England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE TEARE

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/02/2017

This is the judgment of the Court to which all its members have contributed:

Introduction

1. This is an appeal against two judgments of Teare J. The main issue before Teare J (and now, with the permission of Christopher Clarke LJ this court) is whether Mr James Devine for the claimant and Mr Tom Welo for the second defendant agreed in a telephone conversation of 29^th November 2011 that the second defendant would pay the claimant a commission of 0.25% of the revenue to be received from chartering a Stena vessel to Shell, if a charter were to be agreed with Shell as in due course it was. That is, of course, a pure question of fact.

Factual background

2. The defendants are part of the Stena group of companies engaged in, among other things, offshore drilling. The group was negotiating to charter a drillship called the STENA ICEMAX to Shell. This vessel is said to be the first drillship specifically designed to undertake deepwater drilling operations up to 10,000 feet and in Arctic conditions.
3. Mr Devine qualified as a solicitor in 1982, joined Stena in 1989 and left in 1996 in order to provide consultancy services. Mr Welo was managing director of the first defendant, Stena Drilling ("Drilling"). The CEO of the Stena group of companies was Mr Dan Olsson. Other members of the Stena project team were Mr Banks, Mr Lumsden and Mr Reinertsen.
4. From 1^st May 2009 Mr Devine, through the claimant Grizzly Business Ltd ("GBL") had the benefit of a consultancy agreement with Stena Drillmax 1 Limited ("Drillmax"), the second defendant, which stated that GBL would receive an annual retention fee of £150,000 per year and a fee calculated at 500 Euros per hour. It is also stated that:-

"It shall be open to the Company and the Consultant Company to agree, in addition to the Rate, other forms of compensation on a case-by-case basis as a success fee in respect of discrete pieces of business."

Mr Welo was the Stena representative who had authority to deal with all matters relating to the administration of consultancy agreements.

5. In his first judgment Teare J decided that there was an agreement that GBL should be paid a "success fee" of 0.25% of revenue from the STENA ICEMAX charter to Shell.

The first judgment

6. In a detailed judgment Teare J set out the factual background to the case. At paragraph 10 he identified factors which could be said to be for and against GBL's case. The factors in favour were that:-

1) it was to be expected that Mr Devine would raise the issue of the success fee on his return to Australia on 27^th November 2011, two days after the fourth meeting with Shell which took place at The Hague; and

2) within a short time of being told that his services were no longer required he emailed Mr Welo saying that he would invoice Stena for the success fee.

7. The two factors which could be said to support Stena's case were:-

1) the context of the phone call meant that it was unlikely that the subject of the success fee would be raised at all; and

2) the alleged agreement was not confirmed in writing immediately after the call.

8. With respect to the first factor in favour of GBL's case, he said at paragraphs 111-112 that Mr Devine had on all previous occasions agreed a success fee with Mr Welo when providing services in relation to charters. Also, he had already inquired about what success fee he would receive and had made suggestions based on previous success fees. The agreement for a success fee in relation to a transaction referred to as the Hess transaction specifically contemplated a further success fee in relation to the Shell deal.
9. As for the context of the call, the defendants said that Mr Welo was angry with Mr Devine in this call because Mr Devine had mis-handled (1) a contractual issue concerning local taxation (which resulted in a suggested increased charter rate for Shell which Shell had rejected) and (2) an agreement in principle said to have been reached with Shell about the neutrality of the cost consequences if an option to substitute the rig was exercised. Mr Welo said that Shell had effectively walked away from the deal at the point of this call and that had been a matter of great concern to him. At paragraph 115 the judge concluded that Shell had not walked away from negotiation and that Mr Welo needed Mr Devine's further input into the negotiations. The judge at paragraph 116 said that Mr Devine did not fail to record any agreement in principle about the cost consequences of substitution, because no such agreement in principle had been reached.
10. As for the taxation point, Mr Welo knew that the question whether the proposed hire rate should be increased to take into account tax which Stena would have to pay in French Guyana (where the drillship was to be used by Shell) remained to be addressed in the negotiations and that Mr Devine had asked for and received instructions on the point. Mr Welo had accepted that in cross-examination. There was therefore no reason to suppose that the telephone call had been an angry conversation.
11. As for the issue of a lack of confirmation email, the defendants argued that it was Mr Devine's invariable practice to send a confirmation email after any agreement. At paragraph 125 Teare J outlined 10 previous deals in which Mr Devine provided services to the defendants and earned a success fee. On the basis of this information the judge said at paragraph 126 that there did not appear to have been a practice of confirming an agreement for a success fee based upon a percentage of revenues where the fee had not been translated into a fixed figure payable on certain dates.
12. It was Mr Devine's case that since he resumed UK tax residency in 2009 he no longer had any need to confirm his oral agreements because the purpose of doing so was to prove exactly when the money was earned. When asked why his residency was relevant since it was his company's earnings and not his personal salary, he said that there was a "back-to-back" agreement with one of his companies which made his residence relevant. As to why he had in fact confirmed success fees since 2009, he said that he only confirmed in situations in which the fee had been translated into a sum of money with specified payment dates.
13. In paragraph 133 the judge advanced three reasons for concluding that he could not fairly infer from the lack of confirmation email that no success fee was agreed. These are that (1) his explanation at trial was consistent with previous practice (2) his place of residency was relevant to his practice due to a back-to-back agreement with his company and (3) there was a relationship of trust between Mr Devine and Mr Welo.

The second judgment

14. The second judgment was on costs. The main issue was whether the first defendant should pay GBL's costs or whether it should be awarded its costs. The submission for the first defendant was that it had succeeded in showing that it was not liable under the consultancy contract to pay the success fee. The second defendant, party to the consultancy agreement, was the party liable. This was important because it emerged after the hearing that the second defendant was a company with only US$106,000 of assets.
15. The judge decided that the first defendant ought to pay 90% of GBL's costs, the reduction of 10% reflecting its victory on the contractual point. The judge said that, if the first defendant had not been made a party, then it would nevertheless have been ordered to pay costs because it had funded the entire defence, even though the second defendant had been made a party ten months after the claim form had originally been issued on 8^th October 2012. We return to this below.

The First Appeal

16. The findings of fact challenged are:-

1) (at paras 115 and 141) that Shell had not walked away from the negotiating table at the time of the telephone call on 29^th November 2011;

2) (at para 114 to 122 and 141) that Mr Welo was not angry in the telephone call; and

3) (at paras 133 to 134 and 141) that it was not Mr Devine's invariable practice to confirm by email an agreement to pay a success fee equal to a percentage of revenues.

17. The correct findings are said to be (1) Shell had walked away from the negotiations (2) Mr Welo was angry in the critical phone call (3) it was therefore unlikely that Mr Devine had initiated a request for agreement about a success fee or that Mr Welo would have agreed to it and (4) any agreement was always confirmed in writing by Mr Devine once it had been made.
18. The judge found that both Mr Devine and Welo were unsatisfactory witnesses in certain respects. He did not consider that either of them was lying or trying to deceive the court in any relevant way. He instead found it necessary to consider the manner in which negotiations with Shell developed in great detail and the manner in which success fees had been agreed between Mr Devine and Stena in ten previous transactions. He then drew what he considered to be appropriate inferences from his conclusions about those matters. It is said that, since the judge's decision did not turn on credibility, this court is in as good a position to judge the probabilities of the case as was Teare J. It is because he felt that that proposition was at least arguable that Christopher Clarke LJ gave permission to appeal.
19. The defendants have no substantial quarrel with the way in which the judge set out the primary facts of the history of the negotiations between the relevant parties in paragraphs 19-109 of his judgment and the interested reader is referred to them there.
20. We can summarise the position reached by 29^th November in the following way:-

1) Shell and Stena had agreed in principle that the STENA ICEMAX would, subject to agreement on terms, be chartered to Shell for drilling in the waters off French Guyana once the rig had been built and commissioned.

2) There were, however, a number of matters that remained to be agreed.

3) In particular Stena were concerned that, among the special properties of the rig, an important feature was that it could be used for drilling in Arctic waters; they wanted, therefore, to have the right, if an Arctic charter became available, to substitute a suitable rig for the STENA ICEMAX for use in French Guyana waters; they did not, however, want the vessel just to wait around for a suitable Arctic charter; they were concerned to get the rig earning hire as soon as possible.

4) Another matter which had to be resolved was the amount of tax that would be payable to the French Guyana tax authorities and whether the rate of hire could be uplifted to include that tax.

5) As at 27^th November a status document sent to Shell by Mr Devine (as the lead negotiator in the Stena team) shows that at that stage

a) the hire rate was to be US$550,000 per day;

b) input and export duties for the rig itself were to be for Shell's account but Stena would be responsible for duties on spares;

c) Stena was to have a rolling option to propose a swap after two years on giving six months prior notice, such swap to be effected with one of 3 specified Stena vessels provided that Stena bear the cost of rig time used in effecting the swap; and

d) Stena would work up a formal offer to be made to Shell for the purpose of signing a letter of intent.

6) Mr Devine then returned to Australia.

7) On 28^th November Shell reverted essentially agreeing the above matters but proposing (inter alia) that notice of the swap should only be given after May 2014 and that all costs of the swap should be for Stena's account.

8) At 02.04 GMT on 29^th November Mr Devine emailed Mr Welo with 3 areas which had not been closed out and had been left as "Stena to revert" with a view to providing potential rate escalators. The second of these items was French Guyana tax in respect of which Mr Devine said that Shell were "assuming" that the rate of US$550,000 included that tax. Mr Devine asserted that he had said "we would check and revert with what our US$550,000 rate included". Apparently Stena's tax people recommended an increase of 6% and Mr Devine asked for instructions. Mr Reinertsen on behalf of Mr Welo responded by saying:-

"Tax was not included. Ask Shell if they want a gross up."

At 10.24 Mr Devine responded:-

"Pretty ballsy on tax. Are you sure?"

9) The documentary record does not record any answer to this, but at 11.49 Mr Devine reverted to Shell saying that Stena wished to gross up the rate by 6%. At 15.21 Mr Van den Broek of Shell emailed Mr Devine with copies to Mr Welo and Mr Reinertsen saying that the requests "below" were not in line with discussions of the previous week and that Shell could no longer proceed with the process of committing to the rig. The "below" requests included the proposed 6% increase in rates which was said not to be acceptable.

10) At 15.31 Shell sent a more conciliatory email to Mr Welo and Mr Olsson (though not to Mr Devine) saying that Shell remained available "in case Stena Drilling is willing to reconsider their position". At 16.14 Stena's Chief Executive, Mr Olsson, asked Mr Welo what he was doing about it and Mr Welo responded to Shell at 18.51 saying, in an email drafted by Mr Devine, that it was not Stena's intention to raise last minute issues and that he would phone Shell the next day.

21. It is in this context that the 25 minute telephone call at 18.25 in which, according to Mr Devine, the success fee was agreed with Mr Welo has to be considered.

Had Shell walked away?

22. The position at the time of the critical telephone call was that Mr Welo had received both Shell's email of 15.21 saying they could no longer proceed and the email of 15.31 saying that Shell remained available if Stena were willing to reconsider. This latter email had not been sent to Mr Devine by Shell but only to Mr Welo and Mr Olsson, but Mr Welo had sent a copy of it to Mr Devine (together with a question from Mr Olsson in Swedish) so that in the early morning of 30^th November Mr Devine had a copy of that as well. The main purpose of Mr Devine's calling Mr Welo at 18.25 GMT (which was early the next day in Australia) was no doubt to decide what to do next. It seems to us that the judge was amply justified in his conclusion that Shell had not walked away from the deal and had not appeared to have done so at that time. The more important question is whether Mr Welo was angry at the time of the phone call. He must, on any view, have been very concerned at the possibility that Shell might walk away in the future even though their latest email said that they remained available.

Was Mr Welo angry?

23. The judge set out his conclusion at paragraph 137:-

"The conversation on 29^th November between Mr Devine and Mr Welo was not angry and uncivilised. There was no cause for it to be. But Mr Welo must have expressed his concern at Shell's response to Mr Devine's email asking Shell to underwrite Stena's corporate tax in French Guyana. There must have been an urgent discussion about the prospects of getting the deal back on track following Mr Welo's brief telephone call with Mr Vanden Broek. That would have been Mr Welo's prime concern and Mr Devine must have spent some time dictating a holding response to Shell which Mr Welo must have tapped onto his iPad during the call so that he could send it to Shell. In circumstances where Mr Welo had spent 28^th and 29^th November in the Stena Sphere meeting it is likely that he made some reference to that meeting. Having regard to the importance of the contract to Stena it is likely that the proposed contract with Shell was discussed at the meeting and it is possible that such discussion was mentioned by Mr Welo to Mr Devine. But there is no evidence that other Stena managers sought to interfere with or criticise Mr Welo's conduct of the negotiations with Shell and it is unlikely that they did so. It is therefore unlikely that Mr Welo indulged in a "diatribe" against fellow Stena managers. That would appear to be an exaggeration on Mr Devine's part."

24. Mr Andrew Hochhauser QC for the defendants launched a comprehensive attack on this paragraph. He submitted that it was effectively common ground that Mr Welo had been angry, whether there was cause for the anger or not. In fact there was such cause because Mr Devine had mishandled the negotiations by failing to record the agreement supposedly reached that the consequences of substituting the rig, if such substitution occurred, should be cost neutral and not raising earlier the question of how local taxes should be dealt with.
25. The common ground was said to be constituted partly by Mr Devine's evidence that he had asked what Mr Olsson had said in relation to the second email referred to above when he had asked Mr Welo in Swedish:-

"Vad har Du hittat pa?"

Mr Welo had translated this as

"What the fuck have you done?"

The true translation is

"What have you done about this?"

The fact that Mr Welo had mistranslated it in the way he did showed that it was common ground that the call had been an angry call. It was also evidenced by Mr Devine's own testimony that Mr Welo had indulged in a diatribe against his fellow managers, although the judge thought that was unlikely.

26. It was then said that the anger was justified in relation to the cost neutral provision said to have been agreed (but not recorded in the status document) in relation to the substitution and the judge was wrong to say that there was no such agreement in the light of the unanimous evidence on the point from the Stena witnesses. As to that, there were exchanges of emails after the critical telephone call which showed that no agreement had been reached with Shell on the neutral cost consequences of any swap which did not suggest that Mr Welo thought that agreement had already been reached; these are discussed in detail in paragraph 116 of the judgment. Contrary to Mr Hochhauser's submissions, we see no inconsistency between paragraphs 95 and 118 of the judgment which states that Mr Welo's anger on this issue only emerged (and even then wrongly) during the later telephone call on 1^st December.
27. Mr Hochhauser's main point, however, was that it did not matter whether the anger was justified. Mr Welo's anger was so obvious, whether it was justified or not, that it was inconceivable that Mr Devine would have raised the delicate question of his own success fee.
28. The question whether the telephone call was so angry that it was inconceivable that Mr Devine would have raised the question of his success fee was one of the essential questions which the judge had to resolve. It is to our mind impossible to say that there was no evidence on which the judge could rely to come to his conclusion that it was not an angry call but rather a very concerned call to deal with what on any view was a major hitch in the negotiations with Shell. The most obvious evidence that it was not so angry as to make it inconceivable that Mr Devine would raise the question of his success fee is that Mr Welo continued at that stage to want Mr Devine's involvement in the negotiations, at least to the extent of tapping onto his iPad Mr Devine's draft of what the judge called a holding response to Shell saying that it was not Stena's intention to raise last minute issues and that he (Mr Welo) would talk to Shell on the phone the next day.
29. Mr Hochhauser relied on the agreed fact that there had indeed been an angry telephone call between Mr Welo and Mr Devine at 09.11 on 1^st December 2011 and said that there was no reason to believe that the earlier call had not been equally angry but by that stage further disagreements had emerged between Mr Welo and Mr Devine about how the negotiations should be structured and Shell had specifically stated that they no longer wished to negotiate with Mr Devine. The judge took all those matters into account and concluded that Mr Welo had probably persuaded himself that the earlier call had been equally angry. That was a conclusion open to the judge on the evidence. It is moreover of some relevance that, when Mr Welo sought to explain to Mr Olsson after the contract with Shell had been signed why Mr Devine had not been involved in the later stages, he said "Fee or no fee, he had to leave otherwise there would have been no contract".
30. Mr Hochhauser made the further point that nothing had been agreed about a success fee before the call on 29^th November and that the matter had been specifically left as at 26^th/27^th November on the basis that the ball was in Stena's court to revert to Mr Devine on the matter. That was two days before and there had been no response. It is not surprising therefore that Mr Devine reminded Mr Welo in the early hours of 29^th November that 0.25% had been agreed on earlier contracts and that he would have wanted to raise the matter on 29^th November, (see judgment paras 53, 111 and 136). The judge was clear that he did not consider either Mr Devine or Mr Welo was lying. In those circumstances Mr Welo might well not remember something which was not at the forefront of his mind at the time; whereas Mr Devine would have every reason to recall it.
31. All these considerations persuade us that it would be wrong to reverse the judge on this particularly important finding of fact.

Absence of Contemporaneous Confirmation

32. There is no doubt that Mr Devine's explanation of this took time to emerge. He started by saying in his witness statement that he had only sent confirmatory emails about success fees in the past when he was a non-resident in the UK and it was necessary for tax purposes to have evidence about the time when a success fee was agreed. Since he resumed residency in 2009 it was no longer necessary. Yet in two of the previous cases which the judge examined, Stena Don in 2010 and Drillmax 1 in 2011, he had sent email confirmations. It was moreover difficult to see how the time of earning the fee was relevant for Mr Devine when it was actually his company, the claimant, which earned the fee. When these difficulties were put to him in cross-examination he gave a more sophisticated explanation to the effect that his previous confirmations were not given at the stage when a percentage fee was agreed but only when the fee had been "reduced" or "translated" into a sum of money and dates for each instalment of the fee so translated would be paid – which had never happened in the present case. The judge remarked that this was a somewhat convoluted explanation but did appear to be consistent with his past practice. The judge concluded that, despite his surprise that on such an important question Mr Devine's evidence was not clear, upon reflection

"I have concluded that his explanation be accepted."

33. Mr Hochhauser complained that the explanation ultimately given "had not had the benefit of full disclosure". But this was difficult to understand since the judge examined 10 previous cases in relation to which disclosure was (or at least could have been) forthcoming.
34. Then Mr Hochhauser said that in relation to 2 of the 10 examples the explanation did not stand up. These were, to use the numbers used by the judge in paragraph 125 of his judgment, (iii) the Stena Don and (vi) Drillmax 3. In relation to the Stena Don, the judge referred to an email of 2^nd August 2006 confirming an agreement "reached today" for $500,000 payable in two instalments immediately and before 30^th June 2007 respectively. Mr Hochhauser submitted that the judge should have referred to an earlier email of 20th June 2006 serving "to confirm our previous agreement of a success fee of 3 x £250,000" payable on contract commencement and the first and second anniversaries thereof. Mr Welo replied that he believed they had talked about euros. Mr Devine responded that his note recorded sterling and asked Mr Welo to give him a call. This was obviously before the final agreement which was recorded in the email of 2^nd August. There must have been discussions relating to the dollar sum eventually agreed. But we do not see any inconsistency between the earlier email and Mr Devine's explanation since he was recording a fixed sum with dates when the instalments were payable, not an overall percentage.
35. As far as Drillmax 3 is concerned, the judge referred to an email of 9^th October confirming an agreement that the success fee was earned at contract signature on 27^th September being 0.25% of contract revenues which was reduced to a lump sum of £1 million for early payment, payable in 5 consecutive equal monthly instalments beginning on 1^st November 2007. Mr Hochhauser said that the judge should have referred to an earlier email of 4^th September 2007 in which Mr Devine told Mr Welo that "as you know", he was working on the premise that the deal on Drillmax 1 and 2 (i.e. 0.25%) remains in place for Drillmax 3 and asks him to confirm if that is not his understanding. But that is not recording an agreement reached, only that Mr Devine hopes that there is a common understanding. There were further conversations which did result in an agreement that the success fee was reduced to £1 million with dates for payment of 5 equal instalments. We do not consider that this is in any way inconsistent with the explanation which the judge ultimately accepted.
36. So we see no reason to suppose that the explanation accepted by the judge was, in fact, inaccurate; there is, in any event, evidence which the judge was entitled to accept in support of the explanation. The judge was rightly sceptical about the explanation in the light of how it emerged but, after careful consideration, accepted it as he was entitled to do.

General observations

37. These conclusions suffice to dismiss the first appeal but we would add that we are not at all convinced that the comparative credibility of Mr Devine and Mr Welo was irrelevant to the judge's conclusion. Although he criticised elements of each of their evidence which led to the conclusion that neither was an impressive witness, he saw them cross-examined in detail over some days. He could hardly have failed to be influenced by the one whose evidence he found more persuasive, tested as it was by reference to the contemporaneous record. In his final conclusion he said (para 140) that Mr Devine gave clear and consistent evidence that he and Mr Welo had agreed the success fee on the telephone on 29^th November and he enumerated four matters supporting that evidence. As against that he considered that the matters relied on as supporting Mr Welo's evidence were not established. He clearly gave the case careful and lengthy consideration and produced a reasoned judgment which, in our view, cannot justifiably be set aside.
38. Ms Prevezer QC for Stena enumerated eight separate unchallenged findings adverse to Mr Welo's evidence. In the light of our conclusions about the findings which have been challenged by Stena it is unnecessary to consider whether, as Ms Prevezer submitted, the judgment could stand even if the challenged findings were set aside, apart from saying that the existence of some or all of those unchallenged findings might have made it difficult for this court to enter judgment for Stena rather than ordering a re-trial.

The Law

39. The parties were broadly agreed upon the relevant law in the light of the recent Supreme Court decisions of Henderson v Foxworth Investments Ltd [2014] UKSC 41; [2014] 1 WLR 2600 and McGraddie v McGraddie [2013] UKSC 58; [2013] 1 WLR 2477 the latter of which cited with approval Hamilton v Allied Domecq Plc [2006] SC 221, para 85. In the latter case it was said:-

"If findings of fact are unsupported by the evidence and are critical to the decision of the case, it may be incumbent on the appellate court to reverse the decision made at first instance."

In Henderson the Supreme Court (para 62) also said:-

"It does not matter, with whatever degree of certainty, that the appellate court considers that it would have reached a different conclusion. What matters is whether the decision under appeal is one that no reasonable judge could have reached."

We have also had regard to the last three reasons why appellate courts are warned not to interfere with findings of fact unless compelled to do so as enumerated by Lewison LJ in Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5:-

"iv) In making his decisions the trial judge will have regard to the whole of the sea of evidence presented to him, whereas an appellate court will only be island hopping.

v) The atmosphere of the courtroom cannot, in any event, be recreated by reference to documents (including transcripts of evidence).

vi) Thus even if it were possible to duplicate the role of the trial judge, it cannot in practice be done."

40. There will be (and have been) rare cases where an appellate court is compelled to set aside findings of fact made by an experienced trial judge but we are far from convinced that that is the case here. None of the challenged findings can be said to be unsupported by the evidence and the decision is certainly not one that no reasonable judge could have reached. The case was not an easy one for the judge but he grappled with all the potential difficulties of the evidence and came to a conclusion which, we feel able to say (although our own opinion is immaterial) was probably correct.
41. For these reasons the first appeal will be dismissed and we can turn to the second appeal on costs.
42. 
     
    

The costs appeal

43. Stena Drilling Ltd ("Drilling") and Stena Drillmax I Ltd ("Drillmax") appeal, again by permission of Christopher Clarke LJ, against the costs order made by Teare J on 30th July 2014 in the following terms:-

"Save that the Second Defendant shall be only liable in respect of costs incurred after 25th October 2013, the Defendants shall pay 90% of the Claimant's costs of the claim, to be assessed if not agreed:

(a) up to 21st November 2013 on the standard basis;

(b) from 22nd November 2013 on the indemnity basis"

The proceedings

44. In response to Mr Devine's e-mail of 11th December 2011, in which he claimed to be entitled to a success fee, Mr Welo replied by letter dated 4th January 2012 in which he set out his position in some detail. That letter was written on the notepaper of Drilling. It made an offer of settlement on behalf of "Stena".
45. On 4th May 2012 GBL sent an invoice in respect of consultancy services for the fourth quarter of 2011. It was addressed to "Stena Drillmax Ltd c/o Stena Maritime AG" at an address in Zug, Switzerland.
46. In response to a letter before action dated 14th June 2012 from Quinn Emanuel, solicitors acting for GBL, Herbert Smith Freehills in a letter dated 5th September 2012 stated that they noted that the claimant had failed to address the consultancy agreement between GBL and Drillmax included in May 2009. They maintained that the services provided by Mr. Devine "were provided to our client through GBL and were provided pursuant to the consultancy agreement". They stated that under the agreement GBL had received its annual retainer and fees calculated as an hourly rate "for the time spent by Mr. Devine working for GBL on Stena Drillmax's business and its associated companies. Both the annual fee and any fees for works done on a time basis had been paid to GBL, by or on behalf of Stena Drillmax".
47. Proceedings were commenced by a claim form issued on 8th October 2012. Drilling was the sole defendant. The claim form alleged that in breach of the success fee agreement Drilling had failed and/or refused to pay GBL the success fee.
48. On 22nd October 2013 the Claim form was amended by leave of Leggatt J to include an alternative claim against Drilling for failure and/or refusal to pay the success fee. The amendment was made with the consent of Herbert Smith Freehills on certain conditions, including conditions relating to the disclosure exercise.
49. The action proceeded to trial which began on 30th April 2014 and occupied the court for six days. It is accepted by the appellants that Drilling met the legal expenses of both Drilling and Drillmax in defending the action. At the trial it was the primary case of GBL that the success fee agreement had been concluded with Drilling. In his judgment delivered on 13th June 2014 the judge held that the success fee agreement had been made between GBL and Drillmax. The judge considered that the consultancy agreement contemplated that Drillmax might agree a success fee with GBL. The reason why Drillmax, a Bermudan company, was party to the consultancy agreement rather than Drilling, an English company, was that Mr Devine had not wished to charge valued added tax and therefore requested that his contracting party be an overseas company.
50. We draw attention to the following further matters:-

1) Although Drilling and Drillmax are associated companies, Drilling is not the parent of Drillmax. The parent of Drillmax is Stena Maritime Zug AG, another associated company.

2) The company which entered into the charter agreement with Shell in respect of the STENA ICEMAX was Stena Drillmax Ice Ltd, another associated company.

3) Although it is apparent that during the trial the legal advisers of GBL were concerned that Drillmax might be without assets, it was only after the conclusion of the trial that they became aware of the true position. Following enquiries by Quinn Emanuel on 23rd June 2014, Herbert Smith Freehills responded on 30th June 2014 stating that Drilling was "not prepared to meet the liabilities" of Drillmax. After further requests for information by letters dated 9th July 2014 and 22nd July 2014, Herbert Smith Freehills stated that the net realisable assets of Drillmax were "approximately US$ 106,000 on which basis it is plainly not in a position to meet your client's claims".

The Costs Judgment and Order

51. A further hearing took place before Teare J on 30th July 2014 at which the judge dealt with costs. Mr Hochhauser for the defendant companies submitted that Drilling had been successful on the contracting party point, a point which it had taken from the outset, and it had been dragged unwillingly into the litigation. It should recover its costs from GBL. Ms Prevezer for GBL submitted that Drilling had not simply pursued the contracting party point but had run two further defences: that there was no agreement and that, if there was an agreement, it had been repudiated. The first of those had been the main issue of fact to be determined at the trial and the vast majority of costs were connected with it and the repudiation issue. Those issues had been pursued by Drilling before Drillmax had been joined and were pursued by both defendants thereafter. Drilling had paid the costs of running those issues. Had Drillmax been the only defendant, it was likely that a non-party costs order would have been made against Drilling.
52. The judge considered that the order should reflect the justice of the case and ordered that Drilling should pay 90% of the costs of GBL. In his view the reduction of 10% would more than take care of Drilling's victory on the contracting point. The judge considered that he was justified in making such an exceptional order because, had Drilling not been a party, it would have been ordered to pay those costs as a non-party.
53. The judge did not consider it appropriate to reflect in the costs order the fact that the defendants had won on the issue that there was an agreement in principle and that they had successfully resisted allegations of lying made against Mr Welo, Mr Reinertsen and Mr Banks. The costs which would have been incurred in pursuing the claim which did succeed would essentially encompass all of the factual matters which it was necessary to consider in order for the judge to reject, quite briefly, those two matters.

Submissions on behalf of the Appellants

54. The principal submissions of Mr Hochhauser on behalf of the appellants may be summarised as follows:-

1) The judge failed to give sufficient consideration and weight to the fact that the defence advanced by Drilling was not dishonest. None of the defence witnesses were found to have given evidence which they knew to be untrue and the allegation of conspiracy to commit perjury was expressly rejected.

2) The judge failed to give proper consideration to the true nature of the relationship between Drilling and Drillmax. They were merely two of many subsidiaries of the very large Stena Group. Drilling does not control Drillmax. It is not its parent and would gain no economic benefit from Drillmax advancing a successful defence.

3) The judge should have concluded that Drilling, if not a party to the proceedings, would not be an appropriate party against which to make a non-party costs order. The close connection between defendants which might justify such an order is lacking and such an order is exceptional.

4) The judge failed to give proper consideration to the fact that Drilling funded the defence by necessity not by design. Despite making it clear to GBL prior to commencement of the action that it was not the correct party, it was required to fund the defence for a full year until the joinder of Drillmax. Drilling did not satisfy the description of Rix LJ in Goodwood Recoveries Ltd v Green [2005] EWCA Civ 414 of "the real party seeking his own benefit, controlling and/or funding the litigation".

5) The judge attached undue weight to the fact that Drilling ran other substantial defences in addition to its defence that it was not a contracting party. In that regard, the judge failed to take account of the fact that Mr Welo was not found to have been lying. Furthermore the judge failed to take account of the fact that it would have been, for the purposes of litigation, unwise for Drilling to run only the contracting party defence.

Submissions for the Respondent

55. On behalf of GBL Ms Prevezer submits that the costs order was a classic proportionate order based on the issues. Drilling had succeeded on the contracting party point but the principal defences which Drilling ran from the outset (i.e. the contract issue and the repudiation issue) and which it funded had been rejected by the judge. She relies in particular on the decision of this court in Threlfall v ECD Insight Ltd [2013] EWCA Civ 1444; [2014] 2 Costs LO 129, where, by analogy with a non-party costs order, the director of the defendant company who had been joined as a co-defendant, was made liable for the costs of the action.

The law

56. CPR 44.2(2) provides:

"If the court decides to make an order about costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but

(b) the court may make a different order."

57. The power to make a non-party costs order under section 51 of the Senior Courts Act 1981 has been considered in a number of recent decisions of this court. Furthermore, it has been extended by analogy in Threlfall to cases of a co-defendant. We derive the following propositions from these recent cases:-

1) "Where a non-party Director can be described as the "real party", seeking his own benefit, controlling and/or funding the litigation, then even where he has acted in good faith or without any impropriety, justice may well demand that he be liable in costs on a fact-sensitive and objective assessment of the circumstances." (Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414; [2006] I WLR 2723 per Rix LJ at [59])

2) It is not the case that both control and funding of the litigation must be present. (Systemcare UK Ltd v Services Designed Technology Ltd [2011] EWCA Civ 546; [2012] 1 DCLC 14 per Lewison LJ)

3) "The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion. Moreover the fact that the discretion, if exercised, is exercised against a non-party underlines the proposition that the non-party has no substantive liability in respect of the cause of action in question. … [T]he court is not fettered by the legal realities. It is entitled to look to the economic realities. It is in this sense that many of the cases pose the question whether the non-party is "the real party" in the case." (Threlfall v ECD Insight Ltd per Lewison LJ at [13])

4) Each case turns on its own facts. Since the decision involves an exercise of discretion, limited assistance is likely to be gained from the citation of other decisions at first instance in which judges have or have not granted an order of this kind. (Deutsche Bank v Sebastian Holdings Inc. [2016] EWCA Civ 23 per Moore-Bick LJ at [61], [62])

5) An order of this kind is "exceptional" only in the sense that it is outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. (Deutsche Bank per Moore-Bick LJ at [62])

6) "…The only immutable principle is that the discretion must be exercised justly." (Deutsche Bank per Moore-Bick LJ at [62])

7) "By funding, the funder takes a risk, a risk as to the nature of which he has the opportunity to inform himself both before offering funding and during the course of the litigation which he funds." (Excalibur Ventures LLC v Texas Keystone Inc. [2016] EWCA Civ 1144 per Tomlinson LJ at [29])

8) "The single question is whether in the circumstances it is just to make a discretionary order requiring the non-party to pay costs because of the nature of its involvement in the litigation." (Excalibur Ventures LLC per Tomlinson LJ at [51])

58. This Court's power to interfere with regard to the costs order made below is constrained:-

"Before the court can interfere it must be shown that the judge has either erred in principle in his approach, or has left out of account, or taken into account, some feature that he should or should not, have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale." (Roache v News Group Newspapers Ltd [1998] EMLR 161 per Stuart-Smith J. at p. 172; cited with approval in AEI Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR, 1507 per Lord Woolf MR at p. 1523).

Discussion

59. It is clear that the principal issue at trial was whether an oral contract to pay a success fee had been concluded in the telephone conversation between Mr Welo and Mr Devine on 29th November 2011. The great majority of the evidence was directed at that issue. However, there was also substantial evidence and cross examination in relation to the repudiation issue which required an examination of events between the telephone conversation on 29th November 2011 and Mr Devine's removal from the project on 6th December 2011. The defences on the contract issue and the repudiation issue were raised by Drilling from the very outset. (See Mr Welo's letter of 4th January 2012 written on the notepaper of Drilling and which made no mention of the contracting party issue). The contract issue and the repudiation issue were contested by Drilling throughout the proceedings. That remained the case after Drillmax was joined as a defendant. The two were jointly represented and the defences were run jointly. Their defences were funded by Drilling.
60. The contract for the charter of the STENA ICEMAX was concluded between Stena Icemax Ltd and Shell and not between Drilling and Shell. It is therefore not the case that Drilling benefitted directly from the services provided by Mr Devine in relation to the negotiation of that charter. Similarly, Drilling would not have derived any direct financial benefit had Drillmax been successful on the contract issue. However the principal actor on behalf of the Stena Group of companies in the negotiations for the charter party was Mr Welo who was a Director and Managing Director of Drilling and who was not a Director of Drillmax. Furthermore, Drilling assumed the burden of defending the claim not only on the contracting party point but also on the contract issue and the repudiation issue and it did so for the benefit of its associated company Drillmax. There is some force in the point made by Mr Hochhauser that it might have been unwise for Drilling to limit its defence to the contract point. Nevertheless, in running the other points Drilling assumed that burden, and in doing so, conferred a substantial benefit on Drillmax.
61. Furthermore, we are satisfied that Drilling was in control of the litigation throughout. Contrary to the submission of Mr Hochhauser, Drilling was not dragged into the litigation. Mr Welo's letter of 4th January 2012 on the notepaper of Drilling puts forward defences on the contract issue and the repudiation issue without raising the question of the contracting party. It is only on 5th September 2012, in response to the letter before action, that the point was first taken by Drilling that it was not a party to any agreement to pay a success fee. Thereafter it was Drilling that ran the litigation. There is no evidence that the directors of Drillmax played any role in the case (or, indeed, that they had played any role in relation to its subject matter). By letter dated 1st July 2013 Herbert Smith Freehills confirmed that they were instructed that Drillmax did not hold any of its own documents independently of Drilling. Furthermore, by letter dated 27th August 2013 Herbert Smith Freehills drew attention to the fact that Drilling had undertaken an extensive disclosure exercise at considerable time and expense and insisted that it be a condition of their agreement to permission to amend the pleadings to join Drillmax that Drillmax should not be required to carry out its own separate disclosure exercise. It is clear that Drilling was running the litigation.
62. Furthermore, it is accepted that Drilling funded the defence of both Drilling and Drillmax. In their letter of 28th July 2014 Herbert Smith Freehills stated:

"With regards to Drillmax's costs in these proceedings, as our letter of 23rd July 2014 indicates, Drilling has met all of our fees and disbursements; there were no additional costs for Drillmax as the defences of Drilling and Drillmax were aligned, save in relation to the contracting party point, which was solely Drilling's defence in which it succeeded. Drillmax therefore did not incur any liabilities in respect of our costs with regards to your client's claim."

In our view, this is critical. Drillmax's defences were run only because Drilling funded them. Moreover, Drilling ran those defences on behalf of Drillmax and caused GBL to incur the costs of proceeding against Drillmax knowing that Drillmax would not be able to meet all of the costs in the event that GBL succeeded.

63. Mr Hochhauser makes the point, entirely accurately, that, by contrast with Threlfall, the defence advanced by Drilling was not dishonest. Furthermore, none of the defence witnesses was found to have given evidence which they knew to be untrue and the allegations of conspiracy to commit perjury were rejected by the judge. However, we do not consider that this can avail the appellants. It is not necessary to demonstrate impropriety before a non-party costs order can be made or before its analogy can be invoked. (See, for example Goodwood Recoveries Ltd v Breen per Rix LJ at [59])
64. On behalf of the appellants emphasis is placed on the fact that GBL waited for a year after commencement of the proceedings before joining Drillmax. The point is made that for a period of over a year Drilling was the sole defendant in the proceedings and that the additional presence of Drillmax thereafter did not materially add to the costs. There might be some force in this submission had Drilling simply pleaded that it was not the contracting party. However, it did not limit itself in that way but also took the contract and repudiation points. Prior to Drillmax being joined as a party, Drilling was not defending the claim on behalf of Drillmax but it did assume the burden of arguing these points which were essentially arguments in defence of Drillmax. Once Drillmax was joined as a defendant, Drilling continued to control the proceedings and to fund them.
65. The further point is made on behalf of the appellants that, had GBL claimed against Drillmax alone, in the light of the likely costs of defending the claim Drillmax would have had to consider whether it could afford to defend the proceedings. However, the responsibility for what in fact occurred cannot be attributed to GBL. The reality is that Drilling chose to run, for the benefit of Drillmax, defences which were not Drilling's defences and it also, by funding the proceedings, enabled Drillmax to run those defences. Those defences were rejected by the judge and, in all circumstances, it is entirely appropriate that Drilling should pay the costs.
66. In these circumstances we consider that the judge's decision that Drilling should pay a substantial proportion of the costs of GBL in pursuing the action against Drillmax was entirely fair. The judge made no error of principle in coming to that conclusion. On the contrary, it was entirely within his discretion to make such an order.
67. The judge ordered that Drilling should pay 90% of the costs incurred by GBL. The reduction was intended to reflect the fact that Drilling succeeded on the issue as to which Stena company was the contracting party. He also held that his order did not need to reflect the fact that GBL had failed to establish an agreement in principle in October 2011 and that it failed to establish that the defendants' witnesses had committed perjury.
68. On behalf of the appellants Mr Hochhauser submits that the contracting party point on which Drilling succeeded was not insignificant. On the contrary, he submits, Drilling had consistently maintained that it should never have been a party to the litigation and had been wrongly brought in by GBL.
69. In exercising his discretion in awarding costs Teare J correctly took account of the extent to which the trial of individual issues had contributed to the overall cost of the proceedings. Notwithstanding its importance to Drilling, the contracting party point was limited in scope and occupied only a small proportion of the time at trial. The factual and legal issues were limited. In his judgment the judge was able to deal with this issue comprehensively in four brief paragraphs in a judgment of 165 paragraphs. Accordingly we consider that the judge was clearly entitled to conclude that a reduction of 10% would more than take care of Drilling's victory on the contracting party point.
70. Finally, we consider that the judge was clearly entitled to conclude that it was not appropriate to make any further adjustment to the costs order in order to reflect the success of the defendants on the agreement in principle and perjury issues. The judge was clearly correct in his conclusion that the costs which would have been incurred in pursuing the claim which did succeed would encompass essentially all of the factual matters which it was necessary for the court to consider in order to reject GBL's case on those two matters.

Conclusion

71. For these reasons we would also dismiss the appeal against the costs order.

Case No: A3/2014/2758

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

THE HONOURABLE MR JUSTICE TEARE

Before:

THE RIGHT HONOURABLE LORD JUSTICE LONGMORE

THE RIGHT HONOURABLE LORD JUSTICE LLOYD JONES
THE RIGHT HONOURABLE LORD JUSTICE TREACY

Between:

	GRIZZLY BUSINESS LIMITED	Claimant/ Respondent
	- and -
	STENA DRILLING LIMITED STENA DRILLMAX 1 LIMITED	Defendants/Appellants

ORDER

UPON the Appellants' appeals against the judgments of Mr Justice Teare dated 13 June 2014 and 30 July 2014

AND UPON hearing Counsel for the Appellants and the Respondents

IT IS ORDERED THAT

1. The Appellants' appeals be dismissed.

2. The stay contained in paragraph 2 of the Order of Lord Justice Christopher Clarke dated 6 July 2015 shall be lifted.

3. The Appellants do pay the Respondent's costs of the appeals on the standard basis, such costs to be assessed if not agreed.