Rights to Appropriation and Payment Obligations

Khandanpour v Chambers [2019] EWCA Civ 570

04 April 2019

Should relief from sanctions be granted where a judgment debtor purports to appropriate monies paid to satisfying a procedural condition for setting aside a default costs order, but the creditor purports to appropriate the monies instead to the judgment debt?

Background

The Appellant was a judgment debtor against whom the Respondent, the judgment creditor, had also obtained a Default Costs Certificate. An Order setting aside the certificate had been granted, subject to two conditions: (i) the Appellant to pay £10,000 on account of costs to the Respondent by 4 pm on 15 June 2017 (the ‘Condition’); and (ii) also by 4 pm on the same date, Points of Dispute to the bill of costs be served and filed.

On the due date, the Appellant duly filed the Points of Dispute and gave three banking mandates to pay, to a total sum of £10,000. One payment of £4,000 settled into the Respondent’s solicitor’s account by 4 pm on 15 June 2017, but the remaining £6,000 did not settle until 8.53 am the following day.

The Respondent’s solicitors (the ‘Solicitors’) recognised that the £4,000 had been intended as part payment towards the Condition. Although the Solicitors later accepted that they could not suggest that they had not recognised that the £6,000 was intended as the balance, the Solicitors declined to treat the payment this way.  Instead, the Solicitors purported to appropriate the £6,000 to the judgment debt and, therefore, contended that the Appellant had failed to comply with the Condition.

The County Court

The parties agreed that timely performance of the Condition required the £10,000 to have settled into the Solicitor’s account by 4 pm on 15 June 2017; therefore, the Appellant required relief from sanctions to succeed. The grant of relief, in turn, depended significantly on whether the Solicitors had been entitled to appropriate the £6,000 to the judgment debt, or whether it should have been applied to the Condition.

By reference to the authorities, the Judge began with the proposition that where several separate debts are due from a debtor to a creditor, the debtor may appropriate specific payments to a particular debt/s. In the present case, the timing and amounts supported the existence of an implied intention to appropriate the payments to the Condition. However, whatever the Appellant had intended, he had failed to communicate that intention, expressly or impliedly, as required by the authorities. Therefore, there was nothing to prevent Respondent’s right to appropriate, as creditor, from arising and appropriation of the £6,000 to the judgment debt.

Therefore, compliance with Condition was not merely a few hours late, but remained outstanding; £6,000 of the £10,000 had not yet been paid at all.  Relief from sanctions was refused against this background, with further consideration given to the long-standing failure to pay the judgment debt.

The Court of Appeal

The Court of Appeal referred to the authorities on implied communication, which clearly held (i) appropriation by a debtor can be inferred by wide variety of circumstances, and each case turns on its own facts; and (ii) that intention is to be inferred from the circumstances of the case as known to both parties.

In the present case, it was common ground that the £4,000 received on 15 June 2017 was intended as part payment of the Condition. It was, therefore, equally obvious that the £6,000 received at 8.53 am the next morning was intended as the balance, especially given that the mandates for those payments would have been given before relevant time limit expired. Furthermore, that the Appellant had filed and served the Points of Dispute on 15 June 2017 made clear he intended to comply with the Order and, therefore, that the Respondent could expect the balance of the sum required by the Condition.

The Solicitors had not, therefore, been entitled to appropriate the £6,000 to the judgment debt, and the Condition was met, albeit approximately 17 hours too late. In the context of relief from sanctions, this significantly mitigated the seriousness of the failure to comply.

The Court of Appeal further found that, in line with stage one of the Denton test, the failure to comply with the Condition had to be assessed independently of the failure to pay the judgment debt. In the present case, the Condition had not been imposed as an ‘Unless Order’, which are made when a party is already in breach of some obligation and then applies for an extension of time in which to comply.  The ‘unless’ sanction is used to secure performance after granting a ‘final chance’ to comply with this obligation.

Here, there was nothing to show that the Condition had been made in the light of the Appellant’s failure to pay the judgment debt, and even if it were, the Appellant was not in breach of any previous order as to costs. Given, further, that all the banking mandates to pay had been made with sufficient time, in theory, for the full sum to settle before the deadline, the Court of Appeal therefore considered that relief from sanctions should be granted.

Commentary

This case raises several points for practitioners to note. First, the law takes a sensible approach when considering which debt(s) a payment is intended to discharge. The Judge below was wrong to impose strict requirements for making an inference about the debtor’s intentions. In the circumstances of the case, it was obvious that the Appellant had intended to discharge the costs liability. Second, the Court of Appeal appears to have confirmed that Jackson LJ’s discussion in British Gas Trading Ltd, about non-compliance with previous orders, is limited to when the applicant is in breach of an unless order. In the present case, however, no unless order had been made. Finally, the Court of Appeal has given a reassuring statement of principle in respect of failure to comply with a payment deadline due to delays in settlement:

Ultimately, a sense of perspective is necessary. For the delay of a few hours which made no practical difference whatever, it would be disproportionate and unjust to [refuse relief from sanctions].