Appeal No. UKEAT/0565/04/TM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 11 November 2004

Before
THE HONOURABLE MR JUSTICE BEAN
MR J MALLENDER
MS B SWITZER

MR P VARGHAI	APPELLANT

CAFFYNS PLC	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MISS J EADY
(Of Counsel)
Instructed by:
Messrs Dean Wilson Laing
96 Church Street
Brighton
East Sussex
BN1 1UJ	
For the Respondent	MR R SAMUEL
(Of Counsel)
Instructed by:
Messrs Sherrards 
Solicitors
Grosvenor Hall
Bolnore Road
Haywards Heath
West Sussex 
RH16 4BX	

SUMMARY

Application for costs under 2001 Regulations made more than 14 days after promulgation of the decision - may be considered under rule 14 (rather than by way of review under rule 13) if made within a reasonable time:  Johnson v Baxter [1984] ICR 675 applied.  But order to pay two-fifths of employer’s costs set aside as reasoning inadequate, and costs issue remitted to Tribunal to reconsider in the light of McPherson v BNP Paribas [2004] IRLR 558.

THE HONOURABLE MR JUSTICE BEAN

1.	The Appellant Mr Varghai who was born in Iran was employed by the Respondent Caffyns Plc with effect from 15 May 1998.  On 15 October 2002 he was summarily dismissed on the grounds of gross misconduct.  He launched an Originating Application alleging unfair dismissal and race discrimination.

2.	A five day hearing took place in the Employment Tribunal sitting at Brighton beginning on 30 June 2003.  At the conclusion of the hearing the Tribunal reserved its decision.  The reserved decision was promulgated, that is to say, entered in the Register and sent to the parties on 2 September 2003 and in it the Tribunal emphatically rejected all Mr Varghai’s claims.  By letter to the Tribunal of 26 September 2003 the Respondents, through their solicitors applied for costs against Mr Varghai.  That letter was apparently received by the Tribunal on 29 September but unfortunately was not copied to the Applicant or his solicitors until 22 December 2003.  The Respondents’ solicitors had however notified the Applicant by letter of 3 June 2003 of their client’s intention to apply for costs if the applications were pursued to a hearing and proved unsuccessful.

3.	A hearing of the application for costs took place on 2 February 2004 and by its decision promulgated on 16 February 2004 the Tribunal ordered the Applicant to pay two-fifths of the costs of the Respondent from 24 December 2002 such costs to be assessed by way of detailed assessment if not otherwise agreed.
 
4.	The critical passage of the Tribunal’s reasons on costs is as follows:

“3.     The Tribunal was satisfied that there was no or insufficient evidence to claim a racist conspiracy as between the proprietor and manager of Road Radio Ltd [that is a customer of the Respondent company] and Mr Warren of the Respondent company.  These matters were not put to any of the witnesses and it was, therefore, unreasonable for the Applicant’s claim to be framed in such a way that it was necessary for the Respondent to answer allegations which on the day were not pursued.”
4.     It was improper and unreasonable for the Applicant to pursue an allegation of fraud without any evidence to support that allegation.  Again, the Respondent was forced to defend an allegation which was not pursued and was withdrawn part-way through the hearing.”

Pausing there the reference to an allegation of fraud is in our view clearly an echo of paragraph 1(2) of the Decision where the Tribunal mentioned 
“(2)  …an allegation of fraud, namely that the disciplinary and appeal hearing notes had been fabricated, which was withdrawn on the 3rd day of the hearing”
The Tribunal continued:
“5.     The Tribunal is satisfied that in this regard the Applicant acted unreasonably and that costs should be paid by him in so far as they arise out of the above heads.”
6.     The Tribunal have considered the cross-examination of the witnesses at length and have formed a view as to how long this case would have taken and who would have been involved had the two allegations not be made.  All but two of the witnesses would certainly have given evidence in any event and in some cases the length of evidence of witness would have been very little different.  The Tribunal is satisfied, however, that had this matter proceeded as a claim for unfair dismissal, without a claim for racial discrimination, it should have been completed in three days and the appropriate proportion of costs to be paid by the Applicant to the Respondent should, therefore, be two-fifths of the costs properly incurred by the Respondent.”

They declined to order any costs prior to the issue of the Originating Application and there was no dispute before us about that.

5.	Mr Varghai now appeals against the decision as to costs.  Miss Jennifer Eady of Counsel (who, it must be emphasised, did not appear below) has represented him on appeal.  Her submissions can be summarised as follows.  Firstly, that there was no jurisdiction to make an order for costs under Rule 14 of Schedule 1 to the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2001 because the application was made too late.  Alternatively as developed in oral submissions before us Miss Eady submits that if there was jurisdiction to make such an order it arose only by way of a review under Rule 13 of the Rules.  The application for such a review was out of time and if it was to be entertained at all it could only be entertained after a balancing exercise which the Tribunal did not carry out.

6.	The second head of Miss Eady’s submissions is that, if there was jurisdiction, to make an order that the Applicant pay two-fifths of the Respondent’s costs was excessive and the reasoning process which led to it was illogical; and that because of either or both of these factors the decision was perverse.

7.	It is important to note that there is no challenge and could not be any challenge to the finding by the Employment Tribunal that the conduct of the proceedings by or on behalf of the Applicant in the respects set out in their costs decision was unreasonable.  We have read as we think it is plainly correct to do the liability decision and the costs decision together.  Given the findings in the liability decision it was plainly open to the Employment Tribunal to find unreasonable conduct of the proceedings.  Miss Eady realistically did not suggest otherwise.  The extent of the unreasonable conduct is in dispute; we shall come to that in dealing with the second head of the submissions.

8.	As to jurisdiction Miss Eady invited us to note (as those reading this judgment should note) that the point which has arisen in this case could not arise under the 2004 Regulations.  This is because Rule 38(7) provides:
“(7)  A party may apply for a costs order to be made at any time during the proceedings.  An application may be made at the end of a hearing, or in writing to the Employment Tribunal Office.  An application for costs which is received by the Employment Tribunal Office later than 28 days from the issuing of the judgment determining the claim shall not be accepted or considered by a tribunal or chairman unless it or he considers that it is in the interests of justice to do so.”

9.	This new regime does not apply to the present case.  The 2001 Rules and their predecessors are silent on whether an application for costs may be made after a decision of the Employment Tribunal determining the proceedings has been promulgated.  In Johnson v Baxter [1984] ICR 675 and [1985] IRLR 96, this Tribunal, Bristow J presiding said:
“No time limit is laid down in the Rules of Procedure within which an application for costs must be made.  In our judgment it follows that, in accordance with ordinary principles, the law is that it must be made within a reasonable time.”

10.	Miss Eady submits that these observations were incorrect.  She points out that in Johnson v Baxter an application for costs had evidently been made before the conclusion of the liability hearing and that the remarks in paragraph 7 are therefore orbiter.  She submits that once a Tribunal has pronounced a decision disposing of all the issues necessary to determine the claim (for example, dismissing all the claims in the Originating Application; or, if it upholds the claim, dealing with all aspects of remedy) it is functus officio save in so far as the review power under Rule 13 of the 2001 Rules is applicable.

11.	The remarks in paragraph 7 of Johnson v Baxter are, strictly speaking, orbiter dicta.  But they are cited in Harvey as authority for the proposition they contain and have remained uncontradicted by other authority and, so far as we are aware, unchallenged for twenty years.  We should be most reluctant to depart from them now, even if we thought they were wrong; but in any event we do not.  On the contrary, we agree with them.  In our view an application may be made in a case to which the 2001 Rules apply within a reasonable time after the promulgation of the Tribunal decision to which the application relates.  If such an application for costs is made (and assuming the Tribunal has neither made nor refused to make an order for costs in its liability or remedies decision) then it is an application under Rule 14 and not an application for review under Rule 13.  

12.	Miss Eady’s submission that the jurisdiction if any arises by way of review rather than under Rule 14 is not simply academic, and in case we are wrong in our decision that it is Rule 14 rather than Rule 13 which applies we should consider the next step in her argument.  This was that a review should be held only if interests of justice require it: see Rule 13(1)(e).  (The other sub paragraphs of Rule 13(1) are plainly inapplicable in the present case); and particularly so when an application is made for a review more than 14 days after the decision which is sought to be reviewed.  This being so, Miss Eady argues, the Tribunal were entitled to take and indeed ought to have taken the Applicant’s means into account in deciding whether to grant a review, whether to make an order for costs on that review or in determining the amount of those costs.

13.	The Court of Appeal in Kovacs v Queen Mary and Westfield College [2001] IRLR 919 decided that on an application for costs under Rule 14 of the 2001 Rules the prospective paying party’s means are not relevant either on the issue of whether to make an order or on the amount of the order if made.  It is true that Kovacs was a case of an application made during or at the conclusion of a liability hearing and not by way of subsequent application following a reserved decision.  But save possibly in cases of changed circumstances we cannot see that there is any logical basis for distinguishing between an application made at the conclusion of the hearing and one made after promulgation of the decision.  It would be very strange if means were to be ignored in the first type of case but were a highly material or at least material factor in the second type of case.

14.	There may be cases where the circumstances of the party against whom the application for costs is made have materially changed since the decision was given, for example by purchase of a home in the belief that the hearing is over and costs are no longer in issue.  Mr Samuel for the Respondents was inclined to accept, as we are, that in such a case the Employment Tribunal could have regard to the changed circumstances, of the prospective paying party in deciding whether to make an order for costs.  But here there was no such change of circumstances,,,,,, even by the time Mr Varghai was belatedly notified of the application.  We conclude that the Employment Tribunal clearly had the jurisdiction to make the order which they did at the time when they did and that it was properly made under Rule 14 of the 2001 Rules.

15.	We turn to the second head of Miss Eady’s submissions, which is that the proportion of two-fifths of the Respondents’ costs is perverse or unsustainable.  Miss Eady, with characteristic frankness, began these submissions by reminding us of the observations of the Court of Appeal in the recent decision of McPherson v BNP Paribas (London Branch) [2004] IRLR 558 at paragraph 26 where Mummery LJ, delivering the principal judgment, said:
“26.    When a costs order made by an employment tribunal is appealed to the Employment Appeal Tribunal or to this court the prospects of success are substantially reduced by the restriction of the right of appeal to questions of law and by the respect properly paid by appellate courts to the exercise of discretion by lower courts and tribunals in accordance with legal principle and relevant considerations.  Unless the discretion has been exercised contrary to principle, in disregard of the principle of relevance or is just plainly wrong, an appeal against a tribunal’s costs order will fail.  If, however, the appeal succeeds, the appellate body may substitute a different order or, if it is necessary to find further facts, the matter may be remitted to the tribunal for a fresh hearing of the costs application.”

16.	As to how the discretion to make an order for costs should be exercised Mummery LJ said this:
“40. …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 BNP Paribas to prove that specific unreasonable conduct by Mr McPherson caused particular costs to be incurred.”
Mummery LJ went on at paragraph 41:
“41.     In a related submission Ms McCafferty [Counsel for Mr McPherson] argued that the discretion could not be properly exercised to punish Mr McPherson for unreasonable conduct.  That is undoubtedly correct, if it means that the indemnity principle must apply to the award of costs.  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 precondition 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.”

17.	Returning to the Tribunal’s costs decision in the present case: as we understand it, there are findings that two allegations constituted unreasonable conduct of the proceedings by or on behalf of the Applicant.  These were, firstly, the allegation of a racist conspiracy between Road Radio Limited and the Respondents and, secondly, the allegation of fraud.  We do not read the extended reasons as constituting a finding that all aspects of the complaint of race discrimination were brought or pursued unreasonably.  On the contrary it is plain to us, from reading the liability decision alongside the costs decision, that the Employment Tribunal were critical of some aspects of what went on within the Respondent company.  For example, in paragraph 5 they found that there was racist and sexist behaviour among the salesmen of the Lewes Branch where the Applicant worked; and they give examples of racial banter, some of which were admitted, some of which were denied but were found nevertheless to have occurred.  

18.	The Tribunal had to consider the application for costs without the advantage as we have of the judgment in McPherson v BNP Paribas.  They appear to have approached the decision they had to make simply on the basis of causation.  They find that had the matter proceeded as a claim for unfair dismissal without a claim for racial discrimination it should have been completed in three days and they therefore ordered the Applicant to pay two-fifths of the Respondents’ costs.

19.	We have difficulty with that reasoning, even without regard to McPherson.  Firstly, it fails to make any distinction between preparation and the costs of the hearing.  Secondly, it sits oddly alongside the Tribunal’s findings earlier in the same paragraph that:
“All but two of the witnesses would certainly have given evidence in any event and in some cases the length of evidence of the witness would have been very little different.”

Thirdly, the Tribunal are critical, and rightly so, of the fact that allegations of fraud were made and pursued to a hearing but then withdrawn; but those allegations did not, as we see it, having read the extended reasons, substantially lengthen the hearing.  As to the allegation of racist conspiracy the Tribunal say in paragraph 3 of their decision that the matters were not put to any of the witnesses.  So, again it is difficult to see how they substantially lengthen the hearing.  They may very well have substantially increased the required preparation and they may to a small extent have extended the length of the hearing.
 
20.	So far as the judgment in McPherson v BNP Paribas is concerned that enjoins this Tribunal to have regard to the ‘nature, gravity and effect’ of the allegations or arguments which it has found to have amounted to unreasonable conduct of the proceedings.  Clearly the two allegations which were the subject to the Tribunal’s findings of unreasonableness were of a grave nature.  Mr Samuel submitted, and we agree, that the allegation of fraudulent production of documents (that is, the criminal offence of forgery by another name) was at the top end of the scale of gravity.

21.	However, it will be apparent from what we have already said that we have difficulty with the Tribunal’s reasoning in so far as it dealt with the effect of the allegations.  Mr Samuel submits that the Court of Appeal’s reference to ‘effect’ means effect on the witnesses as well as effect on the length of the hearing.  In this case there is no finding by the Tribunal that the allegations had any particular effect on the witnesses.  We would not be surprised if the allegations had been extremely distressing for the witnesses accused, but there is no specific finding of that kind.

22.	We do not have to decide whether an unreasonable allegation which is found by the Tribunal to have caused a witness distress could be a proper basis of an order for costs if it did not have financial consequences for the witness.  That is for another case and another day.  The Court of Appeal in McPherson in a passage to which we have already referred in paragraph 41 accepted the submission on behalf of Mr McPherson that the indemnity principle applies to an award of costs under Rule 14, but they appear to have accepted that the discretion cannot be properly exercised simply on a punitive basis.  They also made it clear that the indemnity principle does not require a Tribunal to take a magnifying glass to the application for costs and attribute for example one hour and forty-five minutes worth of hearing to a particular allegation made on a particular occasion.  The Tribunal is entitled to paint with a broader brush than that.  Nevertheless, particularly in a case where as here the costs subject of the application are substantial, the losing party is entitled to a logical explanation of what leads the Tribunal to make the order in the amount or proportion which it does, and with respect we think that paragraph 6 of the decision on costs falls somewhat short in this regard.

23.	We should finally record that Mr Samuel submitted that in the present case the unreasonable conduct was as much as that of the Applicant’s solicitor as of the Applicant himself and that since it was (as he put it) misconduct on the part of the solicitor to pursue the allegation of fraud without evidence to support it, the Rule 14 application should be regarded as being an application for a wasted costs order where he submits the costs order may be punitive in a way that it is not appropriate in an ordinary costs application against a party.

24.	We do not accept this submission.  It seems to us that the wording of Rule 14 makes no distinction between unreasonable conduct of the Applicant and unreasonable conduct of his representative.  There is no express finding of improper or unreasonable conduct on the part of the Applicant’s solicitor in the reasons of the Tribunal and we decline to infer any.  If there had been it would be necessary to go into the question of whether different considerations may be applied to an order under Regulation 14 if made directly against an Applicant’s legal representative.  The question however, does not arise in our view in this case.
 
25.	  We therefore allow the appeal to the extent of setting aside the order that the Applicant pay two-fifths of the costs properly incurred by the Respondent.  We remit the application for costs to the Employment Tribunal to reconsider in the light of this judgment and the judgments in McPherson v BNP Paribas.  We make it clear we are not seeking to revisit, or permitting the parties to revisit, the finding that the Applicant or his representative had in conducting the proceedings acted unreasonably in the respects set out in paragraphs 3 and 4 of the reasons.  We simply direct the Tribunal to reconsider the amount or proportion of costs to be paid in the light of their findings, our judgment and the McPherson case