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 CHICHESTER COUNTY COURT
(HIS HONOUR JUDGE BARRATT)

		Royal Courts of Justice Strand London, WC2
		12th January 2007

1. LORD JUSTICE CHADWICK: This is an appeal from an order made on 2 June 2006 by HHJ Barratt QC sitting at Chichester County Court on an application by Mr Terence Dowling and others, trading as the Joseph Dowling Partnership, for a third party costs order against Mr Alan Phillips, a director and substantial shareholder in Alan Phillips Associates Limited. The application followed the successful defence by the Joseph Dowling Partnership of proceedings brought against them by the Phillips company. The judge made the third party costs order sought. Mr Phillips appeals to this court with permission granted by Sir Christopher Staughton on 27 June 2006.
2. Mr Phillips is an architect. Until September 1999, if not thereafter, he carried on practice under the firm name Alan Phillips Associates. At that time, and until 2001, the defendants ran a nursing home (or residential care home) at premises known as 39 – 41 Willbury Villas, Hove. In August 1999, they appointed Mr Phillips as architect to a development project involving an extension and internal alterations at that property. Mr Phillips' letter accepting that appointment, which is dated 10 August 1999 and which is on the headed stationery of the firm, explained that the firm's professional services were regulated by the Royal Institution of British Architects and the Architects' Registration Board. The significance of that statement was that the architects' code, Standards of Conduct of Practice, issued by the Registration Board required that architects should not undertake professional work without adequate and appropriate professional indemnity insurance cover.
3. The company, Alan Phillips Associates Limited, was incorporated on 15 September 1999. The directors were Mr Alan Phillips and his wife Mrs Christine Phillips. Mr Alan Phillips was the secretary. He held 70 of the 100 issued shares. The remaining 30 shares were held by Mrs Phillips. It appears from September 1999 or thereabouts the architectural practice was carried on by the company; although, as the judge found, Mr Phillips continued to use the firm name Alan Phillips Associates, "in whatever capacity he has purported to act as an architect from time to time". The stationery used by the company was almost indistinguishable from that used by the firm, save for the word "limited", which appears under the words "Alan Phillips Associates" in small print. The VAT registration number, 699400303, as it appears on the stationery of both the firm and the company, is the same number.
4. On 27 April 2007 Mr Alan Phillips wrote to Mr Terence Dowling, on the stationery of the company, to accept appointment as architect and designer of a further project at the premises 39 - 41 Willbury Villas. The circumstances in which that appointment was made are explained by Mr Dowling in a witness statement dated 28 February 2006. He said this, at paragraphs 3 and 4:

"3. The other defendants and I formerly ran a nursing home from commercial premises at 39 – 41 Willbury Villas, Hove ('the property'). Prior to 2001, we decided to close the nursing home business and convert the property into residential flats (the 'development'). We consulted Mr Phillips about this proposal as he had previously acted for us in 1999 in relation to a rear extension to the property.

4. On obtaining planning permission for the conversion Mr Phillips wrote to us on the claimant's headed notepaper on the 27th April 2001 setting out the terms on which his Company would act as our architect, surveyor and project manager. We accepted these terms, but did not really give much thought to the identity of the party that we had appointed. So far as the other defendants and I were concerned Mr Phillips would be taking charge of the project as our architect."

The letter of 27 April 2001 contains a paragraph in these terms:

"We confirm that we maintain professional indemnity insurance cover of £250,000 for any one occurrence or series of occurrences arising out of one event and this will be the maximum of our liability arising out of this agreement."

Mr Dowling countersigned that letter under the endorsement:

"The client wishes to appoint Alan Phillips Associates Limited as the architect and designer for the project and the architect has agreed to accept such appointment and to perform the services upon and subject to the terms set out in this letter of appointment."

5. The insurance position as at that date or shortly thereafter -- as now appears from the policy schedules and a verification dated 3 August 2001 issued by RIBA Insurance Agency Limited -- was that professional indemnity insurance to a limit of £250,000 was in force in the name of the firm but not in the name of the company. That remained the position until 23 April 2002. From 24 April 2002 to 23 April 2003 the assured named in the policy schedule was Alan Phillips Associates Limited. Thereafter for the years 2003/2004, 2004/2005 and 2005/2006 both the company and the firm were named as the assured.
6. In or about September 2002 the defendants, the Dowling Partnership, excluded the architect from the site at 39 – 41 Willbury Villas. These proceedings were commenced on 16 April 2003 by the issue of a claim form in the Worthing County Court. The claimant named in the claim form was Alan Phillips Associates: that is to say, the claimant was Mr Phillips personally suing under the firm name. The claim was for architect's fees said to be due to the claimant under a letter of instruction dated 5 October 2001. In fact the letter was dated 9 October 2001. It was signed by Mrs Christine Phillips, pp Alan Phillips, but was on the company's stationery. It referred simply to an invoice; and to an agreement to the balance of the fees being paid at the end of the project. The balance of the fees said to be due under that letter was £48,000 or thereabouts.
7. On 23 July 2003, shortly after the defendants had instructed solicitors, those solicitors wrote to the claimant's solicitors in these terms:

"We write to advise you that we are taking counsel's opinion in this matter and would put you on notice that we may be making a claim of negligence against your client. In this regard we should be obliged if you would provide us with your client's insurance details and request that you put the insurance company on notice of the intended proceedings."

That letter was followed by a letter of 28 August 2003. That referred to the earlier letter of 28 July, noted that there had been no response to that letter, sought confirmation that the claimant's solicitors had notified insurers of a potential professional negligence claim, and requested that insurance details be provided. The response to that was a short sentence in a letter of 1 September 2003 from the claimant's solicitors: "The question of insurance is entirely a matter for our client and his advisors". The defendant's solicitors made another attempt to obtain the information. On 4 September 2003 they wrote in these terms:

"We are considering bringing the insurers into this matter as a third party and consequently require their details. Your client's correspondence to us clearly sets out an insurance indemnity of up to £250,000 and is a term of the contract. We have put you on notice that a potential negligence claim exists and we require the insurers' details to ensure that any potential order for damages received in favour of our client will be met. If you do not assist in this simple request we shall have no choice but to make an application for disclosure of this information and seek the costs incurred against yourselves."

That too received a brusque answer from the claimant's solicitors. They wrote on 10 September 2003:

"The question of our client's insurers is with the greatest respect one for our clients. At the moment you have raised what the district judge considered to be unspecified and vague allegations of negligence. Absent these we consider your request is mischievous and simply designed to cause our client problems with his insurers. You state that you will be making an application to the court. There is no legal basis whatsoever upon which such an application can be made."

8. The insurance position as at September 2003 when those letters were written, as I have already explained, was that during the period up to 23 April 2002 the assured had been the firm -- that is Mr Phillips personally -- and during the  year  to  23  April  2003 the assured had been the company. In  September 2003  both  Mr  Phillips and the  company were named as assured.
   
9. Mr Phillips did not notify the insurers. The reasons for what was, plainly, a deliberate decision not to do so appear at paragraph 7 of his witness statement dated 22 April 2006:

"I was first asked by the defendant's solicitors as to the company's insurance position by letter of 28 July 2003. At this stage I had had an excellent claims record and was aware that premiums were highly sensitive to claims' history. In my view I saw this as another tactic by the defendant to muddy the waters and I made a commercial decision – wrongly with hindsight – not to report the matter to the insurers or to give any details."

10. The proceedings had been before the district judge on 20 August 2003, on the claimant's application for summary judgment. It appears that the defendants had been acting in person. They had filed a defence which the district judge regarded as inadequately particularised. He struck out that defence; but he refused summary judgment. He directed the defendants to file a fully pleaded defence and counterclaim, if any, by 26 September 2003. The defence and counterclaim were in fact filed on or about 20 October 2003. It is clear from the pleaded defence and counterclaim that the defendants thought (as was the case) that the claimant was Mr Phillips personally and not the Phillips company. Paragraph 2 of the defence asserts that the claimant is a chartered architect. Paragraph 3 refers to a contract made on 27 April 2001 between the claimant and the defendant; without, it seems, recognising that that contract was made by the company. Paragraphs 7 and 8 refer to the duty of the claimant to exercise skill and care in the performance of his services under the contract. The defence, in substance, was that Mr Phillips had failed to exercise all due professional skill and care in the performance of his services. That failure, it was said, had led to a substantial overrun both in time and costs in respect of the project. The project was the conversion of the former care home into nine flats. Further, it was said, Mr Phillips had ordered additional work to be done by contractors, and had ordered additional materials to be supplied, without consulting the defendants and without obtaining their authority. The cost of the additional work and materials were said to amount to some £59,000. The defendants counterclaimed under CPR part 20 in respect of the additional and unauthorised expenditure and for damages for breach of contract and negligence.
11. The proceedings came before District Judge Edwards at Worthing County Court on 9 July 2004. Both parties were represented by solicitors. Paragraph 1 of the order made by the district judge on that day was in these terms:

"Alan Phillips Associates Limited be substituted as the claimant and re-service dispensed with."

It is probable that the application to substitute the company for the firm as claimant was prompted by a realisation -- a rather belated realisation -- that the contract on which the claimant sued, as evidenced by the letter of 27 April 2001, had been made with the company and not with Mr Alan Phillips personally. The position is briefly explained in paragraph 4 of a witness statement made on 7 April 2006 by Mr Nigel Desoutter, the claimant's solicitor:

"The proceedings were issued originally in the trading name Alan Phillips Associates. This was an error. The proceedings should have been issued in the name of Alan Phillips Associates Limited trading as Alan Phillips Associates. This error was corrected by the order of District Judge Edwards on 9 July 2005. My recollection of that hearing is that there was no serious objection to our application."

12. If Mr Desoutter is correct in his view that the company had traded under the name "Alan Phillips Associates", then the position (on the judge's finding at paragraph 11 of his judgment on the current application) is that both Mr Phillips and his company were trading under the same name. In an attendance note of the hearing of 9 July 2004, Miss Lee, the solicitor acting for the defendants noted:

"Attending the Worthing County Court for the case management conference on Friday 9 July 2004. Discussing draft directions with Nigel Desoutter before the hearing. Noting that Mr Desoutter wishes to amend the claimant to Alan Phillips Associates Limited. I am not happy with this. He is unable to show me the copy of the contract although he can show me a copy of the letter of appointment which may have been some time after the contract which says in the small print at the bottom that the clients are contracting with Alan Phillips Associates Limited. Unless we have sight of the contract I shall not agree to it. Going into the hearing this point was raised first by Mr DeSoutter to District Judge Edwards noting that District Judge Edwards agreed that the claimant is entitled to call himself whatever he wishes and allowed for the change of name to limited. However District Judge Edwards allowed permission to amend the defence by reason of the substitution by 4pm on 6 August 2004. Noting that the defendant is insured." [emphasis added]

It may well be that the last sentence is an error, in that there seems to have been no reason why Miss Lee should note that her own client was insured, if indeed they were. But there were obvious reasons why she should note that the claimant was insured.

13. Two comments may be made on that attendance note. First the suggestion by the district judge that the claimant was entitled to call himself whatever he wished indicates that the district judge, at least, thought that there was no material distinction between Mr Alan Phillips and the Phillips company for the purposes of these proceedings. Second, the question of insurance was clearly raised -- whether that last sentence is an error or not. But the defendants were not told that the claimant's insurance might be voided by the claimant's failure to notify the insurers.
14. With hindsight, the substitution on 9 July 2004 was of some importance. Up until 9 July 2004 it would have been open to the defendants (had they thought of it) to take the point that the claim against them was made on a contract to which the claimant Mr Alan Phillips was not a party. They did not take that point, no doubt because they were quite content to meet that claim by their own counterclaim against Mr Alan Phillips personally: he being the person whose negligence was relied upon to found the claim in tort in the counterclaim. But, when the substitution was made so as to enable the company to bring a claim, it seems to have been overlooked that the effect would be that there was no longer a counterclaim for negligence in the proceedings against Mr Alan Phillips personally: he was no longer a party. And, if the defendants were really minded to give up their counterclaim against Mr Alan Phillips personally, the insurance position was critical. They must have believed (if they understood what they were doing) that the insured party was the company and not Mr Phillips personally. More to the point, when the district judge was asked to make that substitution it was essential that the true position was explained to him. Clearly it was not.
15. The proceedings came on for trial in December 2005 before HHJ Barratt. By the order which he made on 21 December 2005, he dismissed the claim and gave judgment for the defendants on the counterclaim -- directing that the assessment of damages should stand adjourned for trial on a date to be fixed not later than 4 February 2006 and reserved to him -- he gave the defendants their costs of the claim and counterclaim and he made an order for the payment of interim costs in the sum of £20,000 by 4 January 2006.
16. In the course of his judgment on 21 December 2005 HHJ Barratt said this, at paragraph 15:

"The defendants' counterclaim for damages they allege he was negligent. He failed to exercise a duty of car he owed here to supervise competently. He failed to exercise the reasonable standard of care of a competent and careful supervising architect in his performance. Compensatory damages are claimed. Quantum is adjourned to await the determination of liability."

And, at paragraph 31:

"Thus although some of the additional costs incurred may be attributable to the negligence of the claimant and caused by him some of the additional costs were inevitable. It will be for the defendants to establish at the hearing whether all the losses they seek to recover were caused by the negligence of the claimant. Some may have been incurred by the defendant in any event wherever the project was executed."

It seems clear from those observations -- in which he referred to the claimant as "he" and "him" -- that the judge was not making any distinction in his mind between the corporate and individual claims.

17. The present application -- which is undated but must have been made about 28 February 2006 -- sought an order that Mr Alan Phillips be added as a party to the action for the purposes of costs pursuant to CPR rule 48; that there should be a third party costs order that Mr Phillips be liable for all the costs that Alan Phillips Associates Limited is liable to pay; and that the costs of the costs applications should be provided. The reasons for seeking that relief are set out in these terms:

"(1) that there is a causal link between the funding provided by the additional parties and the costs incurred by the claiming party;

(2) the additional parties being company officers of the claimant stood to benefit from the litigation controlled and directed it and started it personally; and

(3) the claimant failed to advise the defendants' professional advisers of the material fact that, if disclosed, would have led to advice that the defendants' case was hopeless, in that the claimant had failed to claim on its insurers and had no sufficient means to meet the defendants' counterclaim and is insolvent."

The terms in which these reasons are set out suggests, perhaps, that there may have been some intention to link both Mr and Mrs Phillips as parties to the application; but in the event it is only Mr Phillips who is the respondent.

18. The judge gave judgment on that claim on 18 April 2006. At paragraphs 10 and 11 he said this:

"10. I also note that the architect had initially practised and may indeed still operate as a firm. He was known as 'Alan Phillips Associates' ('the firm'). This was apparently the trading name which he used when first instructed by the defendants in August 1999. This date was prior to the incorporation of the consultancy which is a private limited company not incorporated until 15^th September 1999. It has now ceased trading following judgment in the action. I do not know whether Alan Phillips continues to practice under another name. Both the firm and the consultancy appear to have the same VAT number according to the headed notepaper.

"11. On the balance of probability I am satisfied on all the evidence which has been before me during this case that Alan Phillips has professionally continued to use the title, 'Alan Phillips Associates' in whatever capacity he has purported to act as an architect from time to time. He has done so interchangeably in whatever capacity he was acting."

The judge set out a number of factors which led him to that conclusion.

19. At paragraphs 25 and 26 the judge referred to the failure to notify the insurers of the claim:

"25. It was only for the first time in January 2006 were the defendants' solicitors informed that in fact Mr Phillips had failed to notify the insurers of the claim in 2003.

"26. It was not revealed until Mr Phillips' statement dated 2^nd April 2006 which was filed only immediately prior to this application being heard that this was a deliberate decision by Mr Phillips personally in September 2003. That decision was never reviewed or reconsidered by him or by the claimant or his or its legal advisers."

His comment on that decision at paragraph 36 of his judgment:

"36. In my judgment to fail to do so is neither reasonable or responsible; to decide quite deliberately to leave the underwriter ignorant of a potential claim is unwisdom of significance. I am driven on anxious consideration to conclude that such behaviour is unfair to another party in litigation especially litigation which the professional has initiated in his personal capacity. I must therefore conclude that in the absence of some compelling consideration to the contrary I really ought to exercise my jurisdiction in favour of the defendants' application."

20. The jurisdiction to which the judge was referring to in that passage is the jurisdiction under section 51 of the Supreme Court Act 1981 to make order for costs against a person who is not a party to the action. The jurisdiction has been exercised in a number of recent decisions in this court, and in one decision of the Privy Council. In particular, as the judge noted, it has been considered in Taylor v Pace Developments [1991] BCC 406; in Metaloy Supplies v MA UK Limited [1997] 1 WLR 1613; by the Privy Council in Dymocks Franchise Systems NSW Pty Limited v Todd and Others [2004] UKPC 39, [2004] 1 WLR 2807; and most recently by this court in Petromec Inc v Petrolio Brasileiro SA Petrobras [2006] EWCA Civ 1038.
21. It is, I think, helpful to have in mind the observations of Longmore LJ in that last case, which are set out at paragraphs 10 to 16. It is unnecessary to set out those paragraphs in this judgement; but it is important to note that Longmore LJ cautioned against over-analysis of the authorities. He observed that, essentially, the decision whether or not to make a third party costs order under section 51 of the Supreme Court Act 1981 lay in the discretion of the judge -- who ought usually to be the trial judge as the judge having the best knowledge of the circumstances -- and that the appellate court should be cautious before intervening to reverse that exercise of discretion.

Laws LJ said this at paragraph 19:

"I would wish to emphasis my agreement with Longmore LJ's statement that the exercise of this jurisdiction becomes overcomplicated by reference to authority. Indeed I think it has become overburdened. Section 51 confers a discretion not confined by specific limitations. While the learning is with respect important in indicating the kind of considerations upon which the court will focus it must not be treated as a rule book."

22. With that guidance in mind, I confine myself to noting that Longmore LJ, with whom the other members of the court agreed, endorsed the approach of Rix LJ in Goodwood Recoveries v Green [2005] EWCA Civ 414. Rix LJ had said this:

"The law has moved a considerable distance in refining the early approach of Lloyd LJ in Taylor v Pace Developments. Where a non-party director can be described as the real party seeking his own benefit controlling and/or funding the litigation and even where he has acted in good faith and without any impropriety justice may well demand that he be liable in costs on a fact sensitive and objective assessment of the circumstances."

23. In my view the judge in this case was entitled to reach the conclusion that he did for the reasons that he gave. This does seem to me to be a case in which there is so close an identity between Mr Alan Phillips and the Phillips company -- and so close an identity between the interests of Mr Phillips and the interests of the company -- that it is just to make a third party costs order against Mr Phillips personally.
24. The features which seem to me of importance are these. First, the close identity between Mr Phillips and the company illustrated by the following matters: (1) the continuation of Mr Phillips' own architect's practice by the company incorporated by him and of which he and his wife are the sole shareholders and directors; (2) the close similarity of the stationery used by the company, calculated to give rise to a belief that there had in fact been no change in the identity of the person carrying on the practice; (3) the adoption by the company, it seems, of the same VAT number as the firm had used in its business; (4) the way in which the insurance policy was switched from Mr Phillips to the company, and then to both of them; and (5) the fact that the confusion was such that the solicitors themselves, instructed by Mr Phillips, thought that these proceedings should be brought by the firm and not by the company.
25. The way in which this business was carried on -- and in particular was carried on by Mr Phillips in his relationship with earlier clients of his firm, the Dowling Partnership -- seems to me to indicate that he intended there to be an apparent identity between himself and the company for all practical purposes. That is how matters must have appeared both to the district judge in July 2004 when he made the substitution order which he did, and to HHJ Barratt in the judgment which he gave in December 2005.
26. Second, the fact that Mr and Mrs Phillips are not only the directors but also the whole beneficial owners of the Phillips' company, has the effect that any claim brought by the Phillips company is plainly a claim for their benefit and, in particular, for the benefit of Mr Phillips.
27. Third, the position which Mr Phillips took in relation to the notification of the insurers. As he put it in his own witness statement, his concern was with his own record of claims. If he wished to continue to practice as an architect, he would have to continue to maintain an insurance policy -- probably with the same insurers, the RIBA Insurance Company -- and it seems clear from his own statement that his decision not to notify the insurers of the claim was taken, not with a view to the benefit of the company, but with a view to improving or maintaining his own position as an architect with a claim-free record.
28. Finally, as it seems to me, there is the stance taken before the district judge in July 2004: when the application for substitution was made on behalf of Mr Phillips and his company without revealing either to the district judge or to the defendants the important consequences which that substitution might have in relation to the negligence counterclaim against Mr Phillips personally, and the possibility that that claim would not be covered by insurance as a result of the alterations in the named assured in the policy, and the failure to notify the insurers. It seems to me inconceivable that the district judge would have made the order which he did make if he had not been led to think that it was not going to effect the insurance position. If he had thought the substitution would have the effect of denying to the defendants the benefit of the architect's insurance cover, the district judge could not have endorsed the proposition that "the claimant is entitled to call himself whatever he wishes".
29. For all those reasons this does seem to me to be a case in which the way in which Mr Phillips has conducted his affairs through the Phillips company makes it unjust for him now to seek to rely on the separate legal personality of that company in order to avoid a liability for costs which, looking at the matter in the round, he plainly should bear.
30. For those reasons I would dismiss this appeal.
31. LORD JUSTICE MOSES: I agree. I add only that there is now an abundance of authority on the absence of any need for abundant authority on the principles which should guide a judge as to whether to make a third party order for costs. I emphasise, only when agreeing with my Lord, Lord Justice Chadwick's reasons for dismissing this appeal, that such appeals should be rare, since this court should not interfere with the judgment of a judge as to the propriety of such an order unless the judge plainly erred. The injustice of Mr Phillips' position is plain: either he made a conscious decision not to inform the insurers for his own benefit or there was so little difference in his own mind between the limited company through which he practiced or the firm in his own name that he made no effective distinction between the two.

Order: Appeal dismissed.