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August 16, 2021

It is very common for each party at a final hearing to be carrying unpaid costs. The amount owed should feature on the Form H and may range from a few hundred to many thousands of pounds, sometimes tens of thousands. Where a litigation loan has been taken out the true debt may be much higher than is apparent on the Form H, on the basis that the lawyers have been paid but only by taking out a debt, usually at penal rates of interest. In these circumstances the question arises to what extent should a Judge increase the award to take account of the costs? What if the costs are unreasonable? And, in a needs case, if he or she treats them as a debt which needs to be paid from the award, to what extent is that an impermissible back-door costs order?

These questions have all recently been answered by the Court of Appeal in the case of Azarmi-Movafagh v Bassiri-Dezfouli [2021] EWCA Civ 1184.

This case was characterised by the first instance (Circuit) Judge as one involving “extreme positions and a degree of bitterness”, a description which the Court of Appeal found “if anything understated the position.” As a consequence of the parties’ stance, the Court of Appeal found that “the costs have become so disproportionate relative to the assets that it is now hard to achieve an outcome in this uncomplicated needs case which will not leave each of the parties profoundly discontented.”

The husband and wife were both in their 50s. They had one child who was eight. They were married for about ten years and the marriage ended when the husband was violent to the wife (a finding of fact made in subsequent Children Act proceedings, although the husband was acquitted in criminal proceedings). The wife was a barrister “practising in a modest way” and remained living with the child in the matrimonial home. The husband was in receipt of universal credit and was living in a rented flat.

The total net assets were about £2m and all of them (seemingly even the matrimonial home) were categorised as non-matrimonial. Despite the obvious need to house both parties, it was the wife’s case that the husband should come away with nothing, a position she sought to justify on the basis that he had contributed nothing. In fact (insofar as it was relevant), the trial Judge found that the husband had made a significant (non-financial) contribution.

Unsurprisingly, the Judge found that it was a needs case and that the husband’s needs included the need to buy a house. In so finding, the Judge rejected the wife’s case that the husband should continue to rent. The husband’s needs were assessed at £425,000, to include a house, purchase costs and a car.

So far, so good.

To the sum of £425,000, however, the trial Judge added a further £200,000 as a payment towards the husband’s unpaid costs. Here the story become a little more interesting.

At the date of the order the husband’s total costs were £246,864, comprising £185,000 in the financial remedy proceedings, £48,864 in the Children Act proceedings and £13,000 for the criminal proceedings. These costs had largely been funded by a litigation loan of £120,000 and a loan from his sister of £122,560, which she had raised by way of mortgaging her house.

These costs were higher than they could have been because within the criminal proceedings the husband had been entitled to legal aid, but had chosen instead to instruct a QC privately, thereby significantly increasing his costs.

After the payment of £625,000 the wife was left with net assets of about £1.4m and there was a clean break. One might have thought that she would have been reasonably happy with that outcome, but not a bit of it, and she appealed the order. In the appeal she continued to argue that the only fair order would have been for the husband to have received nothing.

Cohen J gave the wife permission to appeal on the basis that no consideration had been given to whether or not the £200,000 should have been secured by way a charge in favour of the wife, repayable to her on sale of the husband’s house. This was a point not argued at trial.

The appeal came before Mrs. Justice Judd, who allowed it to the extent of substituting a charge for the additional lump of £200,000. She gave no reason for preferring a charge, other than to say that the Judge had been wrong to allow the husband the lion’s share of his costs in circumstances where there had been a finding of violence against him in the Children Act proceedings.

Judd J made a costs order of £25,000 against the husband because he had lost the appeal. This was added to the charge, with the effect that when the charge bites he will be left with about £175,000 with which to re-house himself.

This time both parties appealed. The husband appealed on the basis that the Judge should not have interfered with the first instance decision; whereas the wife appealed on the basis that it was unfair to require her to pay the costs at all and on the basis that neither side had sought a charge or been invited to make submissions about it. This time the wife did not appeal against the finding that the husband needed £425,000 to rehouse himself and to buy a car.

As ever, the Court of Appeal reminded itself of the limited powers of the appeal court, particularly on second appeals, but clearly felt that the outcome was so unfair that was obliged to allow the appeal nonetheless. They expressed concern that Judd J had twice referenced the finding of violence made against the husband and felt that this had wrongly influenced her reasoning.

The submission made on behalf of the wife was based upon the superficially attractive point that the outcome imposed on her was worse than was likely had the trial Judge instead made a costs order against her. It was inconceivable that the husband would have obtained a costs order of £200,000 and so (went the argument) how could it be fair instead to award him an extra £200,000 of capital to achieve the same outcome by a different route?

This argument did not find favour with the Court of Appeal. Various first instance decisions were cited to the court, which elicited the comment simply that:

“All these cases turn on their own individual facts and in my judgment the most significant principle to be drawn from them, either individually or collectively, is that the judge at first instance has a wide discretion as to the extent to which it is appropriate to order an enhanced lump sum to a party in receipt of a needs award designed wholly or in part to satisfy their outstanding costs bills.”

Several of these cases concerned parties who had incurred costs unreasonably (which was not the case here, despite the instruction of the QC) and in those cases (such as WG v HG [2019] 2 FCR 124) the amount awarded left the recipient without any obvious means to pay the balance. This was because “people cannot litigate on the basis that they are bound to be reimbursed for their costs” and if they do and incur unreasonable costs along the way they must bear the consequences.

Here, the Court of Appeal found that ordering an extra sum to pay debts is entirely conventional. Where those debts are costs, however, greater care should be taken:

“It is undoubtedly the case that there is no specific rule requiring the first instance judge to carry out an analysis by reference to the principles applicable to costs orders and in my judgment to do so would not be compatible with the wide discretion of the judge to determine the extent of a party’s needs and the extent to which they should be met. Having said that, in my judgment in cases where it is argued that an order substantially in excess of the sum required to meet a party’s assessed needs is sought in order to settle the outstanding costs (or debts referrable to costs) of that party, the judge should:
i) Consider whether in any event the case is one in which consideration should be given as to the making of an order for costs under FPR 28(6) and (7) in particular by reference to FPR PD 28 para 4.4;
ii) Whilst not carrying out a full costs analysis, the judge should have firmly in mind what the order which they propose to make by way of additional lump sum to meet a party’s costs would represent if expressed in terms of an order for costs. To do this would act as a cross check of the fairness of the proposed order.”

This may be good common sense, but it raises an obvious question, namely why should this thought process apply only to the party who has yet to pay their costs? If the other party has paid their costs already (possibly from matrimonial funds) why should the same not apply to them, and does it follow that in order to avoid this scrutiny clients should always be advised to pay their costs before the hearing if they possibly can?

As to the imposition of a charge, the Court of Appeal criticised Judd J for making an order without hearing argument, particularly in circumstances where the imposition of charges, including Mesher charges, has fallen from favour. The Court of Appeal’s view was had that argument been permitted:

“…Counsel would have had the opportunity to take the judge to some of the many cases which deal with the making of so called Mesher orders (Mesher v Mesher & Hall [1980] 1All ER 126) in order to demonstrate the court’s ambivalence towards the use of a deferred charge in matrimonial finance cases, to the point that, whilst they remain a useful tool in certain limited circumstances, it is only rarely that it will be felt that the advantages outweigh the disadvantages of making an order designed to maintain the tie between the parties long after their divorce.”

According to the Court of Appeal a Mesher order is an order which is:

“..regarded by many as outdated and by all to be one that is only rarely used.”

Such orders were said to be particularly inappropriate where the parties’ relationship is poor:

“In a case such as this, marked by bitterness between the parties, extreme caution must in my view, be exercised before putting the parties in a situation which will, by continuing a financial link between the parties, serve to feed resentment; the wife at having ‘her’ money invested in the husband’s property and the husband at being under constant surveillance in order for the wife to see if he is cohabiting. Most serious however it might be thought, is the potentially invidious and conflicted position for their child moving between the parties. One fears the grim reality given the history of this case, would be a further round of ruinously expensive litigation.”

The husband’s appeal was accordingly allowed and the decision of the trial judge restored.

To those of us practising at the coal face none of this will be surprising, except perhaps the fact that the order was made in the first place. Back in the long ago Mesher orders were relatively common, but they are now made much more sparingly, and for good reason. Pursuant to section 25A of the Matrimonial Causes Act 1973, the court has an obligation to consider a clean break, which will of course not occur for so long as the Mesher order is in place. Moreover, the effect of a Mesher order is often that it bites when the person selling up (usually the wife) is at their most economically vulnerable.

The rationale of the Financial Remedies Court was the allocation of cases to specialist judges. Until that truly happens, cases such as this are likely to recur.

Nicholas Sproull