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Many people think that they won’t have to pay the other party’s costs in a small claims court case (Claims under £10,000) but if they lose they do have to pay the other party’s court fees and expenses. In fact there is a risk that the Court will penalise a party even if they win, if they have acted unreasonably.

Unreasonable conduct can include refusing to mediate, if offered. It is true that there is a limited free small Claims Mediation Service, but it is not actually free as by that stage the parties have paid the Court issue fee. There is also no guarantee of an appointment as there are only a few Court “mediators” available and none of them are qualified mediators. They do not read the file. This is why we recommend using our Mediation Service before going down the Court route.

The court will always carefully scrutinise the parties’ behaviour when assessing costs in civil disputes. There is now a rich body of case law which provides judicial guidance on the courts’ general approach in assessing unreasonable behaviour when considering whether to make adverse costs orders.

Further judicial guidance on assessing unreasonable behaviour was given by the Court of Appeal in Dammermann v Lanyon Bowdler LLP [2017] EWCA Civ 269. In that case the court provided important guidance on the ‘unreasonable behaviour’ test for ordering costs in the small claims court.

The proceedings

The facts of the case are not relevant save to say that it was a complicated mortgage possession case regarding receiver’s fees.

The deputy district judge found that the Claimant had no standing to make the claim. It was dismissed without any order as to costs.

On the issue of costs, it was ruled that under Civil Procedure Rule 27.14(2)(g), the claimant had acted unreasonably, both by refusing an offer of £1,000 and by getting the law wrong. On the second appeal, the Court of Appeal (consisting of Longmore and McFarlane LJJ) allowed part of the appeal in order to provide guidance on what amounted to unreasonable behaviour for the purposes of rule 27.14(2)(g).

‘Unreasonable behaviour’ – small claims

On appeal to the Court of Appeal,the Claimant  argued that the judge was wrong to take his rejection of the £1,000 offer into account and that, if he had been afforded time, he would have informed the judge of his counter-offer to settle at a higher figure, which was refused.

The Court of Appeal overturned the circuit judge’s decision and held that the Claimant had not been unreasonable in pursuing the legal issue and found that the point on which he lost his claim was ‘somewhat intricate’. Further, when assessing whether he had behaved unreasonably, the circuit judge should have taken into account the fact that he had granted permission to appeal.

However, the court was not persuaded that the circuit judge had erred in the manner in which he approached the Claimant’s rejection of the settlement offer of £1,000. The circuit judge did not base his decision on unreasonable behaviour on this point and was, the court held, ‘entitled by part 27.14(3) to take it into account and, in our view, he was justified in doing so. The fact that the Claimant was prepared to settle for a substantially higher figure is, obviously, irrelevant to this consideration. If the appeal had turned on this point alone, it would not have succeeded’.

What, then, amounted to unreasonable behaviour? The Court of Appeal stated that it could not give ‘general guidance’ because all cases ‘must be highly fact-sensitive’, but it referred to Sir Thomas Bingham MR’s comments in Ridehalgh v Horsefield [1994] Ch 205, 232F in the context of wasted costs. In that case, Bingham held that: ‘Conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result or because other more cautious legal representatives would have acted differently.’ He went on to provide guidance: ‘The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting in a practitioner’s judgement, but it is not unreasonable.’ Longmore and McFarlane LJJ endorsed Bingham’s guidance: ‘We think that the above dictum should give sufficient guidance on the word “unreasonably” to district judges and circuit judges dealing with cases allocated to the small claims track.

The decision is clearly significant in providing judicial guidance on assessing unreasonable behaviour in small claims.

The Court of Appeal determined that whilst the Claimant’s claim had been unlikely to succeed this did not make his behaviour in pursuing it unreasonable. The fact that permission to appeal the decision of the DDJ had been granted indicated that there had been some (if minor) merit in the case. In addition, rejecting an offer to settle was not in itself unreasonable conduct.

The key point in our view is that rejecting an offer to settle was not unreasonable conduct in this case, but had the party refused to mediate the decision would have been different.

A refusal to mediate has been held in other cases to be unreasonable conduct and so parties pursuing claims in the Small Claims Court should be aware of this and mediate first, and litigate afterwards.