England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR PETER LEAVER QC)

		Royal Courts of Justice Strand London, WC2
		Tuesday, 10th December 2002

1. LORD JUSTICE POTTER: Mr Justice Sullivan will give the first judgment.
2. MR JUSTICE SULLIVAN: This is an adjourned application for permission to appeal against a decision of Mr Peter Leaver QC sitting as a deputy judge of the Chancery Division on 21st May 2002 dismissing the applicant's application to set aside an order of His Honour Judge Rich QC sitting as a judge of the Chancery Division on 29th January 2002.
3. On 18th September Carnwath LJ adjourned the application for permission to appeal so that it could proceed on notice to the respondent, and directed that if permission was granted the hearing of the appeal should follow immediately thereafter. At the outset of the hearing the court indicated that it considered that this was an appropriate case in which to grant permission and thereafter proceeded to consider the appeal.
4. The history of the litigation is somewhat convoluted, but in summary the background is as follows. The defendant company (the applicant in the present proceedings) owned a plot of land on which it had obtained planning permission to erect a house, subject to an agreement under section 106 of the Town and Country Planning Act 1990 which required the demolition of a bungalow on adjoining land. The land for the house was sold to the claimant. In 2000, when the house was built and ready for occupation, the defendant failed to demolish the bungalow. The claimant brought proceedings for an injunction and damages. As a result of pressure from the District Council the bungalow was demolished in September 2000, so there was no longer any need for an injunction. The claimant's claim for damages "in excess of £50,000" remained and in response the defendant company advanced a counterclaim alleging, among other matters, that the new house had been erected in breach of covenants in the sale agreement, because the company's consent had not been granted for variations between the building as permitted by the planning permission and the building as erected. Various other complaints were made, including failure to pay for water usage and damage to land drains. The counterclaim was said to be limited in value to £49,999. At a case management conference on 7th March 2001 the claimant abandoned her claim for damages, so the only outstanding matter on the claim was her claim for costs.
5. On 16th May 2001 the claimant applied order striking out various paragraphs of the counterclaim pursuant to rules 3.4 and/or 24.2 of the CPR, on the basis that there were no reasonable grounds for making the allegations in the counterclaim and that it had no real prospect of success.
6. When the matter came before Master Moncaster on 2nd July 2001 he gave the claimant a declaration that the defendant was in breach of covenant as at the date of the claim form, and ordered that the costs of the claim should be reserved to the judge who was to try the counterclaim. He dismissed the claimant's application to strike out the various parts of the counterclaim and gave directions for hearing it. Further directions included a direction that the trial of the counterclaim was to be limited to liability only.
7. Thus matters stood when the matter came before His Honour Judge Rich on 29th January 2002. Mr Carter was there and sought permission to represent the defendant company, as he had been permitted to do at some of the earlier procedural stages in the litigation. However, he had been made bankrupt on 13th December 2001 and so was disqualified from acting as a director of the company. His Honour Judge Rich said this:

"There has come on for trial today, however, a counterclaim which was made in the name of the defendant company, although the person acting on behalf of the company, at some stages with the permission of Master Monkaster, is a Mr Carter, who was until recently a Director of the defendant company. Since December, he has been disqualified from acting as a Director, and has resigned. There therefore appears before me today, nobody entitled to appear on behalf of the defendant company, but it appears the defendant many has not only not been represented here, or not properly represented, it has been wholly unaware of today's hearing."

Having summarised the nature of the company's counterclaim, he continued:

"It is by no means clear to me whether the defendant company would wish to pursue a claim so based, or if it does, what its proper remedy in fact should be. But it has not today appeared to prove such claim, and in those circumstances, under Part 39(3), the court may proceed to strike out the counterclaim. It seems to me that that, in the circumstances of this case, is the appropriate thing to do, although in making consequential orders I do have regard to the fact that the company itself clearly has not attended today because it did not know of today's hearing. It may well not have known of the claim that had been made in its name; that I know not, and that no doubt will be something which will give rise to consideration by the defendant as to whether or not it wishes to avail itself of the right which derives from striking out on non-attendance, that it may make application to set aside the order, if an application is promptly made and supported by evidence, including evidence as to the reasonable prospect of success at the trial."

So he struck out the counterclaim pursuant to rule 39.3(1)(c) of the CPR, ordered the defendant to pay the reserved costs of the claimant's claim and the claimant's costs of the counterclaim, and ordered that the defendant make an interim payment of £10,000 on account of costs by 26th February 2002.

8. Pausing there, three matters are immediately apparent: firstly, the merits of the counterclaim were not addressed, his Honour Judge Rich taking the view that it was appropriate to strike out the counterclaim simply upon the basis that the company had not appeared; secondly, the judge did not give any reason for ordering that the defendant company should pay all the reserved costs of the claimant's claim, notwithstanding the fact that the claim for damages had been abandoned; thirdly, the judge himself envisaged that the company might wish to apply to set aside his order under rule 39.3(5). Rule 39.3 provides, so far as material:

"(3) Where a party does not attend and the court gives judgment or makes an order against him, the party who failed to attend may apply for the judgment or order to be set aside.

(4) An application under ... paragraph (3) must be supported by evidence.

(5) Where an application is made under paragraph ... (3) by a party who failed to attend the trial, the court may grant the application only if the applicant-

(a) acted promptly when he found out that the court had exercised its power to strike out or to enter judgment or make an order against him;

(b) had a good reason for not attending the trial; and

(c) has a reasonable prospect of success at the trial."

9. In paragraph 11 of his judgment Mr Leaver QC pointed out that the three requirements in 39.3(5) are cumulative: thus the applicant had to satisfy the requirements of each of the sub-paragraphs (a) to (c) before the court's discretion could come into play.
10. So far as the requirement in sub-paragraph (b) is concerned, Mr Leaver was not impressed by the company's explanation for its failure to attend the hearing before His Honour Judge Rich, but said if this point had stood alone he would probably have allowed the appeal and exercised the court's discretion in the company's favour. He took the view that the claimant could have been compensated in costs for the company's failure to arrange appropriate representation and the consequential adjournment.
11. I endorse that conclusion. The facts of this case were somewhat unusual. Unlike certain cases where there is no appearance whatsoever, and no explanation is forthcoming, Mr Carter had appeared before His Honour Judge Rich. There is an issue as to the extent to which the defendant company is, in truth, his alter ego, but in any event it is plain that he was (prior to his disqualification as a director) allowed to represent the company on a number of occasions during the course of the litigation. As a bankrupt, he could no longer represent the company as a director, but having regard to the history of the proceedings, and in particular the extent of his involvement as advocate, and witness, on behalf of the company, the reasonable course, rather than striking out the counterclaim, would have been to adjourn for a short period (at the company's cost) in order to ascertain whether it did indeed wish to pursue the counterclaim that Mr Carter was seeking to advance on its behalf.
12. The CPR deliberately introduced a greater measure of flexibility into the ability of companies to choose their representative. They no longer have to be represented by directors, but may be represented by an authorised employee, whether or not that employee is a director, provided always that the court is prepared to grant permission: see CPR 39.6, which provides that:

"A company or other corporation may be represented at trial by an employee if-

(a) the employee has been authorised by the company or corporation to appear at trial on its behalf; and

(b) the court gives permission."

Practice Direction 39.5.2 explains:

"Where a party is a company or other corporation and is to be represented at a hearing by an employee the written statement should contain the following additional information:

(1) The full name of the company or corporation as stated in its certificate of registration.

(2) The registered number of the company or corporation.

(3) The position or office in the company or corporation held by the representative.

(4) The date on which and manner in which the representative was authorised to act for the company or corporation ... "

Practice Direction 39.5.3 explains that:

"Rule 39.6 is intended to enable a company or other corporation to represent itself as a litigant in person. Permission under rule 39.6(b) should therefore be given by the court unless there is some particular and sufficient reason why it should be withheld. In considering whether to grant permission the matters to be taken into account include the complexity of the issues and the experience and position in the company or corporation of the proposed representative."

13. His Honour Judge Rich did not consider the provisions of rule 39.6. Mr Leaver said that rule 39.6 was of no relevance because the advocate then acting for the company was "unable to put his finger" on any evidence that Mr Carter was an employee of the company. As I have indicated, the precise nature of the relationship between Mr Carter and the defendant company is far from clear, but it was being contended on his behalf before Mr Leaver that, as a layperson, Mr Carter had assumed that although he was disqualified from representing the company as a director, he would have been able to continue to represent the company as an employee. Whether there was or was not a genuine misunderstanding in that regard was not investigated by His Honour Judge Rich.
14. On behalf of the claimant, Miss Olley submits that the company did indeed know of the hearing on 29th January, and that there was no force in the alleged need raised by Mr Carter to obtain the sanction of the directors and trustees because in reality the company is nothing more than a front for Mr Carter. For my part, I would refrain from expressing any view about that aspect of the case, since one of the issues in the counterclaim is the extent to which Mr Carter was able to, and did, give consents to variations on behalf of the company. Although His Honour Judge Rich concluded that the company was "wholly unaware of today's hearing", in reality it is plain that the company, by one means or other, was made aware of the hearing by Mr Carter (despite the fact that he was by then a bankrupt).
15. That said, for the purposes of sub-paragraph (b) in rule 39.3(5) I am satisfied that to the extent to which the company was in realty a front for Mr Carter, it was unrealistic to say that it did not, but he did, attend the trial before His Honour Judge Rich, and to the extent to which the company is not a front for Mr Carter it seems probable that it did have good reason for not attending the trial (it believed, albeit mistakenly, that Mr Carter would be able to act as its representative).
16. I turn therefore to the requirement in sub-paragraph (a): did the company act promptly when it found out that the court had exercised its power to strike out its counterclaim? It will be noted that no time limit for an application under sub-paragraph (a) is prescribed in the rules. The requirement is that the application must be made promptly. What is prompt will depend upon all the circumstances of the case. Part of the factual background in the present case is the order of His Honour Judge Rich that the interim payment of £10,000 on account of costs should be made within 28 days. Although that is a wholly separate order, the judge nevertheless explained in his judgment that he was extending the usual period of 14 days to 28 days, bearing in mind that there might be an application made under rule 39.3.
17. Before Mr Leaver the company was represented by a solicitor advocate, Mr Biebuyck. In his witness statement Mr Biebuyck explained the steps taken by the applicant following His Honour Judge Rich's decision on 29th January:

"Mr Carter first contacted me by telephone on 7 February 2002 and we first met on 8 February when he delivered to me the considerable volume of documents relating to this action. Having had the opportunity to consider these documents, I advised Mr Carter by letter dated 15 February 2002 having given a summary of my views by telephone on 14 February. I telephoned the representatives of the defendant on the Isle of Man on 15 February but was unable to do more than leave a message. I wrote on 18 and 22 February, having spoken to a Mr Paul Winnell, accountant, on 21 February. In that conversation Mr Winnell confirmed to me that Mr Carter has the company's authority to give reasonable instructions. He told me that he had only recently taken over responsibility, and would give me full information as soon as he was able to. I have given him details of the steps taken in the action since I was instructed, including the order of 29 January. I have advised him of the instructions by Mr Carter to make this application. ...

Mr Carter instructed this firm within days of service of the Order on him. Since then I have made several attempts to speak to the defendant company in the Isle of Man, succeeding on one occasion and writing two letters. I have received the answer dated 26 February 2002 ... I had previously advised Mr Carter of the possible personal consequences if engaged in directing or management of a company contrary to Section 11 of the Company Directors Disqualification Act 1986, or for personal liability for costs if he is found to be acting without authority."

18. In the event the application to set aside His Honour Judge Rich's decision appears to have been signed on 27th February, but was not issued until 14th March, some six weeks after 29th January.
19. Mr Leaver said that the letter of 26th February 2002 referred to by Mr Biebuyck was not satisfactory. It was from a Mrs Winnell, who described herself as a director:

"It may be that she is a director of Corporate Secretary Limited, company secretary to the defendant company. It appears that the two directors of the defendant company are someone called Wackley and someone called Avis. In Mrs Winnell's letter, which is brief, what is said amongst other things is:

'Based on information provided by Mr Carter and the company's bank, together with assurances from long term creditors, we consider that the company is financially solvent.'"

Mr Leaver continued, in paragraphs 20 and 21 of his judgment:

"That, in my judgment, is wholly unsatisfactory. Mr Biebuyck says that he was not willing to act until he had received this letter. He cannot have received, in my judgment, much comfort from the letter.

In my judgment, there was a failure to act promptly and within the time limited by the CPR, and no adequate explanation for that failure and this application would fail on that ground."

20. I respectfully part company with Mr Leaver's views on this issue. There was no challenge to the accuracy of the procedural chronology that was set out in Mr Biebuyck's witness statement. Following His Honour Judge Rich's decision Mr Carter consulted Mr Biebuyck on 7th February. Given the considerable amount of documentation in this case, and the uncertainties surrounding the relationship between Mr Carter and the company, and the fact that the company is an Isle of Man company, it was readily understandable that Mr Biebuyck should have taken some time (about a week) to assimilate the facts and set out his summary views, and thereafter that he should have wished to clarify the company's position from those who were in the Isle of Man before taking proceedings any further. It may well be that the letter dated 26th February did not give him as much comfort as he would have wished, but it was still reasonable for him to seek such comfort as could be obtained and to wait for the company's response before making the application to set aside. As I have indicated, the procedural history of this case is by no means straightforward and in all the circumstances I am satisfied that the company did act promptly for the purposes of sub-paragraph (a).
21. Although prejudice to the claimant no longer forms any part of the test under rule 39.3(5), it is relevant to note that it was not being suggested that delay had caused any particular prejudice to the claimant, beyond the inevitable prejudice the longer this litigation drags on.
22. Turning to the requirement in sub-paragraph (c): what are the prospects of success at the trial of the counterclaim? Those prospects were not considered by His Honour Judge Rich. Mr Leaver set out the covenants in the contract of sale which were alleged by the counterclaim to have been broken. He then said this, in paragraphs 23 to 25 of his judgment:

"23. The counterclaim itself is an extremely vague and unparticularised document. The breaches alleged are that the house is on three floors instead of two, with windows in the third floor frontage and roof windows on the second floor roofs. All in all, it is said to be very much more imposing than the original drawings and the footprint is said to be larger. The garage is said to be ugly and unacceptable. The nature of damage is said to be twofold. First, of detriment to the environment of the surroundings, and secondly, an increase in the value of the built property to the detriment of the defendants, for the reason that any possible future potential enlargement was in effect specifically reserved for them in the pre-emption agreement.

24. As I have said, the counterclaim is vague, it is unparticularised, and in my judgment, having looked at the terms of the contract, hopelessly shadowy.

25. I have come to the conclusion that on the material present before me, there is no reasonable prospect of success on the counterclaim."

23. I respectfully disagree with those conclusions of Mr Leaver. The allegations made in the counterclaim may or may not prove to be correct. They are strenuously denied by the claimant, but I do not accept that the counterclaim can fairly be described as "vague", as "unparticularised", or as "shadowy". It is not drafted by a lawyer, but the complaints, whether justified or not, seem plain enough to me. One of the covenants which is alleged to have been broken is clause 2 in the third schedule to the transfer and is as follows:

"No building or structure shall be built on the Property save strictly in accordance with the Planning Permission and no alterations or additions shall be made to the said building or structure requiring planning permission or amendment to the Planning Permission shall be applied for by the Purchaser without the prior approval of the Vendor (such approval not to be unreasonably withheld)."

24. There is, as I understand it, no dispute that alterations and additions were made to the new house, and that certain of the alterations did require planning permission or an amendment to the original permission. The sole issue that divides the parties is whether they were made without the prior approval of the vendor. The alleged breaches by reason of the alterations made to the design of the new house are all set out in the counterclaim, and are summarised in paragraph 23 of Mr Leaver's judgment. The alleged failure to pay for water usage is set out, as is the alleged damage to the land drains (although it seems from the applicant's appeal statement that this last item is no longer being pursued).
25. It is not contended by Miss Olley that the counterclaim is misconceived as a matter of law. Rather, she invites us to conclude that there is no prospect of the company being able to establish that it did not consent to the variations that were made. This is, in essence, a factual dispute. There are conflicting witness statements, and the truth or otherwise of the parties' allegations in those statements has not been tested in any forum. It is relevant to note that the earlier application to strike out parts of the counterclaim, not merely under rule 3.4 but also under rule 24.2, was dismissed by Master Moncaster. The counterclaim was struck out by His Honour Judge Rich not because it had no real prospect of success (see rule 24.2) but on the sole ground that the company had not appeared. Absent any examination of the factual basis for the counterclaim, I do not understand how it could be concluded that it does not have a reasonable prospect of success at trial.
26. For these reasons, I am satisfied that the conditions set out in sub-paragraphs (a) to (c) in rule 39.3(5) were all met. I accept that the court still has a discretion: it may refuse to grant the application. I appreciate that the claimant is desperately anxious to bring this litigation to an end, but the fact remains that the defendant has a counterclaim and the issue for this court is whether it is right to prevent him from advancing that claim. Bearing in mind the overriding objective, to deal with cases justly, I am satisfied that it would not be right to exercise the court's discretion so as to prevent the merits of the company's counterclaim from being examined. It will be remembered that His Honour Judge Rich specifically envisaged that an application to set aside his order might well be made. While he mentioned the reserved costs of the claimant's claim, he gave no reason for awarding the claimant the totality of her costs (subject to detailed assessment) notwithstanding the fact that she had originally claimed not merely injunctive relief but also substantial damages, had pursued the latter claim after the bungalow had been demolished, and had subsequently abandoned that part of the claim. It may be that no extra costs were thereby incurred, but in my judgment this aspect of the matter, to which Mr Leaver made no reference, also deserves further consideration.
27. For my part, therefore, I would allow the appeal against Mr Leaver's decision and set aside so much of the order of His Honour Judge Rich as relates to the striking out of the counterclaim.
28. However, in exercising the court's discretion under rule 39.3(5), I am satisfied that His Honour Judge Rich's order that the company should make an interim payment of £10,000 on account of costs should stand. The court has been informed that the costs to date are very substantial. A figure of £50,000 has been mentioned by Miss Olley. On any basis the claimant was entitled to pursue her claim for injunctive relief (notwithstanding the fact that it was subsequently overtaken by events, so that declaratory relief sufficed). It is therefore appropriate for this court to order the company to make an interim payment of £10,000 as a condition of being permitted to reinstate the counterclaim.
29. Moreover, bearing in mind the fact that the company is based in the Isle of Man and it is that fact which gave rise to some of the difficulties, at least in terms of the time taken to make the application to set aside, and there is very little information as to the extent of the company's assets, it would also be appropriate to require the company to provide security for the future costs of pursuing its counterclaim. I would have in mind a figure of £10,000.
30. Thus, for my part, on condition that there was an interim payment of £10,000 and security for a further £10,000 in respect of costs was given by the company, I would allow the appeal.
31. LORD JUSTICE POTTER: I agree with the judgment of Mr Justice Sullivan.

ORDER: Appeal allowed; claimants to have their costs of the hearing before His Honour Judge Rich; the defendant to have the costs of the hearing before Mr Leaver; if the defendant makes the payments provided for in paragraph 2 of the order, then the defendant shall be entitled to his costs of the appeal, but if the said payments are not made and the counterclaim stands struck out, then the claimant shall be entitled to the costs of the appeal.

(Order not part of approved judgment)