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
QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE MARR-JOHNSON)

		Royal Courts of Justice Strand London, WC2
		4th October 2006

1. LADY JUSTICE ARDEN: This is an appeal against the order dated 2 December 2005 made by HHJ Marr-Johnson sitting as a judge of the High Court whereby (so far as material) the appellants, Fox Gregory, were ordered to pay the costs of the respondents, Hamptons. The costs, which are in issue in this action, are the costs of the action itself, and they were summarily assessed at £12,500 including Value Added Tax. The claim was for breach of confidence, breach of contract and inducing breach of contract, arising out of the alleged misappropriation by the first defendant, Mrs Spinks, of Fox Gregory's trade secrets, acquired during the course of her employment by Fox Gregory. The claimant, Fox Gregory, considered that Mrs Spinks had taken a large quantity of confidential information, as I will describe in a moment, and that she had conveyed it or intended to convey it to Hamptons, a direct competitor of Fox Gregory, to whose employment she had gone immediately following her resignation from the employment of Fox Gregory.
2. The relevant history is contained in correspondence starting on 15 November 2005. On that day Fox Gregory's solicitors, B D Laddie, wrote two letters, one to Mrs Spinks and one to Hamptons. The letter to Mrs Spinks is four pages. It starts by setting out the relevant provisions of her contract of employment, dealing with confidential information and in particular recited the provision in clause 9 of her contract that she should not disclose or use any confidential information except in the proper course of her duties. The contract also provided that, at the end of her employment, she should not disclose or use any of the company's trade secrets or other information which was of a sufficiently high degree of confidentiality to amount to a trade secret.
3. The letter went on to say that Fox Gregory had discovered that a large amount of information had been inappropriately obtained and used by Mrs Spinks, and in particular that a number of emails and attachments concerning confidential information had been sent to her private email address. They included some 14 items, one of which was the Japanese contact distribution list of Fox Gregory.
4. The letter went on to recite a non-solicitation clause and then sought various undertakings including an undertaking that she should, by 4.00pm on 17 November, return to the company all property, information and disks belonging to the company which she had in her possession or under her control. The letter said that if there was no satisfactory response Fox Gregory would apply to the court for interim relief, including an order for her to confirm on oath her answers to various questions set out in the letter.
5. Mrs Spinks had, by the date of this letter, become employed by Hamptons at their St John's Wood office, which was near to the offices of Fox Gregory. She took this letter to a Mr Glass at her new employers and (according to the judgment of the judge) he, according to her evidence, had simply advised her to ignore it.
6. On 15 November 2005, B D Laddie wrote a second letter to the directors of Hamptons. It enclosed the letter to Mrs Spinks, it set out the conditions of her contract of employment again and it asked for two things. It first asked for response to the question whether Mrs Spinks had delivered any information to Hamptons which she had unlawfully taken from Fox Gregory, and it also went on to ask for a written undertaking, by no later than 4.00 pm on Thursday 17 November 2005, that Hamptons would not seek to assist or support Mrs Spinks in any breach of her obligations to Fox Gregory. There was no reply by 4.00pm on 17 November. On 18 November there was conversation between a representative of Fox Gregory and a Mr Knowles of Hamptons, in which Mr Knowles led the representative to believe that Hamptons had taken advice and would be ignoring the correspondence.
7. There was a further letter written by B D Laddie on 18 November to both Mrs Spinks and Mr Knowles. In the case of Mr Knowles, the writer stated:

"We are most surprised that you claim to have taken legal advice which suggests that you have no case to answer and that you can simply ignore our correspondence. We believe you are very much mistaken."

The letter also went on to say that the writer had left a message on Mr Knowles' mobile phone, asking him to contact them, that is, B D Laddie.

8. On 21 November 2005, Hamptons wrote to B D Laddie. They stated that they would confirm that Hamptons would thoroughly investigate all the allegations outlined in the letter to Mrs Spinks on 15 November 2005. They went on to say that they had only just received a faxed copy of the letter of 15 November and that they required sufficient time to investigate the allegations, but aimed to respond in detail as soon as reasonably practical, and it concluded by stating that B D Laddie should not hesitate to contact them if they required any further assistance. No assurance was given, as requested, in that letter.
9. There was then on 22 November a letter from B D Laddie to Hamptons marked "urgent". This stated in material part:

"As we have not heard from you in accordance with the terms requested in our letter dated 15^th November 2005 we are now preparing to issue Proceedings against Yukari Spinks and Hamptons International for claims including breach of confidence, breach of contract and inducing breach of contract arising out of Yukari Spinks' misappropriate of our client's trade secrets during the course of her employment. The Application to the Court will be issued either later today or tomorrow and the return date on the Application is likely to be listed either on Thursday 24^th November or Friday 25^th November. We have now instructed Counsel for the Hearing and are dealing with the Application and evidence in support."

10. There is no further request in this letter for undertakings to be given, for instance, an undertaking that, when Hamptons have investigated the position, they will hand over any information given to them by Mrs Spinks which conforms to the description in their earlier letter. Nor, indeed, did Hamptons, on the other hand, ask for any clarification of what it was that Fox Gregory needed, although it was clear from that letter of 21 November that B D Laddie took the view that Hamptons had not responded in terms of the earlier letter, and that that was why they were proceeding.
11. On 23 November proceedings were issued and McCombe J shortened time for service, and on 25 November there was a hearing before Jack J. The second defendant gave undertakings to deliver up or destroy documents and to serve evidence. That evidence was to be served before 4.00pm on 29 November. There is no undertaking given not to induce a breach of contract, or not to communicate with Fox Gregory's clients, although that latter court order had been sought in the court application. So there were undertakings on this occasion and they did not cover all the items claimed in the notice of application, but there was no fight over the remaining matters.
12. At or about 4.00pm, on 30 November, Sandy Pollard's affidavits of the same date were served. In the case of the affidavit complying with paragraph 3 of the undertakings, Sandy Pollard stated that she confirmed that the second defendant had delivered up to the claimants certain material, which had been delivered to them by Mrs Spinks on 24 November 2005. This consisted of some 15 items including, as a second item, Japanese company telephone numbers. It was confirmed that Hamptons had no other documents from Mrs Spinks.
13. The return date for the application was 2 December but, after 6.00pm on 1 December, the claimants, Fox Gregory, told Hamptons they would not be proceeding with the application for injunctions and on 2 December, by consent between Hamptons and Fox Gregory, the action was dismissed.
14. The judge had before him applications by both sides that they should pay the costs of the matter. The judge ordered Mrs Spinks to pay Fox Gregory's cost but he declined to make that same order against Hamptons. He held that the issue of proceedings against Hamptons had been premature, that there was no evidence against Hamptons and that Hamptons had written saying it was investigating the matter and it was Fox Gregory who, in substance, had lost the proceedings because of their dismissal. In other words, he regarded Hamptons as, in substance, the winner.
15. Now there have been a large number of submissions on this appeal. We have not heard from the appellants in person but have from them a skeleton argument. They contend that they had to serve the proceedings to get undertakings and that they discontinued the proceedings because of the contents of the affidavit, which was undertaken to be served. They contend that there was an inadequate response to their letter before action -- that is the letter of 15 November -- and they said it was not enough for Hamptons to say that it was investigating the matter; it would certainly have said it would not be involved in any wrongful breach of Mrs Spinks's contract with Fox Gregory. As it was, Fox Gregory needed to take steps to protect itself, and the judge was wrong in saying there was no evidence on which proceedings could be started. It was a reasonable inference in all the circumstances that Hamptons would be involved in some way, especially when they did not reply fully to the letter for action.
16. The appellants recognise that a high hurdle has to be shown on an appeal against costs. They contend that there was an error of principle. The judge failed to take account of the measure of success Fox Gregory had achieved and was also wrong to say there was no evidence. There was circumstantial evidence, since it was clear that information had been appropriated by Mrs Spinks.
17. The respondents have been represented before us by Mr Choudhury, who has argued this matter persuasively and with skill. He contends that the respondents did not get sufficient time to investigate and that, once they had investigated, they were agreed to give the undertakings. They contend that the judge was right to say that Fox Gregory had to show that Hamptons were complicitous because they were alleged to be inducing breach of contract and the judge was right to say there was no evidence that Hamptons knew or ought to have known of the contract or of the transfer of confidential information. Moreover, and this has perhaps been his most fundamental point, the letter before action did not request an undertaking to deliver up documents or the other orders which had been sought in the application to the court. So, submits Mr Choudhury, the inadequacy was not that of the respondents, it was the inadequacy of the appellants in failing to seek adequate undertakings in their letter for action. Mr Choudhury developed these submissions, and I will refer below to some of the other points he made by way of amplification of these points.
18. I now turn to give my conclusions. I would endorse the point made by Mr James Laddie for the appellants that there is a high hurdle to be shown on an appeal against a judge's order for costs; such an order is a discretionary matter. It has been often said that, in general, the appellate function in relation to the judicial discretion on costs is that described in AEI Ltd v PPL [1999] 1 WLR 1507 at 152(3)(c) to (d):

"Before the Court can interfere it must be shown that the judge has either erred on principle in his approach, or has left out of account, or has taken into account, some feature that he should, or should not, have considered, or that his decision was wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale."

19. That, then, is the basic proposition. Mr Choudhury has referred us also to recent cases in this court, particularly the case of Promar International Ltd v Philip Clarke, Hallett LJ and Bennett J, [2006] EWCA Civ 332. That was a case where there had been a compromise of an action at trial in the course of the claimant's opening because the defendant volunteered the undertaking, which was the relief which the claimant wanted. However, they were not agreed on costs and the judge then had to decide what was the appropriate order for costs. One of the parties appealed. It would obviously be a complex matter to determine where the costs should lie in action that was never fought, and the test which was put forward by the court as applicable in that situation was whether the judge's order was manifestly unjust. The court cited the judgment of Mummery LJ in BCT Software Solutions Ltd v C Brewer & Sons Ltd [2003] EWCA Civ 939. Mummery LJ, after setting out the general proposition which I have already set out, said:

"15. There are the additional special circumstances mentioned earlier. In the absence of manifest injustice, an appellate court should not interfere with a discretion, which is not been exercised at the end of the trial, as is usually the case, but with the agreement of the parties when they have settled the case."

20. This is not a case where the judge had to exercise a discretion with the agreement of the parties. He was dealing with applications that had been made to him as a result of the concessions made by the claimant on that occasion, but it was a case where it was, as Mr Choudhury accepts, relatively straightforward for the court to investigate who had won and who had lost, because it all turned on the correspondence and the steps taken within a short period of time, and in any event in this case it was alleged that there were errors of principle, or if there were errors of principle, then it seems to me that it would be a case where manifest injustice would be shown. But, for my own part, I prefer to base my decision, in this case, on the general statement of the appellate function in the AEI case, which I take to be the applicable test for the purposes of a relatively straightforward matter such as the matter before the judge.
21. As I have indicated, the errors of principle which are alleged are, in essence, two. First, the judge was wrong to conclude that there was no evidence against Hamptons, and secondly that the judge was wrong to regard Hamptons as effectively the winner. I will develop these points in more detail below, but first I need to go to the appellant's argument that Hamptons' response to the letter before action was inadequate. The respondents had said that they would investigate the matter; they had not in turn dealt with the specific matters requested in the letter of 15 November. If there was any doubt about that matter, that was mentioned again in the letter of 21 November. Mr Choudhury has argued that B D Laddie could have given Hamptons another 24 hours to consider giving the assurance that had then been sought, but of course once one says there should be another chance, it is difficult to know where the line should stop. Clearly, Hamptons had been given an express request to deal with the matter and they had, unhappily, not dealt with it. I quite accept that they may not have appreciated the importance of it, but it was squarely put and I do not think that the appellants can be blamed for not going back and giving them another 24 hours in all the circumstances.
22. I want to say a little bit more about those circumstances. The respondents argue that it was not squarely put to them that they would be asked to deliver up confidential information that was to be delivered to the court. However, it seems to me important to bear in mind the commercial reality of this situation and what was happening at this point in time. Fox Gregory had lost the services of Mrs Spinks, and she had gone to another estate agent in the exact same area who was a direct competitor of theirs.
23. When the court is examining the adequacy in response to a letter before action, in my judgment the court must bear in mind the perspective of the person who receives that response. As Fox Gregory had made clear to Hamptons, they were of the opinion that Mrs Spinks had removed confidential information. They had also had a telephone conversation with Mr Knowles in which he had made it clear that Hamptons effectively thought that there was no need for them to take any action. They had also had, it seems to me, at best a non-committal response of 21 November that Hamptons were investigating the matter, and of course this is in some senses a promising reply, but it gave no credit to the matter being urgent and made no attempt at giving the assurance which had been sought.
24. Hamptons had had the letter of 15 November, which specified a considerable amount of information which Mrs Spinks was alleged to have taken. Hamptons should, in my judgment, have seen that if Mrs Spinks gave them any of that information, they would have to hand it over to Fox Gregory as, in due course, they did give some limited information. We are told that on 25 November counsel for Hamptons told counsel for Fox Gregory that they had only got this amount of information, which was later handed over, and that it would be handed over, but one has to remember that by 25 November proceedings had been started and indeed undertakings had been given.
25. On the receipt of the letter of 21 November 2005, Fox Gregory had, as Mr Choudhury accepted in his argument, to make a judgment as to what to do next. In my judgment, their response was to write back to Hamptons and state that, in the light of their reply, they would issue a proceedings and to go on, in due course, to issue those proceedings was a reasonable step to take. Moreover, in my judgment, the interim relief which they sought in their application was reasonable and there was nothing untoward in the form of that interim relief, which took it totally out of the order of the relief which they had indicated they would be seeking. Every day counted so far as Fox Gregory was concerned. It is well known that it is difficult and costly to prove misuse of confidential information and loss arising from that matter once those matters actually occur. Accordingly, in my judgment the respondent's submission that their response to the letter before action was adequate does not succeed.
26. They further contend that the application sought wholly new forms of relief; they refer in particular to the delivery-up of information, with which I have already dealt, and also to the fact that in paragraph 8 of the application, Fox Gregory sought an order that Hamptons should not communicate with clients named in listed confidential communications which, they contended, had been removed by Mrs Spinks from their offices. Mr Choudhury's submission is that this matter was an indirect enforcement of the restrictive covenant which, he contended, would be vulnerable to challenge and he also submitted that it went well beyond the undertakings previously sought and that no previous indication had been given of that matter. He also submits that the form of order sought was far too wide; it should have been restricted to a restraint on dealings with clients of the claimant, so far as that was being done on the basis of any confidential information extracted by Mrs Spinks.
27. The fact of the matter is that, although paragraph 8 had not been indicated in the earlier correspondence and although there would have to be some discussion about the width of that provision, the claimants, Fox Gregory, did not insist on that paragraph, and it is not a surprising part of an application of this kind. In those circumstances, to my mind, little turns on paragraph 8 of the application. The real problem was that in the response to the letter before action, Hamptons had not given any indication of what they would do, although, as I have said, they would accept the fact that they agreed to investigate the matter showed some promise.
28. The next question is whether it would be possible to say who was the winner and who was the loser. The only issue, in my judgment, was whether interim relief in the form of the undertakings would have been given if the undertakings had not been given. That, as I see it, is the substance of the issue before the court on 29 November. As I have explained, no significant costs were incurred on the other matters. In my judgment, if one looks at that issue then it is clear that the winner was Fox Gregory, rather than Hamptons, because Hamptons had to give those undertakings, and for this reason I would take the view that the judge was wrong in principle to say that Hamptons was substantially the winner.
29. The return date on the 2 December was simply a follow on from the application on the 25 November. The position is that one of the undertakings included the giving of an undertaking and all the matters were adjourned until after that affidavit was given. That affidavit was served, we are told, about 4.00 pm on 30 November. It was not until after 6.00pm on the following day, 1 December, that Fox Gregory indicated they would not be proceeding for the application for relief. In my judgment it was reasonable for Fox Gregory to take a little time to consider the evidence and that they should not be penalised in costs because they had not come back, as Mr Choudhury submitted they should have done, at the start of business on 1 December.
30. I turn back to the undertakings of 25 November. It cannot, in my judgment, be correct to say, as the respondent would argue, that these undertakings were but a minor matter. The fact is that the costs of applying to the court for a hearing on that date would have been avoided if there had been a more positive and promising response to the letter before action. The obtaining of the undertakings was, in my judgment, a significant success and thus, as I have explained, the judge's exercise of discretion amounted to an error of principle when it took no account of this substantial success. The point about paragraph 8, as I explained, was effectively conceded.
31. I now have to deal with the point whether the judge was correct to say there was no evidence against Hamptons. In my judgment, Mr Laddie is correct that there was plenty of circumstantial evidence. Fox Gregory knew that Mrs Spinks had taken copies of large quantities of material and had gone to work at Hamptons at their St John's Wood office, only 400 metres from Fox Gregory's office. It was a reasonable inference that she would communicate some of that information to her new employer, as she had no other way of using it. In my judgment, it is not an answer, as Mr Choudhury suggests, that Fox Gregory should have had some evidence that Hamptons were actually contacting the clients of Fox Gregory. It was not necessarily taking the realistic view to say Fox Gregory have to wait until that happened.
32. In all these circumstances I consider that the court has to re-exercise the discretion that was available to the judge. In my judgment Fox Gregory should have had the costs of the application on 25 November and they were, moreover, entitled to continue the proceedings until they obtained the affidavit evidence and considered it. In my judgment they withdrew as soon as they had had a reasonable chance to consider that evidence and, having done so, they should not be penalised in costs.
33. Accordingly, I would make an order giving them the costs of this action.
34. LORD JUSTICE TUCKEY: I agree. The result is that the appeal is allowed. The judge's order for costs as between the claimants and the second defendants will be discharged and the claimants will have their costs against the second defendants of the action.

Order: Appeal allowed.