The caps set out in the Civil Procedure Rules on the costs payable by losing parties in Aarhus Convention claims are inclusive of VAT, the Court of Appeal has ruled as part of the third Heathrow runway litigation.
The issue in Friends of the Earth Ltd, R (On the Application Of) v Secretary of State for Transport  EWCA Civ 13 arose from the Court of Appeal’s order of 27 February 2020, after judgment had been handed down in the substantive appeal:
"The Defendant is to pay the costs of the Claimant in the Divisional Court and in this Court, subject to detailed assessment and a cap of £35,000 in respect of the costs in the Divisional Court, and a cap of £35,000 in respect of the costs in this Court."
This part of this Court's order was unaffected by the fact that the Supreme Court subsequently allowed an appeal by Heathrow Airport Limited.
The Secretary of State for Transport did not appeal against the Court of Appeal's decision and the order made by the Supreme Court on 16 December 2020 did not alter the costs order made by the Court of Appeal as between Friends of the Earth (FoE) and the Secretary of State.
The only question for the Court of Appeal now was whether the Secretary of State must pay FoE £70,000 without more or whether VAT was payable on top of that sum.
The Court of Appeal (The Senior President of Tribunals Lord Justice Lindblom, Lord Justice Singh and Lord Justice Haddon-Cave) said that in view of the potential importance of the issue for other cases, it thought it right to give a reasoned judgment, having had the benefit of written submissions from the parties.
The caps imposed by the order were made, in the Divisional Court, pursuant to CPR 45.43(3) and, in the Court of Appeal, CPR 52.19A(2)(b), on the basis that the claim fell within the Aarhus Convention, as defined in CPR 45.41.
The Court of Appeal said it was important to set out the terms of the relevant provision in the Civil Procedure Rules. CPR 45.43 states as follows:
"(1) Subject to rules 45.42 and 45.45, a claimant or defendant in an Aarhus Convention claim may not be ordered to pay costs exceeding the amounts in paragraph (2) or (3) or as varied in accordance with rule 45.44.
(2) For a claimant the amount is–
(a) £5,000 where the claimant is claiming only as an individual and not as, or on behalf of, a business or other legal person;
(b) £10,000 in all other cases.
(3) For a defendant the amount is £35,000.
(4) In an Aarhus Convention claim with multiple claimants or multiple defendants, the amount in paragraphs (2) and (3) (subject to any directions of the court under rule 45.44) apply in relation to each such claimant or defendant individually and may not be exceeded, irrespective of the number of receiving parties."
On behalf of FoE it was submitted that the sums should be exclusive of VAT for three main reasons:
(1) The purposes of the Aarhus Convention would be better served if the cap on costs under CPR 45.43(3) was exclusive of VAT and would be undermined if it was inclusive of it.
(2) Domestic authority supported the proposition that a cost capping order was exclusive of VAT unless the contrary was stated.
(3) An analogy with (i) the position in Northern Ireland and (ii) other parts of the CPR providing for costs limits and fixed costs indicated that costs limits in Aarhus claims should be regarded as exclusive of VAT.
It was submitted that the terms of the Aarhus Convention supported this interpretation of the Civil Procedure Rules.
On behalf of the Secretary of State it was submitted – amongst other things – that the original proposal in the consultation exercise which resulted in the cap being imposed in the CPR was for a cap of £30,000. The Government, in its response to the consultation, said it recognised “the concerns raised about the actual level of the cross-cap being lower than £30,000 because it will be subject to VAT and therefore recommends that the cross-cap should be set at £35,000."
The plain and ordinary meaning of the wording of CPR 45.43 showed that the specified maximum cap of £35,000 was clearly a total, inclusive figure, the Secretary of State's counsel also argued.
The Court of Appeal concluded that the caps which are set out in CPR 45.43, in particular at (2) and (3), were inclusive of VAT. This was for the following reasons.
33. First, that is the natural meaning of the words used in those provisions. The figures are set out as absolute amounts, without qualification.
34. Secondly, this construction is supported by the history of the consultation exercise and the response to it by the Government in the process which led up to the enactment of CPR 45.43.
35. Thirdly, it does not seem to us that this would impede or frustrate the implementation in domestic law of the Aarhus Convention. That Convention simply requires that the costs of environmental litigation such as this should not be prohibitive. It does not require a contracting State to specify a particular ceiling, still less to state whether it is inclusive or exclusive of VAT.
36. Fourthly, the fact that the regulations applicable in Northern Ireland expressly provide for the ceilings to be exclusive of VAT does not assist FoE. Indeed, it suggests that, when the relevant legislative body wished to make the point clear, it was able to, and did so.
37. We do not consider that what is said in Practice Direction 44, paras. 2.7-2.8, has any material bearing on the true construction of CPR 45.43.
The application by FoE was therefore refused. “The sums specified in the costs order made by this Court on 27 February 2020, in respect of the costs as between FoE and the Secretary of State in this Court and in the Divisional Court, include VAT and are not exclusive of it.”
The Court of Appeal made no order as to the costs of this application.
It said this was for the following reasons: “First, the dispute about VAT arose from the terms of the costs orders made by the Divisional Court and this Court. There was a genuine uncertainty about the effect of the costs orders, which needed to be resolved by the Court. It was reasonable for the parties to bring that to the Court's attention and, at the Court's request, to make written submissions about it.
“Secondly, as we have said above, there was no authoritative decision at the level of this Court on the legal issue which we have had to determine. There were a number of first instance decisions, which each side cited in support of its position. It has been important for this Court to resolve that issue of principle. This serves the wider public interest and not only the parties to this dispute.”