England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE CHANCERY DIVISION
MR JUSTICE CARR
HQ12CO2182

		Royal Courts of Justice Strand, London, WC2A 2LL
		08/08/2014

Lady Justice Gloster :

1. On 23 July 2014 I heard an application by the Respondent and Defendant in the action, Knowledge Pool Group Limited ("the Respondent"), for an order for security for the costs of the appeal. On 24 July 2014 I made an order for security for costs under CPR Rule 25.15 in the sum of £50,000 but otherwise in the terms of the draft order attached to the application notice dated 16 April 2014. I made an order that the appellants in the appeal, and claimants in the action, Seakom Limited and Seakom International Limited (together "the Appellants"), do pay the Respondent's costs of the application which I assessed at £16,000. These are my reasons for that order.
2. The Appellants appeal against the judgment of Carr J [2013] EWHC 4007 (Ch) whereby she held against the Appellants in relation to their claim for commission on certain sales. The facts relating to the action are fully set out in her judgment. The claim involved a dispute that centred around a website called Coursemonster (www.coursemonster.com). This is a database and search engine for professional training courses. The dispute which arose was in relation to an agreement between the parties, referred to as "the Channel Agreement", whereby, in outline, the Respondent would provide the staff to deal with enquiries and booking requests coming from Coursemonster. In return for this service, the Respondent would be paid 60% (in some cases 50%) of the profits from sales. The dispute that arose was in relation to precisely which sales would come within the scope of the Channel Agreement and qualify for the agreed profit split as between the Respondent and the Appellants. The Appellants argued that as soon as a person, firm or company made an enquiry through Coursemonster, that person, firm or company became a "Lead" as defined in the Channel Agreement forever after, with the result that any future transaction as between the Respondent and the third party, irrespective of whether it was made by reference to the website, was subject to a commission payable to the Appellants. The Respondent, on the other hand, argued that this interpretation was absurd and that it was not consistent with the literal wording of the agreement. The Respondent submitted that the Channel Agreement provided simply for the Appellants to receive commission on any particular booking made via Coursemonster. In the alternative the Respondent put forward an argument that there was an estoppel by convention, on the basis that the parties acted during the course of the contract in a manner inconsistent with the Appellants' construction of the Channel Agreement as to which transactions were liable to result in commission payable to the Appellants.
3. In her judgment Carr J found in favour of the Respondent's construction of the Channel Agreement on three grounds:

i) First, she held that the literal wording of the contract was consistent with commission being payable on single transactions coming from Coursemonster;

ii) alternatively, if she was wrong in her analysis of the literal construction of the agreement, and there was indeed ambiguity in the relevant terms, she held that the Respondent's interpretation was to be preferred because it was the more commercially reasonable, on the application of the principle recognised in Rainy Sky v Kookmin Bank [2011] 1WLR 29 100;

iii) alternatively, if both findings were incorrect, the Appellants' argument would lead to commercial absurdity and so could not have been what the parties intended; in this respect she applied The Antaios [1985] AC19 1.

4. The judge also indicated that, had it been necessary to do so, she would have rejected the Respondent's alternative argument on estoppel. She directed that an account should be taken on that basis to ascertain when commission should have been payable but had not been paid, as the Respondent accepted that, on occasions, it had failed to pay commission on specific transactions. On the basis of the judge's construction the Respondent's view was that the quantum of the justified claim was likely to be small and estimated its liability as under £10,000. On the other hand the Appellants take the view that, on the basis of the judge's construction, the claim is worth only £505.
5. The Appellants appealed on two grounds:

i) First, that the judge was wrong in her finding on the literal meaning of the relevant contractual terms; and

ii) Second, given the literal interpretation, the judge was wrong to conclude as a matter of law that she could have looked beyond that meaning on account of commercial absurdity.

6. By order made on the papers by Moore-Bick LJ dated 14 February 2014, the Appellants were given permission to appeal. Moore-Bick LJ ordered a stay of the order made by Carr J on 18 December 2013 (which effectively gave directions for the taking and hearing of the account) otherwise than in relation to inspection and disclosure. Carr J made no order for the costs of the liability trial other than to reserve the costs.
7. At the time that the original claim was issued on 30 May 2012, the Appellants benefited from an ATE insurance policy to a limited indemnity of £190,000 (the "Original ATE Policy"). However there was no conditional fee agreement and the Appellants bore and continue to bear their own costs. On 29 January 2013 the Respondent issued its first application for security for costs on the basis that the Original ATE Policy was not sufficient in light of the anticipated costs of the proceedings. Ultimately the Appellants accepted that additional security should be given. On 26 March 2013 they obtained an uplift in the indemnity of the ATE Policy to £350,000 ("the Uplifted ATE Policy"). On 9 April 2013 the Appellants obtained a deed of indemnity operating to guarantee payment of £250,000 in favour of the Respondent of the amount of Uplifted ATE Policy.
8. As a result of certain matters coming to the attention of the Respondent before, during and after the trial of the liability issues, a further application for security was made by notice dated 16 April 2014, seeking security in the sum of £70,000. The grounds on which security was sought in the second application were as follows:

"a. Under CPR 25.13(2)(a): The Second Appellant is resident outside the jurisdiction, and is not resident in Brussels Contracting State, a State bound by the Lugano Convention or a Regulation State (as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982).

b. Under CPR 25.13(2)(c): The Appellants are companies and there is reason to believe that they would be unable to pay the Respondent's costs if ordered to do so.

c. Under CPR 25.13(2)(g): The Appellants have taken steps in relation to their assets that would make it difficult to enforce an order for costs against them."

9. As to ground 1, Mr Joseph Giret QC, who appeared on behalf of the Appellants on the application (but who did not appear at trial), accepted that this condition had been satisfied in relation to the second appellant ("International"), which is a company incorporated in the British Virgin Islands and managed in Hong Kong. There is no doubt that there would be additional costs incurred in enforcing a costs order against International in Hong Kong and/or in the British Virgin Islands.
10. So far as the second condition as set out in CPR 25.13 (2) (c ) is concerned, I am satisfied that, despite the arguments advanced by Mr Giret QC, there is every reason to believe that the Appellants would be unable to pay the Respondent's costs of the appeal, if the appeal was unsuccessful.
11. So far as the first appellant ("Seakom") is concerned there is every reason to suppose it is insolvent. Its most recent accounts as at 31 March 2013, dated and signed 31 December 2013, show a deficiency of £61,704. The sole director and owner of both the Appellants, Mr Kelvin Durcan, in his witness statement dated 30 May 2014, does not dispute that Seakom no longer trades and is effectively dormant, save for participating as a co-claimant in the litigation. He accepts that Seakom has no real assets of its own and that its ability to raise funds for the purpose of meeting an order for security for costs is substantially impaired. He makes it clear that Seakom is not in a position to apply for any loans at the present time as it is not currently trading.
12. The financial position of the second appellant, International, also appears to be very weak. The company's accounts for the period ending 31 March 2012 showed net assets of HK$ 1,158,675 which equated to about £80,000. In paragraph 13 of his witness stated dated 30 May 2014 Mr Durcan explained that International does not prepare or file formal accounts and therefore "they are not available". He attached copies of International's bank statements for the period from May 2011 to January 2013 which, he explained, demonstrated that there has been very limited turnover in the company but that it is solvent. The bank statements produced purportedly show net assets held at the bank as at 19 January 2013 of HK$282,270.02, which is a substantial reduction since the earlier date. A statement from International's managers, RYA Management Limited, confirmed that, whilst as a BVI business company International does not have an obligation to prepare or file financial accounts, it does have an obligation to keep sufficient records at any time to enable the financial position of the company to be determined with reasonable accuracy. It is of note that International has not chosen to provide any records or management accounts which would demonstrate the current financial position of International.
13. As Mr Michael Clark, counsel appearing on behalf of the Respondent submitted, by reference to a witness statement made by the Respondent's solicitor, Mr Richard Manyon, in support of the application, it is highly likely that the financial position of International has deteriorated since March 2012 given the ongoing costs of the proceedings. The Appellants' costs schedule filed on 7 October 2013 estimated that their costs at the end of the trial would be £488,106.96. There were subsequent hearings after judgment itself. It would appear that the ongoing funding of the Appellants' own costs of the litigation is being met by Mr Durcan from his own resources or by a third party. He has recently mortgaged his property at 66 Windsor Drive High Wycombe to loan the proceeds of the mortgage to the Appellants for the purposes of enabling them to pay their own legal fees in respect of the proceedings. It would appear from paragraph 20 of Mr Durcan's statement dated 30 May 2014 that the Coursemonster website is now being managed by an associated company CM Innovation Limited ("CMI"), also owned by Mr Durcan and that its income is to some extent financing the Appellants' ongoing costs. Mr Durcan states that

"The income further reduced in mid-2009 once the KGL Channel Agreement was terminated by the Defendant, who retained many of our clients in contravention of the clear terms of the agreement. Since then, I have worked hard to build up the business. However, CM Innovation Limited, who now handles our outsourced sales, is barely breaking even on its turnover over of approximately £1.1m, making a net profit of just £907.00 in the last accounting year. This has meant that the 40% commission that Seakom International Limited has earned on paper on the gross profit generated from the CourseMonster Web site (of approximately £293,000) had to be immediately loaned back to CM Innovation Limited to pay its staff and administration costs. This has been largely how we have been operating since the KGL Channel Agreement was terminated and until and unless CM Innovation Limited is able to make a significant profit from operating the CourseMonster Website this is how we have to continue to operate."

14. Accordingly, on the evidence I am also satisfied that the second ground upon which the application is based, namely that there is reason to believe that the Appellants would be unable to pay the Respondent's costs of the appeal if ordered to do so, is satisfied.
15. In coming to this conclusion I take into account the submissions of Mr Giret on behalf of the Appellants. In summary he submitted in relation to the issue as to the Appellants' ability to meet the cost of the appeal as follows:

(1) that the £350,000 available under the Uplifted ATE Policy will be more than sufficient to provide for the Respondent's costs of the appeal, should the Appellants lose the appeal;

(2) that the Respondent's estimated total costs of the trial at first instance of £719,000 to £800,000 were excessive and would be substantially reduced on detailed assessment;

(3) that, in any event, since on the basis of the judge's construction of the Channel Agreement, the Appellants, according to their calculations, will only recover £505 by way of commission, any costs order made against the Appellants in respect of the liability trial would be proportionate to that recovery and would be well under the £350,000 covered by the Uplifted ATE policy;

(4) the Respondent's estimated the costs of the appeal in the sum of £91,000 were also excessive when compared with the Appellant's estimated costs in the far more modest sum of £21,000.

For these reasons submitted Mr Giret, the court cannot be satisfied that the Appellants would be in a position to pay the Respondent's costs of the appeal were the appeal to fail, as there would be sufficient cover in the proceeds of the uplifted ATE Policy.

I do not accept Mr Giret's submissions. In circumstances where the main thrust of the Appellants' submissions at the trial before Carr J was to the effect that their construction of the agreement would result in a commission claim for millions of pounds, it is highly unlikely that Carr J would award the Respondent trial costs fixed by reference merely to the sum of £505. The Respondent was faced with meeting a claim for many millions of pounds. That was not what I read her as saying in the passages in the transcripts to which I was referred. Even on the assumption that the Respondent's costs will be severely cut down on a detailed assessment, in circumstances where the Appellants' own estimate of costs which they have incurred in relation to the trial is in the region of £480,000, the Respondent's costs are unlikely to be reduced substantially below that figure. There is thus already a serious risk that the £350,000 available under the Uplifted ATE Policy (in relation to which only £250,000 is subject to a direct indemnity in favour of the Respondent) will be insufficient to cover the trial costs. Apart from that point, the Policy does not expressly cover the costs of an appeal.

16. Even if it could be said that the Respondent's costs of the appeal are over-estimated in the sum of £91,000, I have no doubt that such costs together with the costs of enforcement in Hong Kong and/or the British Virgin Islands are likely to be substantial and seriously in excess of the estimate of £21,000 given by the Appellants for their costs.
17. For those reasons I am satisfied that the Respondent has made out its case that it is unlikely that the Appellants would be able to pay the Respondent's costs of the appeal if ordered to do so.
18. I am also satisfied that the grounds set out in CPR25.13(2)(g) are satisfied. It is clear from the evidence that (for whatever reason) the Appellants have taken steps in relation to their assets which will make it more difficult to enforce an order for costs against them. The Respondent's investigations have revealed that a community trademark (EU001091016) for the word-only version of the Coursemonster mark has been assigned to Mrs Deirdre Eagling, Mr Durcan's mother. In addition, two domain names (www.coursemonster.com and www.coursemonster.net) beneficially owned by International, and legally by Seakom have also recently been transferred to Mrs Eagling. Mr Durcan says that this was in connection with Mrs Eagling financing the Appellants' on-going costs of the litigation. However there are nonetheless a number of inconsistencies and question marks raised by Mr Durcan's explanation of these transactions and no documentary evidence in relation to the transfer of these assets has been produced. There is no explanation on the basis of which the Appellants continue to use the trademark and domains now that they are purportedly owned by a third party.
19. In addition Mr Clark rightly draws attention to the evidence that the business of Coursemonster is now being handled by another company owned by Mr Durcan, namely CMI. Although CMI is, according to Mr Durcan, supposed to pay 40% of the gross profits generated by Coursemonster to International, CMI has apparently as from the year ended 31 March 2012 ceased paying over such commission. According to Mr Durcan such amounts had ceased to be paid on the basis that supposedly CMI "could not afford the commission". The date of 31 March 2012 was around the date that the Appellant started proceedings against the Respondent. It appears to be somewhat surprising that the commission, which is in the region of several hundred thousand pounds, is being deferred in circumstances where, according to the press release on the Coursemonster website in August 2013, the website had "smashed their own quarterly profits record" and that profits were "up 35% in July 2013". That sits with some difficulty alongside the statement in paragraph 20 of Mr Durcan's witness statement quoted above that CMI is barely breaking even on its stated turn over of approximately £1.1 million.
20. For those reasons, I am satisfied that the Respondent has demonstrated that the necessary jurisdictional threshold for the court to award security has been satisfied on this ground also.
21. I turn now to consider the question of discretion. Mr Giret QC submitted that on the basis put forward by Mr Durcan (in particular to Mr Durcan's own personal inability to raise funds or provide a guarantee or give security) it would not, having regard to all the circumstances of the case, be just to make an order. He submitted that any order would stifle the Appellants' appeal.
22. The relevant principles when the court is deciding whether to order security in the case of a company were explained by Gibson LJ in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 ALL ER 534 at 539-540. Although that case was a pre-CPR decision, the cases show that the principles which operated before the CPR came into effect remain relevant to the exercise of the discretion under the CPR: see Al Koronky v Time - Life Entertainment Group Limited [2006] EWCA Civ 1123 at [14].
23. As the court explained in Keary at page 540 and at page 542, it is incumbent on a claimant to satisfy the court that, in all the circumstances, it is probable that the claim would be stifled by an order for security for costs.
24. I am not satisfied on the evidence before me that Mr Durcan has put forward sufficient or sufficiently strong evidence to satisfy this assertion. He has clearly been disposing of assets (such as trademarks and domain names) and the equity in his house to fund the Appellants' own costs of the litigation. The Coursemonster website is clearly generating a substantial turn-over out of which it is to be assumed that Mr Durcan is being paid a salary. There are serious questions over the deferment of the commission payments owed by CMI to International. I am not satisfied on the evidence before me that, if required to do so, the Appellants, Mr Durcan or a third party would not be in a position to put up security.
25. I consider that, in all the circumstances of this case, and in particular given the ability of the Appellants to date to fund their own costs, it is just and proportionate to award the Respondent security for its costs of the appeal. In the circumstances it appeared to me that the sum of £50,000 was an appropriate figure to award, taking into account the Respondent's costs of the appeal to date, the likely future costs and the likely costs of enforcing a judgment in Hong Kong and/or the British Virgin Islands against International.
26. I summarily assessed the Respondent's costs of this application in the sum of £16,000. That sum reflected what clearly had been the considerable investigatory costs incurred by the Respondent in ascertaining (so far as it was possible to do so) what had become of the various assets owned by the Appellant and Mr Durcan personally.