Unsuccessful Lessor not entitled to contractual litigation costs

Lease Agreements will normally always contain express provisions for Lessors to recover costs incurred against the Lessee in a wide variety of circumstances, and a recent case in the Commercial Court gave rise to a novel argument by a Lessor seeking to invoke the right to claim costs under a contractual provision in a situation where the court had exercised its discretion to disallow some of the costs it had incurred and to award some of the Lessee’s costs against it.

In Havila Kystruten AS v STLC Europe Twenty Three Leasing Limited [2023] EWHC 444 (Comm) the Lease Agreement contained provisions entitling the Lessor to recover inter-alia:

• “any fee or other amount due and payable but unpaid by any Relevant Party to the Lessor under any of the Operative Documents”;

• “any out of pocket costs (including legal costs) incurred by the Lessor in connection with the termination”; and

• “all Losses incurred by the Lessor in connection with…the early termination of the leasing…the enforcement or preservation of any right conferred upon the Lessor by any of the Operative Documents”.

The Lessor was substantially successful in its litigation against the Lessee but lost on one of the main issues relating to the existence of a termination event, and as is usual the court exercised its discretion in awarding costs by disallowing a portion of the Lessor’s costs and ordering some costs to be paid by the Lessor to the Lessee in relation to that issue.

Notwithstanding the court’s order for costs, which the Lessor did not attempt to appeal, the Lessor then subsequently sought to claim both its own costs which had been disallowed and those which it had been ordered to pay the Lessee in the litigation by relying on express wording of the Lease Agreement, contending that it was entitled to recovery either as amounts within the contractual definitions or as damages.

The court roundly rejected this argument:

“In my judgment, the parties to the charter did not objectively countenance recoverability of any legal costs incurred by the Lessor in future litigation between the parties themselves where a court of competent jurisdiction determines and rejects the recoverability of such costs on a final basis. As stated above, that kind of formal adversarial scenario is anathema to the consensual foundation and operation of the agreement, even if recoverability of some legal costs is contemplated where there is a dispute about termination”.

Comment

This decision is unsurprising, since otherwise it would drive a coach and horses through the well-established principle of English law that save in exceptional circumstances costs are in the discretion of the court. There is provision in rule 44.5 of the Civil Procedure Rules for contractual recovery of costs, but the judge made it perfectly clear in accordance with well-established principles of construction of contracts that it would require the most exceptional and clear terms to allow a party such as this Lessor to in effect hijack the court’s exercise of its discretion by reliance on a contractual provision.