Judgment Title: Dublin Waterworld Limited -v- National Sports Campus Development Authority
Neutral Citation:  IEHC 518
High Court Record Number: 2013 4621 P
Date of Delivery: 07/11/2014
Court: High Court
Composition of Court:
Judgment by: Barrett J.
Status of Judgment: Approved
Neutral Citation:  IEHC 518
THE HIGH COURT
DUBLIN WATERWORLD LIMITED
NATIONAL SPORTS CAMPUS DEVELOPMENT AUTHORITY
Judgment of Mr. Justice Max Barrett delivered on the 7th day of November, 2014
1. This is an application for security for costs brought by the National Sports Campus Development Authority in the context of the within proceedings. Any views expressed in the judgment that follows are tentative in terms of the strength or weakness of any case that might be made by either side at plenary hearing.
2. Dublin Waterworld Limited (“DWW”) is a limited liability company incorporated in Ireland. The National Sports Campus Development Authority (“the Authority”) is a statutory authority established by the National Sports Campus Development Authority Act 2006. It is the legal successor of Campus and Stadium Ireland Development Limited (“CSID”). CSID was a private limited liability company established by the Government in or around 2000 to develop a sports campus at Abbottstown, Co. Dublin. It was owned by the Minister of Sports, Arts and Tourism (50%), the Minister of Finance (25%) and An Taoiseach (25%).
3. In or about 2000, CSID put development of the first element of the National Sports Campus, the National Aquatic Centre, up for tender. The successful bidder was a consortium comprising Rohcon Limited, as design and build contractor, and Waterworld (UK) Limited, as aquatic centre operator. It subsequently transpired that Waterworld UK was not in a position to enter into the desired 30-year lease of the proposed aquatic centre. So between 2001 and 2002, DWW entered into negotiations with CSID to enter into the 30-year lease as the aquatic centre operator. Heads of agreement were signed between CSID, Waterworld UK and Rohcon on 22nd February, 2001. A project agreement was then entered into between these parties and DWW on 7th February, 2002. This project agreement obliged DWW to enter into a 30-year lease and to operate the National Aquatic Centre on agreed terms following practical completion of the centre by Rohcon. On 30th April, 2003, DWW and CSID entered into the lease (“the Lease”) in relation to the National Aquatic Centre for a term of 30 years from 30th April, 2003. Pursuant to the Lease, DWW was obliged to pay to CSID all VAT payable on the grant of the Lease. It was also a term of the Lease that the parties would deal with each other in good faith as regards complying with their obligations under the Lease. A dispute subsequently arose between the parties as to whether VAT was payable on the grant of the Lease. It is necessary to describe this dispute in some detail.
The VAT dispute
5. CSID requested a valuation of the Lease for VAT purposes from the Valuation Office, the State’s property valuation agency. On 25th October, 2002, CSID received a report from Mr. Liam Cahill, a professional valuer within the Valuation Office. Mr. Cahill confirmed the unencumbered rent to be €3m per annum and the open market price of the Lease to be €35m for VAT purposes. (All figures in this judgment are rounded to the nearest whole number). The total development cost of the Centre, as calculated by Mr. Cahill, was €68m. As the open market price of the Lease (€35m) was less than the total development cost of the centre (€68m), these valuations had the result that CSID could not, pursuant to the economic value test, charge VAT on the Lease.
6. Notably, and of central importance to these proceedings, on 27th November, 2002, CSID was advised in writing by the tax advisory division of Price Waterhouse Coopers (‘PwC’) that, notwithstanding a then practice to the contrary, the VAT Regulations only permitted the mathematical methods of valuation contained in the Regulations to be employed “in the absence of other evidence” as to the open market price of the Lease. PwC confirmed that Mr. Cahill’s estimation of €35m constituted such evidence. This being so, the mathematical methods of calculation contained within the Regulations were closed to CSID. A reference to the advice appears in an affidavit sworn by Mr. Barry O’Brien, the CEO of the Authority, on 8th November 2013. In that affidavit Mr O’Brien avers, inter alia, that:
8. Moving on with an account of the facts arising, around late-2002, DWW began to seek sight of Mr. Cahill’s valuation report. However, this was not disclosed at that time by CSID. Instead, in an apparent bid to improve the tax position for itself, CSID appears to have decided to utilise the alternative mathematical methods of valuation set out in reg.19. Initially it appears that CSID intended to rely upon reg.19(1)(c)(ii) but this yielded a similarly unsatisfactory result whereby the open market price was €65m, so still less than the total development cost of €68m. Subsequently, and at the time that the Lease was signed, CSID apparently determined to rely upon the mathematical formula in reg.19(1)(c)(i); this yielded an open market value of €77m, an amount which exceeded the total development cost of €68m, and thus exposed DWW to an ostensible VAT liability of €10m when, under the Act of 1972, its liability was €0.
9. As support for this last approach, CSID relied upon a letter from a tax inspector from the Revenue Commissioners wherein the inspector stated that the last-mentioned methodology (the one that created a VAT liability for CWW) was satisfactory. However, the inspector queried whether DWW had accepted Mr. Cahill’s calculations - the question that would immediately arise, if DWW had accepted Mr. Cahill’s valuations, was why on earth it would be prepared to accept the imposition of a €10m VAT liability when Mr. Cahill’s valuations necessarily yielded a VAT liability of €0? As it happens, DWW had not yet seen Mr. Cahill’s report. So it did not know that Mr. Cahill had given the Lease an open market valuation of €35m. All DWW knew was that Mr. Cahill had provided a valuation of the unencumbered rent at €3m per annum.
10. Despite operating to some extent in the dark, DWW maintained that the €3m valuation of the unencumbered rent was unrealistic, particularly as the projected annual turnover of the Centre was ‘only’ €4m and the actual agreed rent between the parties was (a) for the first five years, €127k per annum, plus 10 per cent of the net profits, and (b) thereafter, 10 per cent of the net profits. So there was a very great differential between Mr. Cahill’s figures and those that had been arrived at between DWW and CSID, both of whom were professionally advised. However, DWW was not only concerned about the level of Mr. Cahill’s valuation of the unencumbered rent. It was also concerned that if it accepted a VAT liability, it might not be able to recover this VAT on a subsequent disposal by it of the Lease. Its particular concern was that it might not be entitled at that future time to adopt the method of valuation that was being taken by CSID. This would have the effect that DWW would have sunk a lot of money into the Aquatic Centre that was irrecoverable. This prospect was referred to at the hearings of these proceedings as “trapped VAT”. Compounding DWW’s concern in this regard was the fact that the VAT Interpretation Branch within the Revenue Commissioners was not prepared to provide any assurances to DWW or CSID on this issue.
11. A further issue of contention between the parties was CSID’s desire that DWW invoke what is known as the ‘Section 4A procedure’. This is a procedure under VAT legislation which minimises the impact of significant VAT liabilities by facilitating the making of simultaneous VAT accounts by a landlord and tenant. However, the process can only be used with Revenue approval and is only applicable where the tenant has full VAT recovery. The relevant form must be lodged with the Revenue before the tenant goes into occupation of the premises and requires a tenant formally to accept and certify that VAT is due, here on the Lease. As it happened, DWW went into possession of the Aquatic Centre in February 2002 and the Lease was not signed until 30th April, 2003. Because of this sequencing of events the Revenue Commissioners confirmed in writing to CSID that the ‘Section 4A procedure’ was not available in this case.
12. On 15th May, 2003, CSID issued an invoice to DWW claiming the sum of €10m in VAT due to CSID. The invoice stated that it had been calculated in accordance with reg.19 of the VAT Regulations. By December, 2003, the invoiced amount remained unpaid and CSID’s solicitors issued a demand letter seeking payment of the VAT. Clearly the VAT dispute between the parties had significantly hardened by this time.
13. In late-2004 and early-2005, CSID met with a cool reaction from certain State entities (the Comptroller and Auditor General and also the Office of the Attorney General) as to the manner in which the VAT dispute with DWW had been managed, the perception being that there was no net benefit to the Exchequer in the pursuit of the VAT claim. The Office of the Attorney General expressed the view that Mr. Cahill’s valuation of the Lease meant that the economic value test was not satisfied and that the sensible approach was to take no further action.
14. In February 2005, PwC, acting for CSID, corresponded with the Revenue Commissioners, indicating that CSID wished to withdraw the claim for VAT and seeking, firstly, confirmation from the Revenue Commissioners that there would be no interest and penalties applied, and, secondly, the approval of the Revenue Commissioners to CSID’s so proceeding. Such approval was neither required nor forthcoming as VAT is a self-assessment tax and thus was a matter for CSID. This liaison between the Revenue Commissioners and PwC was still ongoing in May, 2005, a month after CSID had issued proceedings claiming VAT of some €10m from DWW.
15. In March 2005, CSID was advised by its legal advisors and was aware that the VAT dispute was covered by the arbitration clause in the Lease and that if the VAT proceedings were brought in the High Court they were likely to be stayed in favour of the arbitration. CSID was also made aware that the inclusion of the VAT claim would assist it in crossing the financial threshold necessary for the transfer of proceedings to the Commercial Court and the ‘fast-tracking’ of the case that its listing before the Commercial Court would entail.
The arbitration proceedings
The High Court challenge
The ‘section 214 notice’
The Supreme Court appeal
20. On 11th May, 2010, DWW’s case went before the Supreme Court again for a determination on costs, and to decide how the issue arising between the parties ought now to be resolved. Given the results of the Supreme Court appeal, a second arbitration hearing was now in contemplation. The Authority argued that no order as to costs should be made as if the Authority was successful in the second arbitration, it would effectively be penalised by virtue of the costs order. This argument was rejected by the Supreme Court which awarded DWW the costs of the High Court and Supreme Court proceedings. The Authority applied to have the matter arising between the parties remitted back to Mr. O’Brien. This was opposed by DWW. The Supreme Court decided to remit the matter back to arbitration, though not to Mr. O’Brien.
The second arbitration and related matters
The Freedom of Information process
The instant proceedings
24. On 9th September, 2013, the Authority issued a notice of motion seeking, inter alia, the following reliefs: (i) an order pursuant to s.390 of the Companies Act 1963, as amended, directing DWW to provide sufficient security for the Authority’s costs in the proceedings commenced by DWW against the Authority; (ii) an order fixing the amount and form of such security; (iii) an order staying the said proceedings pending the furnishing of such security; and (iv) in the alternative, an order that all parties funding DWW in relation to the proceedings be identified and made liable to the Authority for any orders for costs that might be made against DWW.
25. In addition, on 16th September, 2013, a Defence was delivered by the Authority in which it denies in full the claims made by DWW in the statement of claim, and sets out the core facts as it perceives them. In particular, the Authority denies that it brought proceedings to recover VAT in the absence of reasonable or probable cause. Rather it maintains that it brought such proceedings on foot of its understanding and belief, which it claims were reasonably held, that it was entitled to charge VAT on the Lease and to recover same from DWW. Moreover, the Authority denies the presence of any malicious intent or mala fides in the bringing and prosecution of the proceedings to recover VAT. Furthermore, the Defence denies in full the allegation that DWW has suffered any loss as pleaded or that the Authority has any liability for same. Lastly, the Defence includes a plea that DWW’s claim is statute-barred.
26. Under s.390 of the Act of 1963, when a limited company, such as DWW, is the plaintiff in legal proceedings, a judge having jurisdiction in the matter, may:
II. Section 390 proceedings.
(a) that he has a prima facie defence to the plaintiff’s claim, and
(b) that the plaintiff will not be able to pay the moving party’s costs if the moving party be successful.
(2) In the event that the above two facts are established, then security ought to be required unless it can be shown that there are specific circumstances in the case which ought to cause the court to exercise its discretion not to make the order sought.
In this regard the onus rests upon the party resisting the order. The most common examples of such special circumstances include cases where a plaintiff’s liability to discharge the defendant’s costs of successfully defending the action concerned flow from the wrong allegedly committed by the moving party or where there has been delay by the moving party in seeking the order sought.
The list of special circumstances referred to is not of course, exhaustive.”
29. What is meant by the term “prima facie defence” referred to in Connaughton? Useful guidance in this regard is to be found in the ex tempore judgment of Finlay Geoghegan J. in Tribune Newspapers (In Receivership) v. Associated Newspapers Limited (High Court, unreported, Finlay Geoghegan J., 25th March, 2011). That case arose out of various claims in tort that arose from the publication by The Irish Mail on Sunday newspaper of a special edition that, it was claimed, resembled a copy of the Sunday Tribune newspaper. In the course of a related s.390 application, Finlay Geoghegan J. observed as follows:
31. By way of recapitulation, the decision of Clarke J. in Connaughton suggests that in deciding whether to direct security for costs in s.390 proceedings the court can usefully ask itself three questions:
(2) Has the moving party established that the resisting party will not be able to pay the moving party’s costs if the moving party is ultimately successful?
(3) If the answer to both of the foregoing questions is ‘yes’, has the party resisting the order shown that there are specific circumstances in the case which ought to cause the court to exercise its discretion not to make the order for security for costs?
32. Of the five questions (Questions (1) to (5) referred to above), the resisting party in the instant application (DWW) has indicated that for the purposes of this application the court should assume that the Authority has a prima facie defence to the claims made by DWW. In effect, therefore the answer to Question (1) is ‘yes’ and there is no need to explore the issues raised by that question or Questions (4) or (5). Moreover, DWW acknowledges that the answer to Question (2) is ‘yes’, so the Authority does not need to establish this fact. The effect of the foregoing is that the court need only address the issue raised by Question (3), namely has DWW shown that there are specific circumstances in the case now arising which ought to cause the court to exercise its discretion not to make the order for security for costs?
33. It is accepted in case-law that where a plaintiff has raised a point of law of exceptional public importance, this may constitute a special circumstance justifying refusal of an order for security for costs that might otherwise be warranted. (See, for example, Lancefort Ltd. v. An Bord Pleanála  2 IR 511 and Village Residents Association Ltd. v. An Bord Pleanála  4 I.R. 321). More recently, in Oltech, Charleton J. indicated, at para. 22 of his judgment, that a point of fact can also arise in litigation which so keenly affects the public interest as to merit refusal of an order for security for costs. Cases in which a point of fact of exceptional importance have been held to arise include Comcast v. Minister for Public Enterprise  IESC 50 and Millstream Recycling Ltd. v. Tierney  IEHC 55. In Comcast the court was presented with a case concerning the alleged corruption of a member of the Cabinet in the context of the awarding of the second mobile phone licence for Ireland. In the Supreme Court, Hardiman J., at para.3 of his judgment, describes the case as “absolutely unique, without precedent or parallel in the ninety year history of the State”. The whole episode arising was a matter of public scandal and was the subject of a lengthy tribunal of inquiry. In Millstream, the proceedings were concerned with the public blaming of the plaintiff for a contamination-of-food scandal that rocked the agricultural sector of the Irish economy. In the present case, the core of the issue arising is, to use colloquial parlance, whether the Authority sought to ‘pull a fast one’ on DWW by deliberately charging to, and pursuing the payment by, DWW of VAT to the amount of €10m in circumstances where, by the Authority’s own admission, its tax advisors had indicated that the method of VAT calculation required by law yielded a VAT liability of €0.
1. Public interest
34. It is trite to note that public and semi-state bodies are often sued for alleged or admitted wrongdoings and it cannot be, and it is not the case that their public character or ownership necessarily converts proceedings against them into proceedings in which refusal of an otherwise merited order for security for costs is invariably justifiable by reference to the public interest. All such disputes are likely to be of interest to the public but that does not make their resolution a matter of public interest. The present case is not one involving alleged Cabinet-level corruption or the reputation of a national industry. However, the Comcast and Millstream cases are perhaps at the extreme end of the spectrum of cases that raise issues so exceptional as to cause the court to exercise its discretion not to make an order for security for costs. Consequently they are not perhaps the most helpful of precedents insofar as illuminating what other categories of case may raise facts that will be considered exceptional, albeit not quite as exceptional - and even exceptionality has its gradations: one exceptional circumstance may not be as exceptional as another, yet both may still be exceptional.
35. In the present case the court is presented with facts that appear to be, certainly one can but hope that they are, unique and uniquely egregious. Here, a semi-state body, by its own admission, deliberately settled on a self-serving course of action which it had been expressly advised was contrary to law so as to seek to charge a ten million euro VAT liability of a private company in circumstances where the semi-state body (a) knew that by law the VAT liability arising for that other company was nil, and (b) sought by every legal means possible to recover the purported liability arising, offering as an excuse for its pursuit of that purported liability, that it had been told that the relevant law was more honoured in the breach than the observance. Insofar as it is suggested that the Authority in its application of the VAT legislation did nothing that other people did not do, the court notes, by way of analogy, that it is of no avail to a man who is stopped after doing 150km/h down the M50 motorway for him to contend that everyone else was driving at the same speed. Nor, is it of any avail to a man, if he gets involved in a Saturday-night brawl outside his local pub, for him to contend that he was not the only person who threw a few punches. Likewise, it appears to the court that it is of no avail to the Authority that its conscious violation of the law was no more than what other people were doing. Neither, in the circumstances arising, does it assist the Authority that the Revenue Commissioners knew or tolerated what it was doing. The Authority was required to comply with the requirements of VAT law and, by its own admission, did not. The fact that other people might also have acted in contravention of the law is an irrelevance. The Revenue guidelines pursuant to which this deviant behaviour apparently arose were expressly stated to be subject to the law, and the Authority had been expressly advised by prominent advisors as to what the law required. The Revenue Commissioners do not enjoy a power to waive the requirements of VAT legislation, they have never purported to enjoy such a power, and there is no suggestion that the Authority understood them to have such a power.
36. Gone are the days of ‘Morton’s Fork’ when no matter how one treated with the State or its emanations, with their almost limitless resources, one could end up with a purported tax liability and have to suffer all manner of related consequences without meaningful hope of relief. There has to be, and it appears to the court that there is a public interest in knowing that a publicly-owned body can and will be held accountable in the public forum offered by the courts in circumstances where that body has initiated and maintained court proceedings to recover a purported VAT liability of the scale of ten million euro that, by law, ought never to have been sought, and the claim to which that body was only able to sustain on the basis of a self-serving and improper application of the law, the true requirements of which law, by that body’s own admission, were known to it at all relevant times. The rule of law must prevail. Our republican Constitution demands too that the law’s levelling influence must apply: just as the man on the M50 motorway has to pay a speeding fine, just as the man outside the pub must take his legal medicine, so too a semi-state body must be capable of being held to account in the courts when, by its own admission, it knowingly acts in contravention of what the law requires and seeks payment of an unmerited charge of ten million euro from another person. As the then Judge Denham noted in the penultimate paragraph of her dissenting judgment in West Donegal Land League v. Udarás na Gaelteachta  IESC 29, when it comes to the question as to whether there are special circumstances that would justify not making an order for security for costs that appears otherwise to be merited “it is appropriate to consider the justice of the case and the court’s duty to advance the ends of justice and not hinder them.” In this case, justice would be hindered, not advanced, if the order that is sought in this application were to issue.
37. There is ample authority for the proposition that the court retains a discretion not to order security for costs where the plaintiff concerned can establish, on a prima facie basis, that its inability to pay the costs of the defendant concerned (in the event that the defendant might succeed) is due to the wrongdoing asserted in the proceedings. That said, the courts must be careful not to show such reluctance to ordering security for costs that this reluctance itself becomes a weapon whereby an impecunious company can use its inability to pay as a means of putting unfair pressure on a more prosperous company. In Connaughton, Clarke J. identifies at para. 3.4 et seq. of his judgment a four-prong test to be applied when determining whether a plaintiff is correct in the assertion that a claimed inability to pay stems from the wrongdoing suggested:
(1) That there was an actionable wrongdoing on the part of the defendant (for example a breach of contract or tort)
(2) that there is a causal connection between the actionable wrongdoing and a practical consequence or consequences for the plaintiff.
(3) that the consequence(s) referred to in (2) have given rise to some specific level of loss in the hands of the plaintiff which loss is recoverable as a matter of law (for example by not being too remote); and
(4) that the loss concerned is sufficient to make the difference between the plaintiff being in a position to meet the costs of the defendant in the event that the defendant should succeed, and the plaintiff not being in such a position.
…Given that, on a motion such as this, a plaintiff is only required to establish the special circumstances, arising out of its inability to pay costs being due to the alleged wrongdoing of the defendants, on a prima facie basis, then it follows that each of the above steps must also be established on such a prima facie basis only.”
39. The court notes in passing the reference by the Authority to the fact that back in 2006, DWW agreed to provide security for costs in the context of other proceedings. It is perhaps in the nature of litigation that opposing parties will hurl at each other every missile that they can find. However, the court considers that this particular missile is something of a dud. When it comes to 2006, that was then and this is now: the court must decide the issue of impecuniosity by reference to the present, not the past. It may be that DWW had the necessary resources to come up with security for costs in other proceedings several years ago. However, DWW has established on a prima facie basis that it does not have the necessary resources now, that it satisfies the various criteria established by Connaughton, and so that no order for security costs should issue at the present time in the instant proceedings, having regard to the factors just considered.
40. The court notes also the assertion by the Authority that there may be some unknown third party funding the present proceedings for DWW, so that even if an order for security for costs is refused, this will not lead to the collapse of DWW’s proceedings. In this regard it seems to the court that DWW cannot ‘have its cake and eat it’. That is to say, it cannot claim that there is a public interest in having its dispute with the Authority proceed to judgment, yet expect that the court will not consider the entirety of the public interest presenting in this case. Here, it seems to the court, the public interest includes avoiding a situation in which the cost of the proceedings between DWW and the Authority might fall ultimately to the taxpayer to meet by way of Exchequer contribution to the Authority in circumstances where DWW may, in and of itself, be impecunious but nonetheless has ready access to the financial wherewithal necessary to meet any order for costs that it might ultimately be ordered to pay, if unsuccessful in its action against the Authority. It seems to the court that the most expedient means of ensuring that justice is done between the parties and also that the public interest is fully and roundly served is for the court to include among any orders it makes in these proceedings an order that DWW disclose at this time the identity of any person who, orally or in writing, and whether by means of a legally binding agreement or otherwise, has agreed to fund or indicated a willingness to fund, directly or indirectly, all or any of the proceedings arising at this time between DWW and the Authority.
41. It will be recalled from the introductory outline of facts that in an affidavit sworn on 8th November, 2013, Mr. Barry O’Brien, the CEO of the Authority, avers, inter alia, that:
Mr. O’Brien’s affidavit
43. Returning again to the five questions that the court has identified above as arising from the Connaughton, Tribune Newspapers and Oltech cases, the court would answer them as follows:
(2) Has the moving party established that the resisting party will not be able to pay the moving party’s costs if the moving party be successful? (Connaughton). In the present case, DWW acknowledges that this is so. Thus again, in effect, the court must treat the answer to this question as ‘yes’.
(3) If the answer to both of the foregoing questions is ‘yes’, has the party resisting the order shown that there are specific circumstances in the case which ought to cause the court to exercise its discretion not to make the order for security for costs? (Connaughton). The answer to both of the foregoing questions falls to be treated as ‘yes’. Consequently the court has considered whether there are such specific circumstances arising and has concluded by reference to the relevant case-law that there are public interest and impecuniosity grounds that justify the refusal of an order for security for costs in the instant application.
(4) Has the moving party objectively demonstrated the existence of admissible evidence and relevant arguable legal submissions applicable thereto which, if accepted by the trial judge, provide a defence to the plaintiff’s claim? (Tribune Newspapers). This is a refinement of Question (1) and only ever falls to be answered if that question falls to be answered. For the reason stated above, there is no need to address Question (1) in these proceedings.
(5) Has the moving party advanced a legal defence that is potentially sustainable on a practical view of the law? (Oltech). This is a refinement of Question (1) and only ever falls to be answered if that question falls to be answered. For the reason stated above, there is no need to address Question (1) in these proceedings.