This is an application for permission to appeal the judgment of Simon Brown QC sitting as a Deputy High Court Judge delivered on 29th July 2004, and his ruling on costs made on the same day. No attack is sought to be made on the judge’s findings of fact, and I can therefore set out the essential facts quite briefly.

On 12th June 2001, the claimants (HSS) and the first defendants (BMB) entered into a 5 year licence agreement which permitted HSS to run a tool hire agency in five branches of BMB in the north of England. By Clause 7.2 HSS was entitled to terminate (i.e. had an option whether to terminate) the licence if and when there was an Event of Default. By Clause 8.2 a change of control of BMB was an event of default “unless previously agreed in writing”.

On 23rd May 2002 Mr Harrison of BMB telephoned Mr Pidgeon of HSS with the news that he was selling BMB to the second defendant (Grafton). That sale was due to be completed on 31st May. Mr Pidgeon asked “Where does that leave us?”, and he was told that it was not clear whether Grafton would continue with the agency, and that Mr Pidgeon should speak to Grafton’s acquisitions director Mr Sowton. After consultation with his own superiors, Mr Pidgeon spoke to Mr Sowton and discussed the possibilities of the agency continuing. Mr Sowton told him there was “no possibility as they had their own hire operation and were committed to it.”

Mr Pidgeon then had a second conversation with Mr Harrison of BMB. He asked for a letter confirming the decision, and he asked Mr Harrison when would be the best time to bring the operation to a close i.e. collect from the one branch of BMB where an agency had been set up, HSS’ materials. Mr Pidgeon suggested the 28th or 29th May. Mr Harrison chose the 29th and it was agreed that on that day HSS would collect its materials from the BMB branch.

On 24th May at 16.19 hours BMB sent a letter “open to mischievous interpretation” as the judge said. It purported to confirm the conversation of the 23rd stating “I understand that you would wish not to continue our existing agency agreement at Pontefract, nor the Barnsley agency due to come on stream imminently. The feeling is apparently mutual as far as Grafton is concerned.” The response to that letter from HSS was “It appears that there is a fundamental misunderstanding on your part concerning the discontinuance of the agency arrangements. The agreement of 12th June 2001 refers specifically to termination conditions, one of which covers the change of ownership situation now being described by you. Such change of ownership by your firm is an event of default and HSS must reserve its rights accordingly. For the avoidance of doubt, HSS is more than willing to continue the agency arrangement, which has been successful to date, but the agreement does not allow this, as mentioned above.”

The suggestion that the agreement “did not allow it” was not accurate. But it reflected the reality in this sense. Although HSS had an option whether to terminate or not, if they wished not to terminate and continue, there would be nothing they could do about it if BMB did not agree. The agency was a personal contract in relation to which, for example, there would be no chance of a court ordering specific performance. Furthermore once HSS had made plain they were willing to go on, whatever the agreement said BMB could have come back and said they also were willing but they did not do so. They did not do so both because the position had been made plain by Mr Sowton, and because Mr Harrison (because he had no choice) had adopted Mr Sowton’s decision. That was the context in which BMB and HSS had accepted that the agency would not continue when arrangements were made on 23rd May for HSS to collect its materials from the Pontefract branch. That position was confirmed by BMB allowing the collection to proceed despite the letter stressing HSS’ willingness to continue.

The judge held that:-

He also found (paragraph 59) that “Grafton wrongfully interfered with the contract between HSS and BMB.”

From the facts as found by the judge a finding that there was an anticipatory breach by BMB by words or conduct on 23rd May, accepted by HSS on that date was an inevitable finding. I say that in the light of considering the alternatives. First there can be no doubt that the Licence Agreement came to an end in the conversation between Mr Harrison and Mr Pidgeon in which arrangements were made for BMB to collect their materials on 29th May. There is equally no doubt that that was not a consensual arrangement Mr Pidgeon having made clear that HSS wished to continue if BMB was agreeable to doing so. The attempt by BMB to suggest mutual termination by letter of 24th May post-dated the termination conversation. In any event it was immediately refuted, and still BMB allowed the materials to be collected on 29th May well aware that HSS were treating BMB as refusing to continue. The misinterpretation of the agreement by HSS had no practical significance.

Equally it is not open to argument that HSS in some way repudiated the Licence Agreement. The argument would have to be that Mr Pidgeon by seeking the return of HSS’ materials was repudiating the Licence which repudiation BMB accepted either through Mr Harrison in the same conversation or by allowing the materials to be collected. Neither argument is tenable. Mr Pidgeon’s request to be able to collect the materials was as Mr Harrison was well aware not because HSS did not wish to continue but because BMB were not going to continue. By the time the materials were collected BMB had received the letter of 24th May demonstrating that HSS wished to continue, but BMB simply allowed the collection to go ahead knowing the basis on which HSS were acting.

Mr Geraint Jones QC for BMB argued that what Mr Sowton said to Mr Pidgeon in the conversation on 23rd May was simply a statement of future intent, and thus was not capable of being a repudiatory statement. Mr Jones argued that all Mr Sowton was saying was “this will be Grafton’s attitude from 31st May, but Grafton cannot go further because the take over is not complete.” It was therefore argued by Mr Jones that it would have still been open to Grafton to continue with the Licence and negotiate a discontinuance; no conduct was repudiatory as at 23rd May and in the result it was HSS’ conduct which was a repudiation accepted by BMB before 31st May.

The difficulty for Mr Jones is that Mr Sowton was not saying that Grafton would allow the continuation or would allow continuation pending negotiation. He was adamant that the Licence would not continue, and it was to him that Mr Pidgeon had been referred by Mr Harrison to find out what the position would be. Having discovered what the position was going to be i.e. that BMB would not be continuing with Licence from 31st May, HSS were entitled to treat BMB as in repudiatory breach, and were not forced to wait until 31st May. The above view accords with that of Clarke LJ when dealing with permission to appeal on paper.

I now turn to the grounds of appeal. The first ground of appeal of BMB is that the judge decided the case on a basis not pleaded, and it was because of that criticism and because he did not find it easy to determine the strength of that point that Clarke LJ adjourned the permission hearing for an inter partes hearing with appeal to follow if permission granted. He clearly did not think that any of the points taken by BMB in relation to what they in their notice of appeal called the “unpleaded case”, seeking to attack the finding of repudiation and acceptance, were valid. I agree with him and it is convenient to deal with those points before coming back to the pleading point.

It is suggested that the judge allowed himself to be influenced by Mr Harrison’s state of mind, and did not approach the issue by applying a purely objective test. The judge does refer to Mr Harrison’s state of mind in paragraph 58 of his judgment quoted above, but the facts objectively viewed supported the judge’s conclusion that BMB were content to allow HSS to discover from Grafton what BMB’s position was in relation to continuing with the Licence. There was no room for any other conclusion than that BMB, by their conduct on 23rd, evinced an intention not to continue with the Licence following the take over by Grafton and that was an anticipatory breach which HSS were entitled to accept.

It is then suggested that the judgment is contradictory in that it held that Mr Harrison did not intend to repudiate the contract hoping that any repudiation would take place after 31st May, but then held that that was exactly what he did. Mr Harrison’s intentions are not relevant. It is his conduct on behalf of BMB and the conduct of Grafton on which he was content for Mr Pidgeon to act which is relevant. Indeed this ground of appeal is inconsistent with that just discussed in paragraph 14.

It is then sought to argue that the judge was not entitled to find what Mr Sowton told Mr Pidgeon as being of any relevance to the question whether BMB were repudiating unless he found that Mr Sowton was acting as “agent” for BMB. This leads to consideration of the pleading point in that it is asserted that HSS had themselves pleaded agency and must therefore have contemplated that they could not succeed unless Mr Sowton was acting as “agent”.

It is true that HSS in their pleading did allege that Mr Sowton was acting as agent. Paragraphs 10 and 11 of the points of claim were in the following terms:-

But in his opening Counsel for HSS made clear that his case was no longer based on agency. He put the matter this way:-

Mr Jones protested as to the way that the case was now being put, but in an interchange with the judge, during which the judge was seeking to discover whether Mr Jones’ clients were prejudiced in anyway, Mr Jones made clear that he was not in difficulty, and the outcome was that the judge put to him that what was in issue between the parties was in reality the facts and that having determined the facts “then you work out what the law is which arises from it in terms of agency, and then you can use the correct terminology”. Mr Jones’ response was not to make any further objection but to be grateful for what the judge had said [see page 209(d) of the Appeal Bundle].

What is clear from these interchanges is that HSS were not in opening their case relying on agency in the sense of Mr Sowton having been appointed an agent with authority to repudiate or not a contract. The way the case was being put was that Mr Harrison for BMB was saying to Mr Pidgeon of HSS that they “would go along with whatever Mr Sowton said”. As appears from what I have already said HSS established on the facts that that is what BMB through Mr Harrison conveyed to Mr Pidgeon. Thus I reject any argument that it was necessary for Mr Sowton to be appointed an agent for HSS’ case to succeed.

Furthermore although it can be said that some minor modification of the pleadings to reflect the case which HSS ultimately made might have been appropriate, there cannot be any doubt but that the essential facts were pleaded, and that Mr Jones on behalf of BMB was content to deal with the case as it was being opened. BMB were in no way disadvantaged by the different way in which the case was being opened. The essential dispute between the parties was whether the telephone conversations had taken place, as HSS asserted and as BMB denied.

I would therefore refuse permission to appeal any of the matters raised in paragraphs 2 to 7 of the grounds of appeal.

In their skeleton for the court of appeal HSS set out in paragraph 57 the admissions which [they say] were made on behalf of the second defendants that the cases against the two defendants stood or fell together. I was not persuaded by Mr Jones that there was any basis on which the second defendants should now be entitled in the Court of Appeal to resile from their position taken in the court below. I would therefore refuse the second defendants permission to appeal.

The judge ordered BMB to pay the costs of the trial on liability. BMB make two attacks on that order. First they suggest that since HSS succeeded on an unpleaded basis, far from HSS being entitled to their costs, they, BMB, should have their costs. Reliance is placed on Beaco Ltd v Alfa Laval Ltd [1995] QB 137 and the words of Stuart-Smith LJ at 153E-156E. Second they rely on the fact that they BMB had made a Part 36 payment into court prior to any order being made splitting the issue of liability from the issue of damages. The judge was informed of this but not of its amount. He ruled that it was not of any relevance to the exercise of his discretion. BMB submit that if when damages come to be assessed it is found they have “beaten” the payment in it will turn out to be a serious injustice if they still have to pay, as per the judge’s order, HSS’ costs of the liability issue.

As we made clear at the hearing we were not persuaded that there was anything in the suggestion that this was a case where the words of Stuart- Smith LJ were apposite. This was not a case where an amendment “substantially” altered the case. The facts were clearly pleaded and the contest in the case was whether the facts were as HSS was asserting. The legal consequences which flowed from those facts were opened on a slightly different basis than was asserted in the pleading, but BMB were in no difficulty dealing with that basis.

However as again we made clear there is great force in the payment in point and we granted permission to appeal on that aspect. Indeed we stated that we were going to reverse the judge’s exercise of his discretion enabling us to deal with a point which then arose on the costs of the appeal. The question is - what is the right approach to the question of costs at the conclusion of a preliminary issue if there has been a part 36 payment in covering the trial as a whole?

The judge’s approach was to reason that under the CPR the court is encouraged to have an issue based approach to costs. So he reasoned the issue of liability was “a completely separate issue”. Having been informed that there had been a payment into court he stated: “It does not matter how much, if anything, the defendants have to pay the claimants. The claimants have expended money on this particular issue and they have, as I have found in my judgment, won on this particular issue.” So he held the claimants were entitled to their costs under the rules of court under Rule 44.3(f).

In defending the judge’s approach and in answer to the question as to what apart from paying into court the defendants could do to protect themselves against an order for costs on the liability issue, Mr Dunning QC robustly argued, it was open to them to concede liability, and if they chose not to do so then liability for costs followed if they lost the issue. If that approach is right it seems to discourage the arguing of preliminary points.

The contrary approach is that parties should be encouraged to make Part 36 payments in and/or offers; they should also be encouraged to try preliminary points if that could lead to the saving of costs overall. If payments in are to be totally ignored at the conclusion of the trial of a preliminary issue, that will discourage applying for the trial of the same, and may even discourage part 36 offers where preliminary issues have been ordered. The proper approach at the conclusion of a trial of a preliminary issue where there has been a part 36 payment in or a part 36 offer, should therefore normally be to adjourn the question of costs pending the resolution of all the issues including damages, at which stage the quantum of the Part 36 offer can be revealed and the discretion in relation to costs exercised in the knowledge of it.

I have no doubt that the provisions of Part 36 and of Part 44 encourage the latter approach. Mr Dunning strove manfully to argue that the provisions allowed the judge to take the view he did. He argued (1) even where there had been a payment in, there was no rule which expressly prevented the judge dealing with the costs of the trial of the issue of liability or which required him to reserve the question of costs until after the issue of damages had been resolved; (2) the modern approach was to encourage stage based orders; (3) it was the defendants who wanted a split trial and the claimants resisted it; (4) the defendants could have admitted liability but chose to fight it; (5) the claimants were entirely successful; (6) it was a case where the dispute was about what was said, and the evidence of HSS had been entirely accepted, and the witnesses of the defendants had been severely criticised – Mr Harrison was described as “disingenuous” and Mr Sowton as “totally unreliable”, and reference was made to CPR 44.3(4) under which it was material to take into account the conduct of the parties; (7) it is the judge who has heard the issue who is based placed to deal with the costs. Thus he argued that the judge having been correctly informed of the fact that there had been a payment in as he was entitled to be under CPR 36.19 (3)(c) , was equally entitled to hold that it was immaterial.

CPR 36.19 is an important provision and some time was spent debating precisely what it meant. It provides as follows:-

It must in my view be construed together with CPR 44 .3 particularly subrule (4) which provides as follows:-

The following points need consideration.Why is it provided that the fact that there has been a Part 36 payment is something that 36.19(3)(c) allows to be revealed to the trial judge where the issue of liability has been determined before the assessment of the money claimed? Why does (c)(ii) contemplate both that the fact that a payment has been made or the fact that one has not been made may be relevant to costs? Is what is contemplated as being disclosable to the trial judge simply the fact of payment in or would it be proper to disclose the actual amount? How does the provision fit with the obligation (the word in CPR 44.3(4) is “must”) to take into account any payment into court or an admissible offer to settle?

At one moment it was being suggested in argument that at the end of a trial on liability it would be appropriate under Part 36.19(3)(c) to disclose both the fact of a payment in and the quantum thereof so that a judge could exercise his discretion in relation to the award of costs on the preliminary issue taking the view, for example, that the amount paid in was on any view too low. In that way it could be argued he could properly fulfil his obligation under 44.3(4) at that stage. Indeed Mr Dunning went so far as to offer to show us the terms of the payment in so that if we took the view the judge had erred we could exercise the discretion afresh.

In my view Part 36.19 does not allow for the disclosure of the amount of a payment in. On its language it allows simply the disclosure of the fact that there has been one or the fact that there has not. The consequences of that being the correct interpretation of Part 36.19 seem to me to be as follows. If the court is told that there has been no payment in, then the court is free to exercise its discretion to award costs in relation to the preliminary issue and there is no difficulty with Part 44.3(4)(c). If however it is told that there has been a payment in, then, in any but perhaps the most exceptional case, I find it very difficult to think that there could be circumstances where if the issue of damages remains to be decided, the judge can do otherwise than to reserve the question of costs until after the determination of that issue.

The points that Mr Dunning makes, for example in relation to the conduct of the witnesses, can be made at the later stage but until the court knows how generous or otherwise the payment in was, it would not, as I see it, normally be fair to exercise a discretion in relation to costs. In any event because the court was not allowed to know the quantum, it could not act as required under Part 44.3(4), at that stage.

In my view, accordingly, the judge was not entitled to deal with costs in the way he did. He should have reserved the same, pending determination of quantum, and his order should be reversed to reflect that finding.

At the conclusion of the appeal we were asked to deal with costs. Mr Dunning QC produced a letter from his instruction solicitors sent in January 2005 which offered a settlement of the appeal on a basis that precisely follows the conclusion that I have reached, and which is a conclusion with which all members of the court agree. The offer did not comply with the provisions of Part 36.5 because it was expressed to be open for only 14 days and not 21. Mr Jones argued that the offer should therefore be ignored, and that since his client had succeeded in reversing the judge on the costs issue, they were entitled to have that success reflected in any order for costs.

We rejected Mr Jones’ submission. Part 44.3(4) is quite clear in obliging a court to take into account any admissible offer “whether or not made in accordance with Part 36.” The offer made was one that Mr Jones’ clients should have accepted. For those reasons we ordered BMB to pay all the costs of the appeal.