22 June 2016

What is "unreasonable" when awarding costs in the First Tier Tribunal ?

The Upper Tribunal ("UT") has handed down its long awaited decision in a number of conjoined appeals concerning the First Tier Tribunal's ("FTT") power to award costs against a party that has acted "unreasonably" under Rule 13.  Forsters were involved in the first of three appeals, which all arose out of residential service charge disputes. The UT allowed all three appeals and in doing so has given much needed guidance as to what constitutes "unreasonable behaviour" under Rule 13, and how it should be applied in practice. Going forward, tribunals will have to adopt a more systematic approach using a three stage test which should be applied at the substantive hearing.  They will also be expected to use their case management powers to avoid applications under Rule 13 at an early stage, which should be reserved for the clearest cases rather than becoming a matter of routine. In light of this decision, it will now be significantly harder to recover costs from an opponent that appears to have behaved unreasonably. 

The FFT's power to award costs is set out in Section 29 of the Tribunal, Courts and Enforcement Act 2007.  Prior to the implementation of the 2013 Rules, it was limited to a £500 ceiling and costs could only be awarded where a party's conduct was frivolous, vexatious or was otherwise an abuse of process.  This was amended significantly by the introduction of the 2013 Rules, which removed the £500 limit and allowed the FTT to make an order in respect of costs "if a person has acted unreasonably in bringing, defending or conducting proceedings" under Rule 13(1)(b) ("Rule 13").

In reaching their decision, the UT considered the guidance given in Ridehalgh v Horsefield [1994] Ch 205, which was a decision relating to the tribunal's wasted costs jurisdiction. Although this decision considered terms such as "improper" and "negligent" as well as "unreasonable" in a slightly different context they did feel that the wording of Rule 13 was sufficiently illuminated by the decision.

Following the guidance in Ridehalgh they said that "unreasonable" conduct includes conduct which is vexatious and designed to harass the other side rather than advance the resolution of the case. They also considered that the behaviour should be judged within its context and placed emphasis on the need for the FTT to actively engage in their case management powers to discourage potentially unreasonable behaviour, particularly when so many inexperienced litigants in person are involved with tribunal proceedings. The decision also makes it clear that the behaviour expected of parties should not be set at an unrealistic level.

In view of the permissive and conditional wording of Rule 13, the UT suggested a systematic approach to applications:  

  • The first stage should query whether a person has acted unreasonably by applying an objective standard of conduct to the facts of the case. If there can be no reasonable explanation for the behaviour then it will properly be adjudged to be unreasonable. It is at this stage that it is necessary to take into account whether a party is legally represented or not.
  • If Rule 13 is engaged at stage one, then at the next stage the discretionary power will be engaged and the tribunal will need to decide whether, in light of the unreasonable conduct, it should make an order for costs or not.  In doing so the UT said it was not necessary to find a causal link between the costs incurred and the behaviour to be sanctioned. Unreasonable conduct is all that is required to trigger stage two.
  • The third and final stage concerns the terms of the order to be made. The UT highlighted in particular the need for the FFT to keep the overriding objective in Rule 3 in mind, which enables the FTT to deal with cases fairly and justly. This includes dealing with cases proportionately, and it therefore does not follow that payment of the whole of a party's costs will be appropriate in every case.

Whilst it is clear from yesterday's decision that it is virtually impossible to establish a 'one size fits all' definition for "unreasonable behaviour", the determination provides useful guidance and a clear methodology to be followed by a tribunal when deciding whether a party's conduct is truly unreasonable.

Should you require further information or assistance in connection with this decision please contact Natasha Rees or Sarah Heatley.

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