England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBEN1 95/1759/E

(HIS HONOUR JUDGE RIVLIN (sitting as a High Court Judge) )

Royal Courts of Justice

Strand

London WC2

Wednesday 9 October 196

B e f o r e:

LORD JUSTICE PHILLIPS

LORD JUSTICE MUMMERY

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DANEMARK LIMITED

Plaintiff/Appellant

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BAA plc

Defendant/Respondent

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(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR P RALLS (Instructed by Rawlence & Hart, Croydon, CR9 1LE) appeared on behalf of the Appellant

MR P LEAVER QC and MR K MACLEAN (Instructed by Herbert Smith, London EC2A 2HS) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

JUDGMENT

LORD JUSTICE PHILLIPS: On 16 october 1995, on the first day of the trial of this action, His Honour Judge Rivlin QC, sitting as a judge of the Queen's Bench Division, made the following order:

"The Plaintiff do provide additional security for the Defendant's costs of this action in the sum of £112,500.00 (One hundred and twelve thousand five hundred pounds) to the satisfaction of the Defendant's Solicitor by close of business on the 20th day of October 1995 and in default of additional security being provided by the Plaintiff this action do stand dismissed."

The plaintiffs now appeal against that order.

The material facts, as set out in the judgment of the trial judge, are not in issue and I can do no better than to incorporate them verbatim:

"In this case, by a writ issued on 1st March 1993, and endorsed with the statement of claim, the plaintiff claims against the defendant the sum of £297,869, plus interest.

The plaintiff company carries on business providing personnel development training, in particular in the context of outdoor activities and team building services. Its trading name is Challenge Outdoor Pursuits. The defendant is the British Airports Authority. The defendant has a group management training centre in Crawley, West Sussex.

In short, it is alleged by the plaintiff that it entered into two consultancy agreements with the defendant to provide outdoor development consultancy services to it at that centre. The first is alleged to be dated March 1989, an agreement initially for two years which was, it is said, extended until 31 October 1991. The second is alleged to be dated November 1991, and to expire on 31 October 2003.

It is said that these agreements provided for a daily rate for the plaintiff's services of £250 plus VAT, later increased to £300 plus VAT, for 254 days each year, regardless of whether the plaintiff's services were actually required for that period, and that in breach of these agreements the defendant has failed to pay for any such services, resulting in unpaid invoices, all first raised in 1992, for sums totalling the amount of the claim.

For its part, the defendant denies ever having entered into these agreements.

It is claimed and pleaded that the two documentary agreements upon which the plaintiff relies are forgeries, the first purporting to be signed on behalf of the defendant by, I believe, a Mr Hunt, the second purporting to be signed on behalf of the defendant by Dr Campling, who was, at all material times, the group training manager at the training centre to which I have referred. As to these two agreements, the first is apparently a photocopy document, the second an original document, and of course both of them have been subjected to the finest scrutiny by experts instructed by both sides.

The plaintiff is a small company with a paid-up share capital of £100.

Having regard to the defendant's contentions in this case, and the fact that it considered that it had strong evidence to challenge the authenticity of certainly the first agreement, it is hardly surprising that at an early stage of these proceedings a summons was issued seeking security for costs.

In fact, there has been a short history of such applications. That history is as follows: on 29 June 1993 Master Murray ordered two directors of the plaintiff (Mr Anthony Reddy and Mr Barry John Scales) to deliver a joint and several guarantee in the sum of £15,000 by way of security. On 5th January 1995, Master Murray made a further order whereby he increased the security to the total sum of £37,500. On 15th September, Master Murray dismissed a further application for security. Six days later, on 21st September of this year, the plaintfiff's latest expert report was signed by its maker, Mr Radley. On 28th September, following receipt of that report, the defendant gave notice to the plaintiff of its intention to make a further application to this court, and that is the application which I have now heard and must decide.

What does the plaintiff's expert say? The position is this: both the defendant's expert and the plaintiff's expert witnesses and forensic scientists specialising in the examination of handwriting and documents. They are now in full agreement with one another that for a number of reasons the first alleged agreement, upon which the plaintiff relies, is, in fact, a forged document. I refer in particular to the report of the plaintiff's own expert, Mr Radley, who, between pages 49 and 53, expresses the unequivocal opinion that a set of initials purporting to be those of Mr Hunt on behalf of the defendant, the date purporting to be 9th March 1989 and indeed the signature of the plaintiff's own representative, Mr Reddy, are not genuine handwriting peculiar to that agreement, but appear to have been ´lifted´ from certain other documents which he believes he has now been able to identify.

As regards the second agreement, as I have said, that document, in contrast to the first, appears to be an original document. Again, by way of contrast with the first, I have been informed that although this is denied by him, the signature of the defendant's employee, Dr Campling, on this document and his various initialling are said by experts to be probably authentic."

The Order of the Judge was made pursuant to Section 726(1) of the Companies Act 1985 which provides:

"Where in England and Wales a limited company is plaintiff in an action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the defendant's costs if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

The apparent inconsistency in the concept of ordering a company, which is unable to pay a defendant's costs to give security for those costs, is explained by the fact that those who stand to benefit from the action brought by the company (normally its shareholders) will not normally be liable for its costs should the action fail, but may be willing and able to secure those costs if this is a precondition to the action proceeding.

A considerable body of case authority provides guidance as to the principles to be applied in the exercise of the discretion conferred by Section 726. This is helpfully summarised in the judgment of Peter Gibson LJ in Keary Developments Limited v Tarmac Construction Ltd [1995] 3 All ER 534 at p 539 and, as well the principles to which he refers are relevant in the present case, I shall set out his summary:

"The relevant principles are, in my judgment, the following,

1. As was established by this court in Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 2 All ER 273, [1973] QB 609, the court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.

2. The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security (see Okotcha v Voest Alpine Intertrading GmbH [1993] BCLC 474 at 479 per Bingham LJ, with whom Steyn LJ agreed). By making the exercise of discretion under s 726(1) conditional on it being shown that the company is one likely to be unable to pay costs awarded against it, Parliament must have envisaged that the order might be made in respect of a plaintiff company that would find difficulty in providing security (see Pearson v Naydler [1977] 3 All ER 531 at 536-537, [1977] 1 WLR 899 at 906 per Megarry VC).

3. The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiff's claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence of the claim. The court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, such as by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiff's impecuniosity (see Farrer v Lacy, Hartland & Co (1985) 23 Ch D 482 at 485 per Bowen LJ). But it will also be concerned not to be so reluctant to order security that it becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on the more prosperous company (see Pearson v Naydler [1977] 3 All ER 531 at 537, [1977] 1 WLR 899 at 906).

4. In considering all the circumstances, the court will have regard to the plaintiff company's prospects of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure (see Porzelack KG v Porzelack (UK) Ltd [1987] 1 All ER 1074 at 1077, [1987] 1 WLR 420 at 423 per Browne-Wilkinson VC). In this context it is relevant to take account of the conduct of the litigation thus far, including any open offer or payment into court, indicative as it may be of the plaintiff's prospects of success. But the court will also be aware of the possibility that an offer or payment may be made in acknowledgment not so much of the prospects of success but of the nuisance value of a claim.

5. The court in considering the amount of security that might be ordered will bear in mind that it can order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal amount; it is not bound to make an order of a substantial amount (see Roburn Construction Ltd v William Irwin (South) & Co. Ltd [1991] BCC 726).

6. Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence (see Trident International Freight Services Ltd v Manchester Ship Canal Co [1990] BCLC 263). In the Trident case there was evidence to show that the company was no longer trading, and that it had previously received support from another company which was a creditor of the plaintiff company and therefore had an interest in the plaintiff's claim continuing; but the judge in that case did not think, on the evidence, that the company could be relied upon to provide further assistance to the plaintiff, and that was a finding which, this court held, could not be challenged on appeal.

However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean maritime Ltd [1990] 2 Lloyd's Rep 27)."

Having referred to these principles, the judge summarised the relevant features of this case to which they should be applied as follows:

"(i) That I have been informed, and it is accepted by both sides, that the plaintiff itself is not in a position to withstand a further substantial order for security and that any further order may well have the effect of stifling this action;

(ii) That we have now reached the first day of this trial and, as Mr Ralls has submitted, a substantial proportion of the costs of this action have already been incurred. Having said that, the full length of this trial, should it proceed, is estimated at in excess of 10 days;

(iii) That in all the circumstances the only realistic and meaningful order at this stage for security would be a substantial order. In the affidavit of the defendant's solicitor, Mr Carson, sworn on 8th September 1995, he estimated that the defendant's total costs up to the end of trial of approximately this duration would be in excess of £226,00;

(iv) That Mr Ralls has, in my view, very frankly and properly conceded that it must be appropriate for me to have regard to the facts of this case, at least to the extent of taking into account the contents of the defendant's expert report, and of course the plaintiff's own expert report, to which I have referred, for these must, prima facie , have a significant impact upon their prospects of success. Clearly it would appear that the impact which they may well have is this: that the plaintiff is likely to have a difficult task in persuading the court, as it must, that the first and perhaps most important agreement is a wholly genuine document;

(v) That again Mr Ralls has, in my view, frankly and properly conceded that if the contents of this report had been known and had been before Master Murray at, say, the hearing for security in January of 1995, it must be recognised that the order for security which he would have made would likely have been in a much greater sum than in fact was the case."

It is accepted by both parties that these were the relevant factors to which the judge should have regard when exercising his discretion. Mr Ralls, for Danemark, submitted, however, that the judge erred in principle in making the order.

The first point made by Mr Ralls was that the judge should not have entertained the application at all. On 15 September Master Murray had dismissed an application for further security for costs. At that time he already had before him an opinion from BAA's expert that the first agreement was a forgery, and an inconclusive opinion from Danemark's expert on this point.

The only development that occurred between that point and the opening of the trial was that Danemark's expert filed a further opinion which agreed that the first agreement was a forgery. This, argued Mr Ralls, was not a sufficient change of circumstances to justify reopening the question of security for costs. The expert's view was not conclusive There was a large volume of other relevant evidence which required consideration before the judge could draw conclusions as to the merits of the case. The only proper exercise of the judge's discretion would have been to order the trial to proceed.

The judge did not conclude on the basis of the expert evidence that BAA had made out a strong prima facie case that Danemark's claim was fraudulent. However, he described the new expert's report as an "important development" that constituted "exceptional circumstances" which justified the making of a further order. Whether it was right to make a further order I shall consider shortly, but Danemark's expert report effected a dramatic shift in the strength of the respective cases. I do not consider that the judge can be said to have erred in principle in reviewing the security position afresh, even at this late stage.

The next argument urged before us, and before the judge, by Mr Ralls was that an order for further security should not be made because this was likely to stifle Danemark's claim. Mr Leaver QC has argued that this point was not open to Danemark because they had adduced no evidence to show that the directors who had put up security in the sum of £35,000 would not be able to satisfy an additional order other than a bare assertion to this effect on affidavit. That assertion was unconvincing having regard to the fact that one of the directors was established to be the beneficiary of an off-shore trust.

I do not consider that it is open to BAA to take that point at this stage. I have read the transcript of the argument in the court below and I am satisfied that, as the judge recited, it was accepted before him that the effect of a further order for substantial security might well be to stifle the action. In the course of his submissions Mr Ralls said at page 66 of the transcript:

"The question is whether or not substantial security, whether the whole of the amount sought or a major proportion of it, should now be given. My Lord, what I say about that is that would have the effect of stifling the claim."

To which the judge replied:

"You are right. From what you say it would or might have the effect of stifling the claim, and that obviously would be a matter for concern."

At page 70 Mr Ralls said:

"My Lord, the fact of the matter is that those instructing me are aware of the seriousness, if I can put it that way, of this situation when these issues are being canvassed and they are going to give evidence on their oath about such matters. Nevertheless, they wish to pursue the claim and it is clear that if your Lordship does order them to give further security they will not be able to do so and the claim will end or the action would have to be stayed."

No challenge was made of these assertions. Furthermore, there is no Respondent's Notice to challenge the judge's finding as to the risk of stifling the action.

This leads to what I consider lies at the heart of this appeal. Did an order for security which might stifle Danemark's claim fall within the legitimate discretion of the judge, or was it so manifestly unjust that it is open to this court to intervene? In argument before the judge, Mr Ralls contended that the judge had to carry out a balancing exercise.

"One has to look at the amount of extra costs to be incurred as against a risk that a proper claim is being stifled."

Mr Leaver argued that it was right that the judge should have regard to BAA's total exposure, both in respect of costs already incurred and future costs. He referred us to a number of authorities in support of the proposition that it was the practice that orders for security for costs should have regard to both past and future costs.

I accept that where the plaintiff, or those behind the plaintiff, are in a position to meet an order for security for costs, it is normal for an order for security to relate to both past and future costs. It seems to me, however, that the position may be very different where the plaintiff and those behind the plaintiff will not be able to meet an order for costs so that the order is likely to stifle the action.

In argument before the judge, Mr Leaver put his case as follows:

"The position which the defendants face is that they are faced with what we would submit is demonstrably a dishonest claim - common ground between the experts on that as to at least one of the agreements - which has been exposed as dishonest before the trial has started. This trial is estimated to last for some two weeks or so. The plaintiff has already spent a very considerable sum of money in meeting this dishonest claim. Our submission is that they should get some more protection or they should not be put to the trouble of meeting a claim of this sort, which has recently been demonstrated to be dishonest."

If the judge had accepted this argument he could properly have attached considerable weight to the costs already incurred by BAA in deciding what order to make. The judge did not, however, accept that BAA's case could be put this high. He was at pains to say that he was not prejudging the merits of the action. If this may be thought surprising, it is right to say that there is a body of other documentary evidence which, on its face, supported Danemark's claim. This was disclosed by BAA, although this disclosure was coupled with a challenge to its authenticity.

In these circumstances, the primary task for the judge was to balance the effect on Danemark of making an order with which they could not comply against the effect on BAA if he did not make that order. As to the former, Danemark would lose a claim, albeit a difficult one, for close on £300,000 plus substantial interest. They would lose their own costs of the litigation up to trial and there would also be lost the £37,500 put up to secure BAA's costs.

So far as BAA are concerned, the consequence to them if the judge did not order security would be that they would incur the additional costs of the trial itself without the prospect of recovering those costs should their defence succeed. Mr Leaver quantified those costs at around £60,000.

What did not fall to be considered in this particular balancing exercise was the costs already incurred by BAA insofar as these were unsecured. They were at risk as to these costs whether or not the action went ahead. The fact that BAA were not fully secured as to costs already incurred is a relevant factor when considering the overall picture, but it does not seem to me to be of much significance, having regard to the considerations to which I have just referred.

The balancing exercise that I have described is one that I believe the court must always carry out when considering whether to make an order for security that is likely to stifle the claim. Where such an order is sought very late in the day, the result of that exercise is not likely to favour the defendant, for the costs left to be incurred are likely to be proportionately small when compared to the plaintiff's claim, including his costs to date and any security he may have already given.

The judge clearly gave the most careful consideration to the application for security but I am not satisfied that he carried out this balancing exercise. It is true that he referred to the fact that:

"very substantial further costs must inevitably be incurred".

But he also stated that:

"I do not believe that the fact that a substantial amount of costs have already been incurred should affect my judgment that, in all the circumstances, the defendant is entitled to a further order"

And the security that he ordered was in relation to both past and future costs.

There is one further consideration that is relevant in this unusual case. BAA have by their defence, in effect, charged the plaintiffs' directors with being party to a serious conspiracy to defraud and to pervert the course of justice. The plaintiffs have, nonetheless, persisted in their claim and secured a substantial sum of defence costs. In such circumstances, to stifle the plaintiffs' claim at the opening of the trial, leaving the very grave issue raised in this case unresolved, appears to be particularly draconian.

The question for the court is, could any judge properly conclude at the beginning of this trial, having regard to all the material circumstances including the strength of the respective cases as they then appeared, that rather than leave BAA exposed to the risk of the residual costs of the trial, an order should be made which was likely to stifle this action? I have concluded that the answer to that question is "No" and that this appeal should be allowed.

LORD JUSTICE MUMMERY: I agree.

Order: Appeal allowed with costs.