Power of the courts to override an express costs clause in a mortgage

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When a court assesses the amount of costs payable by one party in litigation proceedings to another, the costs may be assessed under the Civil Procedure Rules on either the standard basis or the indemnity basis. On an assessment under either basis, the court will not allow costs that have been unreasonably incurred or which are unreasonable in amount. Where costs are assessed on the standard basis, any argument as to whether the costs have been reasonably and proportionately incurred or are reasonable and proportionate in amount, must be determined in favour of the paying party. By contrast, where costs are assessed under the indemnity basis, any such doubt will be resolved in favour of the receiving party.

In The Co-operative Bank plc v Phillips [1] the claimant bank was the second mortgagee in respect of two properties owned by the borrower. Each mortgage provided that all costs, charges and expenses incurred by the bank and all other monies paid by the bank in connection with the charge over the charged property were recoverable from the defendant as a debt and were to be charged on the property.

When the borrower defaulted, the bank instituted possession proceedings in respect of each property. At the time the proceedings were instituted, the borrower had entered into an individual voluntary arrangement (IVA) with his creditors. The evidence from the IVA statement was that that there was negative equity.

The borrower applied to strike out the proceedings as an abuse of process. The proceedings were transferred to the High Court where they were discontinued. The borrower argued that the order for costs which followed should be made and assessed on the indemnity basis. He also argued that the bank was not entitled to add any costs of the proceedings to the security.

The borrower was unsuccessful on the first point. The High Court considered that the bank’s purpose in issuing the proceedings had been to put pressure on the borrower for the purpose of obtaining repayment of the secured debt. This was a legitimate purpose and not an abuse of process.

However, the borrower succeeded on the second point. The Court held that the mortgage did not enable the bank to recover its costs from the borrower. On its proper construction, the clause entitled the bank to recover costs which were reasonable in amount and reasonably incurred. In so holding, the Court applied Gomba Holdings (UK) Ltd v Minories Finance Ltd [2], where it had been established that a clause in a mortgage which provided that the mortgagor would pay on an indemnity basis all costs, charges and expenses however incurred by the bank or receiver did not entitle the bank to costs which were unreasonably in amount or which had been unreasonably incurred. In this case, the Court considered that even though the proceedings were not an abuse of process, they had been unreasonable incurred – the bank had not obtained any benefit from the proceedings which, from the bank’s point of view, had been a waste of time and expense.

The case shows the adverse costs consequences that may follow from a mortgagee commencing proceedings where there is limited or no prospect of recovery.

[1] [2014] EWHC 2862
[2] [1993] Ch 171