Guidance provided to determine 'unreasonable behaviour' on the Small Claims track

On 31 July 2026 the Court of Appeal handed down judgment in Orton v Barclays Bank UK Plc [2026] EWCA Civ 1025. The Court of Appeal considered the court’s power to award costs for unreasonable behaviour to a claim allocated to the Small Claims track pursuant to CPR 27.14(2)(g). 25 Canada Square’s Karl Nash appeared on behalf of the Respondent, led by Mr Roger Mallalieu KC.

Factual Background

The appellant’s claim arose from the alleged mis-selling of a Payment Protection Insurance (‘PPI’) policy, taken out to cover repayments of a credit agreement with the respondent, which was taken out at the same time.

The appellant made a complaint relating to the alleged mis-selling of the PPI policy and a further complaint was made by a claims management company on behalf of the appellant. The respondent offered redress to the appellant by letter and payment was subsequently made for said redress. The redress payment did not cover the full extent of the appellant’s loss.

The appellant brought a claim against the respondent seeking to recover the full sums paid under the PPI policy. The claim was allocated the Small Claims track prior to a defence being filed.

The appellant served a defence relying on limitation, absence of unfairness and quantum issues. At the same time as serving the defence, the respondent’s solicitors sent a letter to the appellant’s solicitors inviting the appellant to discontinue their claim by a set deadline with ‘the resultant cost consequences’. This letter stated that if the appellant discontinued, the respondent would waive its entitlement to costs.

Having received no response, a number of further letters were sent by the respondent’s solicitors to the appellant inviting him to discontinue his claim and referring to the respondent’s ‘rights’ in relation to costs. Offers were proposed by the appellant, but these were rejected by the respondent.

The respondent’s final invitation to discontinue asked that the appellant do so by 31 May 2025, beyond which the respondent would have to prepare for trial by way of filing and serving evidence and instructing trial counsel. The appellant did not discontinue at that point and both parties filed and served their trial evidence on 3 and 4 June respectively. 

On 7 June, 12 days before the trial and upon receipt of the respondent’s documents, the appellant served a Notice of Discontinuance. The appellant described this as a commercial decision, that if counsel was instructed to attend the trial this would wipe out any sums recovered.

The respondent requested that the hearing that would have been for the trial remain listed to "consider the Defendant's entitlement to costs pursuant to CPR27.14(2)(g) and CPR 38.6". CPR 38.6 does not apply to cases allocated to the Small Claims track by virtue of CPR 38.6(3).

The District Judge at first instance held that the appellant had behaved unreasonably by discontinuing as late as he had and for failing to accept the respondent’s last drop hands offer. The District Judge awarded the respondent costs in the sum of £2,132.88.

On appeal, a Circuit Judge, considering Ridehalgh v Horsefield [1994] Ch 205 and Dammermann v Lanyon Bowder LLP [2017] EWCA Civ 269, dismissed the appeal. The Circuit Judge, in obiter dicta, set out a 4 stage approach to what constitutes unreasonable conduct. This was based on the test for relief from sanctions set out in the case of Denton v TH White Limited & Others [2014] EWCA Civ 906:

"a. Stage 1: Is the alleged conduct proven on the balance of probabilities? …

1. Stage 2: Is the proven conduct sufficiently serious or significant to warrant further explanation? …
2. Stage 3: If the proven conduct is sufficiently serious or significant, was there a good reason which explains the said conduct? …
3. Stage 4: In considering all the circumstances of the case, does any other reasonable explanation emerge for the conduct? …"

The Appeal to the Court of Appeal

The appellant appealed to the Court of Appeal, on two grounds:

Ground 1: the Circuit Judge was wrong to uphold the decision of the District Judge that the appellant had behaved unreasonably for the purpose of CPR 27.14(2)(g).

Ground 2: In any event, the Circuit Judge erred in law in setting out, and then applying, his guidance (derived from the approach to relief from sanctions under CPR 3.9) to the question of whether a party has behaved unreasonably for the purpose of CPR 27.14(2)(g).

The appellant argued on Ground 1:

• That the standard applied was too strict for the Small Claims track and the Court had treated the respondent’s letter requesting discontinuance like a CPR Part 36 deadline (which did not apply on the Small Claims track).
• The late commercial decision to discontinue was reasonable, it would be perverse for the appellant to be penalised for discontinuing rather than pursuing the matter through to trial.
• The respondent's letters were not "offers" and there was no basis to allow the respondent to dictate the timeline and manufacture unreasonableness by reference to its own position.
• The approach to the appellant’s explanation was unjustified and lacked logic.

On Ground 2, the appellant accepted that this would not change the outcome of the matter but was more of a request for guidance on the application of CPR 27.14(2)(g), as the Circuit Judge’s obiter incorrectly lowered the threshold for a finding of unreasonable behaviour.

Conversely, the respondent argued on Ground 1:

• The Court had been correct in the application of the settled "acid test" to the facts set out in Ridehalgh v Horsefield (whether the conduct permits of a reasonable explanation?)
• The unreasonableness lay in delaying the decision to discontinue once all facts and information were known, not in the appellant’s act of discontinuing itself.
• That there had been repeated invitations to discontinue, non-engagement from the appellant and there was nothing in the respondent’s trial evidence disclosures that changed the appellant’s views as to the strengths of the claim.
• The appellant’s stated reason for discontinuing was a commercial decision based on a cost-benefit analysis and that analysis could and should have been undertaken far earlier than shortly before trial when the parties had already fully prepared for trial.

On Ground 2, the respondent argued that the Circuit Judge’s approach set out in the obiter dicta, was carefully and helpfully reasoned.

The Court of Appeal, led by Lady Justice Cockerill with Lord Justice Bean and Lady Justice Andrews in agreement, allowed the appeal on both grounds and set aside the costs order. 

On Ground 1, the Court held that:

• The assessment for unreasonable behaviour under CPR 27.14(2)(g) needed to commence from the ethos of the small claim track’s cost neutral regime, its litigant-in-person-friendly design, and disregarding the CPR which explicitly does not apply on this track, such as CPR 36 and 38.
• The District Judge’s approach was wrong in law. To disapply the costs-neutral regime of the Small Claims track, there needed to be something which was “unambiguously unreasonable”, with the party alleging unreasonable behaviour bearing the burden of proof.
• This error was compounded by the District Judge focusing on interrogating the explanation for discontinuance, for characterising the respondent’s correspondence as containing offers to settle and placing the burden on the appellant.
• It was wrong to find that the appellant’s ‘commercial’ reason for discontinuance did not make sense.

 On Ground 2, the Court held that the application of the Denton test was erroneous and the approach was too generous to those invoking CPR 27.14(2)(g) and would likely to lead to escalation of costs.

Of note, the Court of Appeal set out some guidance to determine unreasonable conduct [90]:

“a. The process of evaluating whether a "party has behaved unreasonably" must be informed by all the facts. That includes the context of the Small Claims Track and the breadth of the costs neutrality regime which generally applies;

1. The burden of proof is on the party alleging unreasonableness to establish it.
2. The kinds of circumstances which will qualify are as set out in the "acid test" in Ridehalgh, namely circumstances which do not permit of a reasonable explanation.
3. Reference to previous cases is unlikely to be helpful, however:
4. i) Vexatious behaviour, such as issuing proceedings with no prospect of the claim being successful, will usually be unreasonable;
5. ii) The withdrawal of a claim or unsuccessful pursuit of a claim should not itself be considered as unreasonable;
6. Judges exercising the discretion should also bear in mind the undesirability of deterring parties from using the Small Claims Track.”

Comment

The Court of Appeal’s decision will be a welcome one for litigants in person as it preserves the position that the Small Claims track remains accessible, particularly where one party may be well-resourced and may seek to use the threat of costs to deter litigation.

The guidance set out at paragraph [90] of the judgment will be particularly useful in allowing the Court to determine what constitutes unreasonable conduct should an application under CPR 27.14(2)(g) be made.

Of note, Lady Justice Cockerill commented that Karl Nash ‘skilfully advocated for the utility of the Circuit Judge's test’ when addressing the Court on Ground 2 of the appeal. 25 Canada Square Chambers congratulates Karl on receiving such high praise.

A copy of the judgment can be found here: https://www.bailii.org/ew/cases/EWCA/Civ/2026/1025.html.

This analysis was composed by Rowan Whalley, Pupil Barrister at 25 Canada Square Chambers.