England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(His Honour Judge Richard Seymour Q.C.)
1HQ/06/0861 & HQ06X03499

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 July 2007

Lord Justice Moore-Bick

1. This is an appeal against an order of His Honour Judge Richard Seymour Q.C. sitting as a Judge of the High Court ordering the appellants, UK Coal Plc, UK Coal Mining Ltd, Centechnology (UK) Ltd and Mr. Mark Weston, to pay the respondents, SES Contracting Ltd and SES Holdings Ltd, their costs of a successful application for disclosure before the commencement of proceedings under CPR 31.16.
2. SES Contracting Ltd is a company which provides specialist mining, tunnelling and other civil engineering services to the mining and construction industries. SES Holdings Plc is its parent company. It is convenient to refer to these two parties together as "SES". UK Coal Plc is the successor to the British Coal Board and as such is responsible for the operation of the remaining deep coal mines in the United Kingdom. Its wholly-owned subsidiary, UK Coal Mining Ltd, is its principal operating company. I shall refer to these two companies together as "UK Coal".
3. For some years prior to 2006 SES carried out specialist tunnelling and mining operations for UK Coal, including the first phase of a substantial development at Kellingley Colliery. Until he left SES in July 2005 Mr. Mark Weston was its chief executive and as such was involved from time to time in commercial discussions and negotiations with managers and others employed by UK Coal.
4. In early 2005 UK Coal came to the conclusion that it would be preferable from a commercial point of view for many of the services which it had previously obtained from contactors such as SES to be provided from within its own organisation. In the event it decided to make use of the third appellant, Centechnology (UK) Ltd ("Centech"), then a non-trading wholly-owned subsidiary, to provide such tunnelling, mining and similar services as it might require in the future. However, work of that kind calls for specialist equipment and a highly skilled workforce, as well as managers with a suitable degree of operational experience, and resources of that kind were not widely available. The judge found that by the middle of 2005, or thereabouts, SES was well on the way to becoming a monopoly supplier of the kind of services which it offered to UK Coal. UK Coal was not SES's only client, but it was by far its largest.
5. In April 2006 SES tendered for the second phase of the development at Kellingley and in informal discussions with employees of UK Coal it was given clearly to understand that it would be awarded the contract. However, to its surprise and consternation on 3^rd May 2006 the contract was awarded to Centech, whose tender had apparently been based on achieving a rate of progress of 24 metres a week tunnelling in sandstone. SES considered that that was wildly optimistic and that in any event Centech was not technically equipped to carry out the work. The first of these assessments appears to have been well-founded because it subsequently transpired that Centech achieved only about 3 metres progress a week and that the contract was renegotiated to substitute a cost plus price for the original fixed price. All this made SES very suspicious about the manner in which the tender had been conducted. It suspected that Centech had been given access to the details of its tender, thereby enabling it to compete on an unfair basis, and that it had made representations to UK Coal about its ability to carry out the work which could simply not be sustained. Those suspicions were reinforced by the fact that, having obtained the contract, Centech attempted to recruit skilled workers employed by SES. There may also have been more general suspicions that Centech, as a subsidiary of UK Coal, had been treated in a preferential manner.
6. By July 2006 SES was sufficiently confident of its ground to instruct its solicitors to write to UK Coal accusing Centech and Mr. Weston of committing various legal wrongs against it and seeking disclosure of documents in the possession of UK Coal under the principles set out in Norwich Pharmacal v Commissioners of Customs & Excise [1974] AC 133. That letter, which it is unnecessary for present purposes to quote in detail, elicited a response from UK Coal's solicitors flatly rejecting the request. At that point, of course, whatever its suspicions, SES was not alleging that UK Coal itself had acted unlawfully in any way.
7. However, in September 2006 Mr. William Shinkins, the chairman and principal shareholder of SES Holdings, made contact with a Mr. Nicholas Bradley who had at one time been a business associate of Mr. Weston. He had since fallen out with Mr. Weston and in due course he provided Mr. Shinkins with copies of certain e-mails which Mr. Weston had sent to various people while he was still employed by SES. These came to play an important part in the application, for reasons which will become apparent.
8. Two of these e-mails assumed particular importance before the judge. The first was sent by Mr. Weston to Mr. Bradley on 29^th May 2005 and contained the following passage:

"I have been summoned to a meeting with UK Coal on Friday to discuss me running their in-house contracting company that they have already incorporated, we need to make sure we've got a cut of this action as this takes AMCO and SES out of the frame totally."

9. The second was sent on 7^th June to Mr. Spindler, the chief executive of UK Coal. Attached was a memorandum headed "Options Regarding UK Coal In-House Contracting" which included the following passages:

"The size of the mining contracting market is now clearly defined as regards numbers following the recent closure of the Selby Coalfield. The expected reduction in total Contractors numbers has not materialised partially due to the move to flexible working arrangements that has absorbed UK Coal employees. This has allowed a gap in the market that fortuitously has held the core employees. It is essential in the current UK climate to be able to hold a core of key skill sets for the salvage of longwalls, development of roadways, specialist stone work and repair of roadways.

. . . . . . . . . .

To my mind two basic options are available . . . . . .

Option One: UK Coal continues with the plan to incorporate and roll-out an in-house contracting company to fulfil the short term needs of winders and artisan specialists to cover maintenance at non-social working times.

In due course the scope of the NEWCO's works expands and incorporates general contracting with a gradual reduction in contractors' workloads namely those of AMCO & SES Contracting Ltd.

MWCO [a reference to a company owned by Mr. Weston] takes a 50/50 (for the sake of this scenario) equity share in the NEWCO and builds an operational, administrative and commercial team to run the new company as a separate legal entity. Site costs and administrative costs are included in the costs build up, MW remuneration and holding company expenses excluded.

Advantages: (1) Low start up costs and flexibility to grow; (2) Ability to recruit on as needs basis with possible re-allocations from within UK Coal utilising costs savings; (3) A clear break from the TUPE implications in new un-contracted business areas; (4) Perceived as a division of UK Coal from a corporate perspective to the Board.

Disadvantages: (1) Attraction of the correct people to run the NEWCO will be hindered by the current incumbent contractors due to their diversity of business interests and ability to relocate resources internally; . . . . . . . . . .

Option Two. UK Coal employs MW on a temporary basis as a consultant. On day one after MW leaving SES (NEWCO) approach SES to buy the Assets and Liabilities of SES Contracting Limited. This will include the order book, plant assets, creditors, debtors and employment liabilities. Not the share capital, in this way, any injury/disease claim liability will remain with SES Contracting and formally Specialist Engineering Services. (Reference Company Structure).

Equity share arrangements as in Option One.

SES Contracting has a management structure that is working inclusive of Site Staff: administration, quantity surveyors and estimators. Any additional resource required would be wage roll and accountancy, which can be inter-traded with UK Coal.

Advantages: (1) A ready made business is up and running that achieves the same ends as the generic NEWCO; (2) The company works with the current people and can be added to or reduced easily as workloads demand; (3) The business operates in areas outside UK Coal which can give short term external cash and longer term areas for smoothing resource requirements; (4) Company has works with National Trust, English Heritage, Corus, Tarmac Northern and Store Norske Spitsburgen Grubekompani; (5) 80 potential employees at Tower with possible transfer potential to Dawmill in part; (6) It is a recognisable entity, even with a name change, to the contracting work force employed within UK Coal currently.

Disadvantages: (1) The price to pay for business, in light of the substantial forward order book being unavailable the purchase price should be nominal; (2) The TUPE costs which on the work force of 256 employees would be in the region of £400k. The 80 employees at Tower are covered by a secured trust of £336k held by Williamsons in Hull; (3) One or two immediate redundancies would be required with no accrual possibility.

In short my preference would be Option 2 with the comfort factor in that it is an entity that I am confident that can deliver from Day One and no ramp up.

I enclose, confidentially, up to date accounts for SES Contracting. This gives an indication of my realisation of the medium term projection for NEWCO. The Tower contracting work to reduce in the next 24 months due to natural exhaustion, being more than replaced by take up in the market from existing contract and on going requirement.

. . . . . . . . . .

On this basis I would be interested in taking either proposal forward and would not be averse to UK Coal having the controlling interest in one or two percentile points. Providing suitable protection was provided in the shareholders' agreement to prevent un-agreed buyout, liquidation and suitable lock-in that reflected the commitment to the arrangement.

I trust this is of interest to yourselves and look forward to your further communication."

10. Attached to the options document were various confidential financial documents belonging to SES, including a summary of some departmental management accounts. Mr. Shinkins said that following the failure of SES to obtain the contract for the second phase of work at Kellingley Mr Weston did indeed approach SES with an invitation to purchase its business for £1.
11. To cut a long story short, these e-mails not only tended to confirm the suspicions already harboured by SES about the manner in which Centech had obtained the contract for the work at Kellingley, but also provided grounds for thinking that, even while still employed by SES, Mr. Weston had been colluding with UK Coal with a view to stealing its business. They also, therefore, provided grounds for thinking that SES might have a claim against UK Coal itself. However, the position was not entirely clear and so it was thought wise to obtain access, if possible, to documents in the possession of UK Coal which, it was thought, would clarify the position one way or the other. Accordingly, on 23^rd November 2006 SES made an application for disclosure under Part 31.16 of the Civil Procedure Rules. (A separate application was also made against the first and second respondents for Norwich Pharmacal relief, but was barely discussed at the hearing and no further reference need be made to it for the purposes of the appeal.)
12. The application was resisted by UK Coal which filed a number of witness statements taking issue with the assertions made by SES and dealing with the circumstances in which Centech had been awarded the contract for the second phase of work at Kellingley. Mr. Weston also filed a statement which went into matters at some length. However, none of the witnesses exhibited to their statements any documents, despite the fact that there must in the nature of things have existed in the possession of UK Coal documents which both shed further light on and (if the statements were true) supported what the witnesses were saying; and that turned out to be their undoing when the judge came to deal with the costs of the application.
13. At the end of a hearing lasting the better part of three days the judge was satisfied that that SES had satisfied all the requirements of rule 31.16(3). He therefore ordered UK Coal and Centech to disclose 15 categories of documents sought by SES, limiting the scope of each category to documents created between 1^st January 2005 and 30^th September 2006. In Mr. Weston's case he limited the order to 8 of the 15 categories on the grounds that it was superfluous to make an order against him in relation to the other 7. There is no appeal against those parts of the judge's order.
14. The judge then had to deal with costs. After hearing further argument he ordered that UK Coal should pay the costs of the application in their entirety, though not the costs of complying with the order. He gave the following reasons:

"83. Bearing in mind that it is now very late in the day, I am going to give a very short reason for the conclusion to which I have come, which is that the Respondents should pay the Applicants' costs of the application. The reason is this. It was plain to the Respondents what were the facts upon which the Applicants were basing themselves in seeking the relief which they have achieved, because the Respondents decided to prepare extensive witness statements in opposition to the application. There can have been no lack of certainty on their part as to the facts upon which the Applicants were seeking to rely.

84. There has been a bit of dancing around in relation to what the legal consequences of those facts might be, but that, in my judgment, does not point to it being inappropriate to make the order which I have indicated. The fact of the matter is that the Respondents have chosen to react to the application partially by preparing extensive witness statements, making clear indications of the position of each witness as to the accuracy of the facts, but without seeking to support that position by producing any documents. They have sought to create a position, as it seems to me, and deliberately sought to create a position, in which the Applicants were confronted by a wall of witness statements which looked impressive and intimidating. However, having agreed to that extent to engage in the process of responding to the Applicants' concerns, they have declined to go so far as to produce the documents which I have ordered should be now produced. In other words, they have sought to fend off the Applicants without providing contemporaneous documents which might have allayed their concerns. For those reasons, briefly stated, the Applicants should [have] their costs of the application against the Respondents."

15. Later the judge added these comments:

". . . . . each of the Respondents adopted the position of preparing a witness statement, giving an account of matters which, if correct – and I am not in a position to say whether it is correct or not – meant that the complaints of the Applicants were [not] well founded. They had the option, as it seems to me, as I pointed out in my judgment, to have volunteered contemporaneous documents in support of their evidence in their witness statements. They chose not to do that but to stand on the witness statements. That, in my judgment, was unreasonable because they had elected to engage with the Applicants' concerns at one level, but had limited the extent to which they were prepared to do so. In other words, they could have said, "We are not going to get involved in the merits of all of this at this stage, but we want to take the point that supplying documents at this stage is not justified or premature" or something like that. That they have taken a step forward when they should either have stood still or taken two steps forward is perhaps a homely way of explaining the position as it seemed to me. "

16. Mr. Moriarty Q.C. submitted on behalf of UK Coal that in ordering his clients to pay the costs of the application the judge had gone farther than the circumstances of the case could possibly justify. He drew our attention to the terms of rule 48.1(2) and submitted that, provided he does not act unreasonably, a respondent to an application of this kind is entitled to require the applicant to justify his claim by resisting the application as he thinks fit without being at risk as to costs. He drew our attention to the case of Bermuda International Securities Ltd v KPMG [2001] 1 Lloyd's Rep. PN 392 in support of the submission that the court has never gone further than ordering the respondent to an application of this kind to bear its own costs. Mr Béar Q.C. submitted that it was unreasonable for UK Coal to oppose the application at all, or, at any rate, unreasonable for it to do so without supporting its case with any contemporary documents, and that the judge had ample grounds for ordering it to pay all the costs.
17. CPR Rule 48.1 provides that, where a person makes an application for disclosure before proceedings, the general rule is that the court will award the person against whom the order is sought his costs of the application, but that the court may make a different order having regard to all the circumstances, including the extent to which it was reasonable for the person against whom the order was sought to oppose the application. Although a respondent to an application may incur some costs merely in considering what response to make to an application of this kind, in most cases he will only incur substantial costs if he opposes it. By laying down a general rule that the respondent will be awarded his costs, therefore, I think that the Rules implicitly recognise that it will not usually be unreasonable for him to require the applicant to satisfy the court that he ought to be granted the relief which he seeks. The reason for that (if it be necessary to find one) lies, I think, in a recognition that a private person who is not a party to existing litigation which brings with it an obligation of disclosure is entitled to maintain the privacy of his papers unless sufficient grounds can be shown for overriding it and that it is for the person seeking to invade that privacy to justify doing so. At all events, the rule is clear in its terms and provides the point of departure for a judge dealing with the costs of an application of this kind.
18. Mr. Béar recognised, of course, that rule 48.1(2) provides the starting point, although he was inclined to suggest that applications of this kind are becoming almost routine and that the court should not be slow to treat opposition to them as unreasonable. I would not myself accede to that proposition. No doubt in some types of case a degree of disclosure before proceedings has become routine – for example, the disclosure of the patient's records in clinical negligence actions – but the present case does not fall into any such category. The real question which arises in this case, therefore, is whether it was unreasonable for UK Coal to oppose the application at all, and if not, whether its conduct in relation to the application was capable of justifying the order the judge made.
19. I can deal with the first of these questions quite shortly. The claim that SES contemplates making against UK Coal in this case is not by any means of a routine nature. This is not, therefore, the kind of case in which there is an established approach to the investigation of a dispute that may in due course lead to litigation so that one can say with confidence what steps the potential defendant should take. Moreover, the allegations being levelled against UK Coal by SES are of participation in a dishonest conspiracy to steal its business. In paragraph 58 of his judgment in Black v Sumitomo Corporation [2001] EWCA Civ 1819, [2002] 1 WLR 1562, the leading authority on disclosure before proceedings, Rix L.J. doubted whether a prospective claimant could easily say that an allegedly fraudulent respondent had failed to co-operate by refusing disclosure in response to unspecific and unverified (because as yet unpleaded) allegations. I agree and by the same token I do not think that it could easily be said that it was unreasonable for the respondent to resist the application. In my view it cannot be said in this case that it was unreasonable of UK Coal to oppose the application, and indeed, as I read the judgment, that was not the view taken by the judge himself. What carried weight with him was not the fact that UK Coal had resisted the application but the manner in which it had done so.
20. Mr. Moriarty criticised the judge's reasoning on the grounds that it was internally inconsistent and illogical. It is clear both from paragraph 84 of his judgment and from his additional comments that he would not have considered it unreasonable for UK Coal to oppose the application without entering into a debate on the merits of the allegations being made against it, but that he did think it unreasonable for it to dispute those allegations without providing supporting evidence in the form of the very documents to which the application related.
21. In my view Mr. Moriarty's criticism is well-founded. If it was reasonable for UK Coal to oppose the application at all, it was surely entitled to decide on what basis and with what evidence it wished to do so, provided only that it did not take a wholly unreasonable course which unnecessarily increased the costs. If the respondent to an application of this kind decides to contest the allegations against him on the basis of witness statements unsupported by any contemporaneous documents, he runs the risk that the court will place less weight on that evidence than it might otherwise have done, but in my view that does not of itself make his behaviour unreasonable. In the present case, as Mr. Moriarty observed, the judge seems to have been saying that UK Coal had to give the disclosure sought by SES if it wanted to engage on the merits at all. If that was all there was to it, I would find it difficult to accept that UK Coal was open to criticism of any kind.
22. However, that was not all that there was to it. Reading paragraph 84 of the judgment as a whole, I think it is reasonably clear that the judge did think that UK Coal had behaved unreasonably in the manner of its opposition to the application. The argument on costs came at the end of a long day and I have some sympathy with the judge who sought to state the reasons for his decision as succinctly as he could. He referred to the fact that UK Coal had, as he put it, deliberately confronted SES with a wall of witness statements which looked impressive and intimidating, thereby seeking to fend it off without providing any of the documents that might have allayed its concerns. After a lengthy hearing the judge had found that SES had solid grounds for supposing that Mr. Weston may have been in breach of his fiduciary duties to SES and that he and UK Coal may have colluded to create Centech to the prejudice of SES. I detect in that comment more than a hint of a criticism that UK Coal had acted unreasonably in that it had both added to the costs of preparation and prolonged the hearing without putting forward objective evidence in the form of contemporaneous documents that would have given its case real substance.
23. The question then is whether that provided sufficient grounds for ordering UK Coal pay the whole of SES's costs of the application. Mr. Béar reminded us that a judge has a wide discretion in the matter of costs and that an appellate court should not interfere with his exercise of that discretion unless it is satisfied that he has failed to take into account a relevant factor, had taken into account an irrelevant factor, or reached a conclusion that was plainly wrong. He also submitted that the judge may well have taken into account matters which he did not specifically mention but which lent additional support to his decision.
24. I accept Mr. Béar's submission as to the approach the court should take, but in my view the judge did fail to have sufficient regard to an important factor, namely, the general rule that the respondent to an application of this kind is normally entitled to his costs. Although he referred to rule 48.1(2) at the outset of his judgment on costs, he does not appear to have fully appreciated its significance or considered what kind of conduct would justify the court in going so far as to order the respondent to bear the whole of the costs. In that context he does not appear to have taken account of the fact that a not insignificant part of the applicant's costs are likely to have been incurred in preparing and issuing the application and filing evidence in support of it. I think it is dangerous to assume that the judge had in mind matters to which he did not refer unless there are cogent grounds for doing so. The fact is that, short of ordering UK Coal to pay the costs of SES on the indemnity basis, the judge's order was the strongest available to him. If one is starting from the position set out in rule 48.1(2) one would expect an order of this kind to be made only in a case where it was clearly unreasonable for the respondent to oppose the application or where the manner of his opposition was so unreasonable as to make it appropriate to require him to bear the whole of both parties' costs. Although Mr. Moriarty sought to place some reliance on the case of Bermuda International Securities Ltd v KPMG [2001] 1 Lloyd's Rep. PN 392, in which the judge made no order for costs where the respondent had unreasonably resisted the application "root and branch", I do not find that case very helpful. This court only had to be satisfied, as it was, that it was open to the judge to make that order; whether he could justifiably have gone further was a question that did not arise. In any event, each case is different and decisions on costs must reflect the particular facts of the case, taking into account rule 48.1 (2) and the policy behind it.
25. For the reasons I have given I am persuaded that the judge's exercise of discretion in this case was flawed and that this court must exercise its own discretion in the matter. After nearly three days the judge was well placed to assess not only the nature of the evidence filed by UK Coal but also the extent to which its approach to the application had affected the preparation for the hearing and the hearing itself. I see no reason to differ from his assessment and I would therefore approach the question of costs on the basis that the criticisms he made were well-founded. In my view there was ample material to justify a departure from the general rule, but not to the extent of ordering UK Coal to pay the whole of SES's costs. I would set aside his order and substitute no order as to costs.

Lord Justice Moses:

26. I agree.

Lord Justice Waller:

27. I also agree.