, despite the adversarial manner in which the case was ultimately argued. He also noted the absence of arguments that the unsuccessful respondents should pay the costs of the joint administrators or the fourth respondent. As such he found that a “costs follow the event” approach was not appropriate.

The Judge found that

  1. on balance the submissions of all the respondents had been necessary to assist in determining the issues at stake and as such the proceedings were of benefit to all creditors,
  2. the relevant documentation was complex and its interpretation required proper argument by those experienced in dealing with it,
  3. all of the issues raised were reasonable, not frivolous and required determination, and
  4. it was not obvious that all of the arguments advanced by the losing respondents would have benefitted them.

In light of these factors the judge found by a narrow margin that the costs of all the respondents should be paid as an expense of the administration. However, his order was subject to one caveat which was that the costs of the losing respondents would be restricted to the costs that would have been incurred had they all instructed the same solicitors. This was consistent with the approach adopted in previous Lehman Waterfall proceedings.

So, the lessons to be learned from this decision seem to be that

  • It does not always follow that that the loser will pay the winner’s costs, or even that he will have to bear his own costs. The court will exercise its discretion as it considers appropriate.
  • The court will consider whether the proceedings are genuinely adversarial and the manner in which the case is argued is not the determinative factor in this regard.

This case was unusual in that there were surplus funds in the administration and the joint administrators’ own costs were capable of being paid as an expense out of those funds. In many cases the office holder lacks the funds to apply to court. Third party funders will be cautious if asked to fund an office holder’s application for directions as issues could arise as to the definition and quantum of the “win” if the respondent’s costs are to be borne by the estate.