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Cite as: [2002] 1 WLR 953, [2001] EWHC Ch 391

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Sir Elton Hercules John & Ors v. Price Waterhouse & Ors [2001] EWHC Ch 391 (12th July, 2001)

HC 9900100

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

B E T W E E N

(1) Sir Elton Hercules John

(2) Happenstance Limited

(3) William A Bong Limited

(4) J Bondi Limited

Claimants

-and-

(1) Price Waterhouse

(a firm now carrying on business under

the name PricewaterhouseCoopers)

(2) Andrew Mansel Haydon

Defendants

A N D B E T W E E N

Price Waterhouse

(a firm carrying on business under

the name PricewaterhouseCoopers)

Part 20 Claimants

-and-

(1) Frere Cholmeley (a firm)

(2) Frere Cholmely Bischoff (a firm)

Part 20 Defendants

JUDGMENT

The Honourable Mr Justice Ferris

(on indemnity costs and associated matters)

Mr J Hirst QC and Mr N Calver instructed by Eversheds appeared on behalf of the Claimants. Mr C Kinsky instructed by Barlow Lyde & Gilbert appeared on behalf of the First Defendant and Part 20 Claimants. Mr A Fletcher instructed by LeBoeuf Lamb Greene & MacRae appeared on behalf of the Second Defendant. Mr M Kallipetis QC and Mr S Monty instructed by Ince & Co. appeared on behalf of the Part 20 Defendants. Hearing Dates: 5th and 6th June 2001. Judgment Handed Down: 12th July 2001

JUDGMENT: APPROVED BY THE COURT FOR HANDING DOWN(SUBJECT TO EDITORIAL CORRECTIONS)

Mr Justice Ferris :

I handed down my judgment in this action on 11th April 2001. On that occasion I dealt with a number of consequential matters, including in particular the incidence of the costs of the main action as between the claimants and the defendants and the incidence of the costs of the Part 20 proceedings. Certain other matters were expressly stood over for further consideration on a future occasion. I have now heard argument on those matters. On the application for permission to appeal I have given my decision orally. On certain questions relating to costs I reserved judgment. This is my decision on those questions.

The parts of the order made on 11th April 2001 which are relevant to this decision can be summarised as follows:

I ordered Sir Elton and the EJ companies to pay PW's costs of the main action on the standard basis;

I ordered the EJ companies to pay Mr Haydon's costs of the main action;

I stood over for later consideration Mr Haydon's applications (a) that his costs be assessed on the indemnity basis and (b) that he be awarded interest on his costs pursuant to CPR 44.3(6)(g);

I stood over for later consideration PW's application for an interim payment on account of their costs;

I ordered the EJ companies to make an interim payment to Mr Haydon of Ł500,000 on account of his costs within 14 days.

The matters on which I have now heard further argument and on which I now give judgment are the following:

Applications by PW that

The EJ companies pay on the indemnity basis either the entirety of PW's costs or PW's costs incurred after 4th August 2000;

The EJ companies pay interest on PW's costs over the period 4th August 2000 to 11th April 2000

The EJ companies make an interim payment to PW on account of their costs.

Applications by Mr Haydon that

The EJ companies pay on the indemnity basis either the entirety of his costs or his costs incurred after 13th September 2000;

The interim payment on account of costs be increased to reflect any order for payment of Mr Haydon's costs on an indemnity basis.

The application by Mr Haydon for interest on his costs under CPR 44.3(6)(g) which was adumbrated on 11th April and referred to in my order of that date has not been pursued.

PW's application for indemnity costs

This application was made on two alternative bases, which I shall refer to as "the section 51 basis" and "the Articles basis" respectively.

(1) The section 51 basis

What may be described as the ordinary jurisdiction of the court to make orders in respect of the costs of and incidental to proceedings before it is conferred by section 51 of the Supreme Court Act 1981 and, so far as material to this case, is exercisable in accordance with the provisions of CPRs 43 and 44. Under CPR 44.4 the court may direct that a party's costs be assessed either on the standard basis or on the indemnity basis. It is unnecessary to go into the difference between them save to mention that the indemnity basis is more advantageous to the receiving party and correspondingly more burdensome to the paying party. PW's first argument was to invoke this jurisdiction.

There can be no doubt that, when I handed down my judgment on 11th April, I had jurisdiction, if I thought it right to do so, to order not only that the claimants should pay PW's costs, but that those costs should be assessed on the indemnity basis. Further if, as was done on behalf of Mr Haydon, I had been asked to defer to a future occasion the consideration of an application for assessment on the indemnity basis I could, and almost certainly would, have acceded to this application.

The difficulty which lies in the way of PW's reliance on this jurisdiction is that not only was no application for deferment made on behalf of PW but counsel for PW expressly stated

"I am not seeking indemnity costs. I seek an order for costs, but I do not suggest that they should be on the indemnity basis." (Transcript page 3, lines 9-11)

It was in the light of that statement, taken in conjunction with the submissions which I heard concerning other aspects of the application for costs, that I decided that Sir Elton and the EJ companies must pay PW's costs assessed on the standard basis.

In my judgment, by making this decision I exhausted the general jurisdiction which I had under section 51 and CPRs 43-44 to make an order in respect of PW's costs. My order of 11th April has been perfected and I cannot now recall it or vary it. This is not a case where I have jurisdiction under the "slip rule" (CPR 44.12). Accordingly I hold that this limb of PW's application must fail.

I would add that, even if I had a continuing jurisdiction, I would have found it difficult to accede to this limb of PW's application for indemnity costs. It was founded upon the fact that on 21st July 2000 the solicitors for PW wrote to the solicitors for the claimants saying, amongst other things,

"[W]ith a view only to avoiding the inevitable waste of management time and costs involved in defending the action, we are instructed by our client to offer you a settlement by which your clients withdraw their proceedings and they and our client bear their own costs incurred to date. This offer is conditional upon Frere Cholmeley agreeing to allow our client to discontinue the Part 20 Proceedings with no order that our client should pay any of their costs. This offer will be open until 4 August 2000."

The letter was expressed to be written without prejudice save as to costs. The offer was not accepted by the claimants on or before 4th August 2000 or at all. It was contended that, the claimants having turned down a proposal which, in the event, proved to be much more advantageous to them than my judgment, this is a matter to be taken into account by the court, at any rate in respect of costs incurred after the date of the letter. It was not suggested that any of the automatic consequences of a Part 36 offer are applicable, but it was said that this letter constituted an admissible offer to settle to which the court ought to have regard under CPR 44.3(4)(c).

If I had had a continuing jurisdiction I would have agreed that the letter is to be taken into account, but I would have given it little weight. This is because the offer was expressed to be conditional upon FC agreeing to the discontinuance of the Part 20 Proceedings with no order as to costs. There was no evidence that FC was ever willing to agree this. Certainly the claimants were never told that they were willing. The claimants' failure to accept a proposal which was subject to this major unsatisfied condition is in my view, of comparatively small significance.

(2) The Articles basis

The alternative basis of PW's claim for indemnity costs was a provision in the articles of association of each of the EJ companies.

Happenstance and Bong each adopted as its articles, subject to certain modifications, the provisions of Table A to the Companies Act 1948. Amongst those provisions, and adopted by Happenstance and Bong without modification, is regulation 136, which is in the following terms:

"136. Every director, managing director, agent, auditor, secretary and other officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application under section 448 of the Act in which relief is granted to him by the court."

In the case of Bondi the articles follow Table A to the Companies Act 1985. Regulation 118 of Table A to the 1985 Act, which was adopted by Bondi without modification, is to the same effect as regulation 136 of the 1948 Table, although there are some differences in language which are of no substance in relation to the point at issue.

The contention of PW was that, judgment having been given in their favour in proceedings concerning its conduct as auditor of the EJ companies, they are entitled to be indemnified out of the assets of each of the EJ companies against the costs incurred by them in defending those proceedings. This was said to be a contractual entitlement which became fully constituted when I gave judgment in favour of PW in the main action.

The interaction of a contractual right to indemnity costs and the jurisdiction of the court under section 51 was considered by the Court of Appeal in Gomba Holdings Ltd -v- Minories Finance [1993] Ch 171. That case concerned a dispute between a borrower and a mortgagee. After default on the part of the borrower the mortgagee appointed receivers. The borrower commenced redemption proceedings and raised sufficient money to satisfy its liabilities so that the receivers were discharged. The borrower disputed the amounts claimed by the mortgagee in respect of its costs charges and expenses and the main issue was how these costs charges and expenses were to be quantified. A subsidiary issue was the extent, if at all, to which the mortgagee's contractual right to its costs charges and expenses on an indemnity basis was affected by the fact that during the course of proceedings orders had been made for the borrower to pay some of the mortgagee's costs taxed on the standard basis. The judgment of the court, delivered by Scott LJ, was to the effect that the contractual right was unaffected.

In the course of its judgment the Court of Appeal stated a number of principles which emerged from the authorities which it considered. So far as material these were as follows:

" i) An order for payment of costs of proceedings by one party to another party is always a discretionary order: section 51 of the Act of 1981.

ii) Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.

iii) The power of the court to disallow a mortgagee's costs sought to be added to the mortgage security is a power that does not derive from section 51 but from the power of courts of equity to fix the terms on which redemption will be allowed.

iv) A decision by a court to refuse costs, in whole or in part, to a mortgage litigant may be a decision in the exercise of the section 51 discretion or a decision in the exercise of the power to fix the terms on which redemption will be allowed or a decision as to the extent of a mortgagee's contractual right to add his costs to the security or a combination of two or more of these things. The pleadings in the case and the submissions made to the judge may indicate which of the decisions to which we have referred has been made.

v) A mortgagee is not, in our judgment, to be deprived of a contractual or equitable right to add costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee's contractual or equitable rights and without any adjudication as to whether or not the mortgagee should be deprived of those costs."

The Court of Appeal expressed that part of its conclusion which is directly material to the present case in the following paragraph at pages 194-5:

"(5) In respect of any orders for payment of standard basis costs by the plaintiffs to the defendants that have already been made it is, as we understand it, common ground that the court was not thereby purporting to deprive the defendants of any costs which they were contractually entitled to add to their security. Accordingly, in our judgment, the defendants remain entitled on the taking of the account to their costs on an indemnity basis. An indemnity basis taxation of costs that have already been taxed on the standard basis would seem to us to lead to the conclusion that the costs of the standard basis taxation were unnecessarily and unreasonably incurred and should be disallowed on the taking of the account. But that is not before us for decision."

On behalf of PW, Mr Kinsky relied upon the fact that in Gomba Holdings the Court of Appeal was prepared to direct a taxation on the indemnity basis of costs some of which it had previously ordered to be taxed on the standard basis. The only adverse effect on the receiving party of the previous standard basis taxation was that the costs of that taxation were to be disallowed on the taxation on the indemnity basis on the ground that they were unnecessarily and unreasonably incurred. Here there can be no such adverse effect because nothing has yet been done by way of implementation of the order which I made on 11th April for assessment on the standard basis.

In Gomba Holdings the Court of Appeal regarded the order for standard basis costs as having exhausted the court's discretion in respect of those costs under section 51. To that extent the position was similar to the present case. But, having decided that the exercise of this discretionary power did not affect the mortgagee's contractual or equitable right to retain its costs out of the mortgaged property, the court was faced with the need, as part of the claim for an account in the redemption proceedings which were before it, to quantify the costs which the mortgagee was so entitled to retain. It was decided to do this by ordering those costs to be taxed on the indemnity basis.

Here the procedural position is somewhat different. The contractual right of PW to an indemnity under the articles, assuming that there is such a right, is not formally in issue in the proceedings. Indeed it could not be, because any cause of action was not complete until I gave judgment on 11th April and thereby disposed of the present proceedings except in respect of reserved matters.

Accordingly, although I would accept that the fact that I made an order for standard basis costs in exercise of my section 51 jurisdiction does not detract from any contractual right of PW to indemnity costs under the articles and I expressly confirm that no such right was present to my mind on 11th April, I consider that a great deal of caution must be exercised in giving effect to any such right in the present proceedings. Indeed before the recent procedural reforms I think that most judges would have said it could not be done. A new cause of action must be the subject of new proceedings. In the new climate, however, I think that a more informal approach might be possible if it could be seen that to leave the matter to be dealt with in fresh proceedings would needlessly result in extra costs being incurred. Nevertheless I consider that it would be right to proceed in this way only if it were clear that there could be no defence to a contractual claim for indemnity costs, so that if a fresh action were commenced summary judgment would be given in favour of PW.

On behalf of the EJ companies Mr Hirst submitted that it is far from clear that there could be no defence. He pointed out that there had been no hint of a claim to a contractual right to indemnity costs under the articles until PW's application notice dated 16th May 2001 was received, so that there had been little opportunity for the point to be considered. He also disputed that the effect of the articles was incorporated into the contract between the EJ companies and PW. Even if it was, Mr Hirst submitted that the articles give an indemnity only against costs incurred in successfully defending claims brought by third parties, not claims brought by the company in question.

If the last point stood alone I would have no difficulty in rejecting it. There would be no logic in providing for an indemnity in respect of the costs of unsuccessful claims by third parties but not in respect of the costs of unsuccessful claims by the company itself. In any event the terms of the articles in question show, in my judgment, that no such distinction was envisaged. Regulation 136 of the 1948 Table A states in terms that there is to be an indemnity not only in respect of the costs of proceedings successfully defended but also in respect of costs incurred where an officer or auditor of a company is given relief under section 448 on the ground that he has acted honestly and reasonably and ought to be excused. Article 118 of the 1985 Table A does not refer specifically to section 727 of the Companies Act 1985, which has taken the place of section 448, but there can be no doubt that the reference to "relief" is a reference to this section. It is clear that relief under section 448, and now under section 727, can be given in proceedings brought by the company. Indeed in Customs & Excise -v- Hedon Alpha Ltd [1981] QB 818 it was held that section 448 is inapplicable to any claim by third parties to enforce any liability except a director's liability to his company or his directors' duties under the Companies Acts.

I found greater substance in Mr Hirst's point that the articles are not, or may not be, part of the contract between the EJ companies and PW. The articles of a company constitute a contract between the members of the company inter se and between each of them and the company but they do not, without more, constitute a contract between the company and its directors or auditors. Nevertheless the terms of regulations 136 and 118 appear clearly to contemplate that directors and auditors (amongst others) will have a right, which could only be a contractual right, to be indemnified as there mentioned. It seems to me that comparatively little will be required to satisfy the court that, in particular cases, the indemnity provided for by regulations 136 and 118 is incorporated in the contract which is made when the company appoints a director or an auditor.

On this question I was referred to Re New British Iron Company [1898] 1 CH 324 where the directors of a company in liquidation claimed to be creditors of the company in respect of unpaid remuneration by virtue of an article providing that each director be paid an annual sum of Ł1000. Wright J held that they were. He said (at page 326):

"That article is not in itself a contract between the company and the directors; it is only part of the contract constituted by the articles of association between the members of the company inter se. But where on the footing of that article the directors are employed by the company and accept office the terms of art. 62 are embodied in and form part of the contract between the company and the directors."

Mr Kinsky submitted that, in the absence of evidence to the contrary, it should be assumed that the auditors of a company are engaged on the footing of the articles of the company, including any article giving them an indemnity, and that accordingly the indemnity given by the articles of each of the EJ companies was incorporated in the contract between each company and PW.

Mr Hirst submitted that the matter is not as simple as that. He referred me to Re City Equitable Fire Insurance Company Limited [1925] Ch 407. That case is more usually cited as an authority on the nature of the duties of directors, but one of the other issues raised in it was whether the auditors of the company could rely upon a provision in the articles of the company to protect them against a claim for negligence and breach of duty. The article in question in that case, article 150, was in very wide terms which are set out at page 413 of the report. It gave directors auditors and other officers of the company an indemnity in respect of losses damages and expenses incurred by means of acts or omissions in the execution of their duties, with the exception of any losses damages and expenses incurred or sustained by or though their own wilful neglect or default.

The trial judge, Romer J, found that the auditors had been negligent and would be liable but for article 150 but he then said (at page 499):

"But art. 150 in express terms includes the auditors of the company in the protection that it gives and it must be taken to be one of the terms on which the auditors were employed and gave their services."

He held that the auditors acted in good faith, albeit mistakenly, and that their negligence was not wilful. Accordingly they were exonerated.

In the Court of Appeal Warrington LJ dealt in greater detail with the incorporation of article 150 in the contract between the company and the auditors. He said (at pages 520-521):-

"In the first place, I think that that article, as the learned judge has held expressly in the case of the directors and impliedly, if not expressly, in the case of the auditors, does in such a case as the present form part of the contract between the company and the auditors, and for the reason that auditors are engaged without any special terms of engagement. When that is the case, then if the articles contain provisions relating to the performance by them of their duties and to the obligations imposed upon them by the acceptance of the office, I think it is quite plain that the articles must be taken to express the terms upon which the auditors accept their position. Of course, if the terms of their employment are expressed in a separate document, then that document must be taken to define the conditions of their engagement, and it would not be proper to assume any implied terms either from the provisions of the articles or elsewhere."

The other two members of the court, Sir Ernest Pollock MR and Sargant LJ, agreed that the auditors were exonerated by article 150 but did not discuss the means by which that article had been incorporated in the relevant contract (see pages 515-518 and 531-2).

Mr Hirst submitted that the words of Warrington LJ showed that the terms of the articles would not be incorporated in a contract between a company and its auditors where the terms of engagement are expressed in a separate document. This means that it is necessary, in a case where auditors seek to rely on a provision of the company's articles, to examine carefully the terms on which the auditors were engaged. This could not reliably be done on a summary application of the present kind.

Further Mr Hirst submitted that there was evidence in this case that PW were engaged on the terms of a document separate from the articles of any of the EJ companies. This is the letter of engagement, signed by Sir Elton and dated 1st July 1997, which is briefly referred to in paragraph 33 of my main judgment. This letter of engagement presents a number of problems, including the fact that, apart from PW, it was signed only by Sir Elton, who was not a director of any of the EJ companies; it was signed months before PW were formally appointed auditors of the EJ companies by resolutions which made no reference to the letter of engagement; it was expressed in terms which are silent about a number of matters, such as remuneration, which must have been agreed between the EJ companies and PW; and it is not inconsistent with the incorporation of the articles in question into the contract. Nevertheless it is impossible to say that there are no factual issues which may need to be examined in relation to the argument that the articles were incorporated.

If there was incorporation then it appears to me that PW's argument, although a novel one in relation to a claim for indemnity costs in proceedings for negligence, has considerable force. I have therefore considered carefully whether I ought, in these proceedings, to resolve the issues which arise in relation to it. In the end, however, I have reached the conclusion that this would not be the right course to take having regard to the circumstances which I have mentioned.

In the result, therefore, I refuse PW's application for indemnity costs. But I make it clear that, while my conclusion in respect of the section 51 jurisdiction is final, nothing which I have said will prevent PW seeking to recover the difference between the standard costs which I have awarded them and indemnity costs in separate proceedings to enforce the contractual terms of which PW claims the benefit under the articles.

PW's claim for interest on their costs for the period 4th August 2000 to 11th April 2001

In the ordinary way interest on costs runs from the date on which the court awards costs and directs them to be taxed, in this case 11th April 2001 (see Hunt -v- Douglas Roofing [1990] 1 AC 398). However, under the CPRs the court has power, amongst other things, to order that a party must pay interest on costs from or until a certain date, including a date before judgment (see CPR 44.5(6)(g)).

A specific case in which the CPRs envisage that the court may award interest on costs is where a part 36 offer is made by a claimant but not accepted by the defendant and the claimant subsequently does better at trial. In such a case the court may do a number of things including awarding interest on the sum awarded at a generous (or possibly even a penal) rate, awarding indemnity costs and awarding interest on those costs (see CPR 36.21(2) and (3)). This provision is not of course, applicable to the circumstances of the present case. It was relied upon, as I understand it, as an example of the way in which the CPRs recognise that a party is likely to have to lay out money on costs at a date significantly earlier than that from which interest on any costs awarded to him by the court will normally run and make provision for this to be compensated for in appropriate cases.

PW's argument that I should exercise in their favour the jurisdiction conferred on me by CPR 44.3(6)(g) was based upon the proposition that this would be just in the present case because the costs incurred were unusually large (I say something about the amount under the next head) and a reasonable offer was made which, if accepted, would have resulted in no further costs being incurred.

So far as the latter point is concerned, the reasonable offer referred to is that embodied in the letter of 21st July 2000 which I have already considered. In view of the conditionality of that offer its non-acceptance is not, in my judgment, a factor which would justify an award of interest on costs in any part of the period before 11th April 2001.

As to the amount of the costs, I accept that, even allowing for the costs attributable to the unsuccessful Part 20 proceedings, they are very large. No particulars were provided as to the dates on which they were actually laid out, but I accept that very considerable sums must have been expended in the course of preparation for trial, well before 11th April 2001. Nevertheless I do not think that the fact that the costs are large carries very great weight.

In addition the award of costs or of interest on costs involves an exercise of discretion in which the judge has to have regard to all the circumstances (see CPR 44.3(4)). When I made my decision in respect of costs on 11th April I tried to do this. In particular I had to consider an application on the part of the claimants that I should reduce the costs awarded to PW in such a way as to reflect the fact that PW had been unsuccessful on a number of issues. I concluded that it would not be appropriate to do so, having regard to all the circumstances. I was not asked on that occasion to make any order for interest on costs and it would be going too far to say that a factor which was actually present in my mind was that PW would receive no interest on their costs for any period before 11th April. Nevertheless the decision which I made on 11th April was made in an attempt to achieve a just and appropriate result in all the circumstances of the case. I do not consider it would be right now to vary the impact of that decision by exercising in favour of PW the jurisdiction to award interest on costs.

PW's application for a payment on account of their costs

This was a matter which was expressly stood over by my order of 11th April. It is not in dispute that an order for a payment on account should be made. Indeed at the time when I reserved my decision on the questions dealt with in this judgment I made, without opposition from Mr Hirst on behalf of the claimants, an order for an interim payment to PW of an amount equal to the payment which PW had agreed to make to FC on account of the costs of the Part 20 proceedings. The question which I have to decide under this head is what additional sum should be paid by the claimants.

On the footing that, as I have decided, PW are to recover only standard costs under the order made in these proceedings, the amount which PW seeks on account of costs, inclusive of the sum already ordered to be paid in connection with the Part 20 costs liability of PW, is Ł1.4 million. This sum is arrived at as follows. In round figures PW's total costs of the proceedings are estimated at a little under Ł3.2 million. Of this, a part is attributable to the Part 20 proceedings, which PW cannot recover from the claimants. This is put at Ł0.2 million, a figure which is calculated by reference to the proportion of the trial which was taken up by Mr Kallipetis on behalf of the Part 20 defendants. Allowing a further reduction to reflect the fact that PW will not be allowed all their costs on an assessment on the standard basis, it is suggested that PW will nevertheless recover at least Ł1.4 million from the claimants in respect of their costs and that this should be the amount of the payment on account. (If I had been in favour of PW on their claim to indemnity costs the suggested amount would have been Ł2 million.)

On behalf of the claimants it was submitted that this sum is far too high. They said that, in the absence of a formal bill (the time for lodging which I extended by consent until 10th October 2001) PW's costs on the indemnity basis should be taken as no more than Ł3 million, of which Ł1.5 million, which is roughly equivalent to the suggested costs of FC as Defendant in the Part 20 proceedings, should be attributed to PW's costs of the Part 20 proceedings. The claimants submitted that a payment of Ł750,000 (which is 50% of the residual Ł1.5 million) would be an appropriate payment on account of costs which are to be assessed on the standard basis.

Clearly a broad brush approach must be adopted in relation to a payment on account of costs which have yet to be assessed or even quantified in a formal bill, and it is best to err on the side of caution. I think that the allowance which PW suggested in respect of the proportion of their total costs attributable to the Part 20 proceedings was much too low and that suggested on behalf of the claimants is likely to be too high. I also consider that the claimants' approach would lean too far in favour of caution. Doing the best I can in all the circumstances I hold that the sum to be paid by the claimants on account of PW's costs, including the interim sum which I ordered to be paid when I reserved judgment, should be Ł1 million.

Mr Haydon's application for indemnity costs

As I stood over Mr Haydon's application for indemnity costs when it was made to me on 11th April, I have not yet exhausted my jurisdiction under section 51 and CPRs 43 and 44 to make an order that the costs which I have awarded him be assessed on the indemnity basis. The question is whether I think it right to do this in the exercise of my discretion. In doing so I must have regard to all the circumstances of the case including the factors mentioned in CPR 44.3(4).

Mr Haydon relied also on the articles point, saying that if this assisted PW it must be of equal assistance to himself, because the articles in question give the same indemnity to directors as they give to auditors. Indeed it was argued by Mr Fletcher on behalf of Mr Haydon that he is in a better position than PW so far as the articles are concerned. This is because it cannot be said that Mr Haydon's engagement as a director of Happenstance and Bondi (it will be recollected that I have held that he was not even a shadow director of Bong) is governed by a separate instrument. The letter of engagement relied upon as against PW does not apply to Mr Haydon and I was satisfied at the trial that he had no personal contract of employment with any of the EJ companies.

While I accept that Mr Haydon's claim under the articles is, if anything, more straightforward than PW's claim, I have reached the conclusion that it would not be right to uphold that claim in these proceedings when I am leaving the equivalent claim of PW to be dealt with, if it is proceeded with at all, in separate proceedings. The point is, to me at any rate, a novel one and I am unwilling to run the risk that, after I had given effect to the articles claim in favour of Mr Haydon, separate proceedings brought by PW might establish that there is some answer to it which could be relied upon against Mr Haydon as well.

I therefore deal with Mr Haydon's application for indemnity costs on what may be described as "conventional" grounds. As to these, under the old Rules of the Supreme Court the court declined to define the exact circumstances in which indemnity costs might be ordered. This remains the position under the CPRs. The considerations referred to in CPR 44.3 apply in relation to both standard costs and indemnity costs and to the choice of one basis of assessment over the other.

I was referred to a helpful summary of the principles which were applied under the RSC which is contained in the judgment of Hollis J, with whom Russell LJ agreed, in Munkenbach & Marshall -v- McAlpine [1995], 44 Con. LR 30. I was also referred to some observations of Lord Woolf MR in Petrotrade Inc -v- Texaco Ltd, unreported, 23rd May 2000. One of the issues in that case was whether CPR 36.21 applied where summary judgment was given and Lord Woolf, with whom the other members of the Court of Appeal agreed, began by considering that rule. He said (at paragraphs 62-65):

"62. However, it would be wrong to regard the rule as producing penal consequences. An order for indemnity costs does not enable a claimant to receive more costs than he has incurred. Its practical effect is to avoid his costs being assessed at a lesser figure. When assessing costs on the standard basis the court will only allow costs "which are proportionate to the matters in issue" and "resolve any doubt which it may have as to whether costs were reasonably incurred or reasonably proportionate in amount in favour of the paying party". On the other hand, where the costs are assessed on an indemnity basis, the issue of proportionality does not have to be considered. The court only considers whether the costs were unreasonably incurred or for an unreasonable amount. The court will then resolve any doubt in favour of the receiving party. Even on an indemnity basis, however, the receiving party is restricted to recovering only the amount of costs which have been incurred (see Part 44.4 and 44.5).

63. The ability of the court to award costs on an indemnity basis and interest at an enhanced rate should not be regarded as penal because orders for costs, even when made on an indemnity basis, never actually compensate a claimant for having to come to court to bring proceedings. The very process of being involved in court proceedings inevitably has an impact on a claimant, whether he is a private individual or a multi-national corporation. A claimant would be better off had he not become involved in court proceedings. Part of the culture of the CPR is to encourage parties to avoid proceedings unless it is unreasonable for them to do otherwise. In the case of an individual proceedings necessarily involve inconvenience and frequently involve anxiety and distress. These are not taken into account when assessing costs on the normal basis. In the case of a corporation, corporation senior officials and other staff inevitably will be diverted from their normal duties as a consequence of the proceedings. The disruption this causes to a corporation is not recoverable under an order for costs.

64. The power to order indemnity costs or higher rate interest is a means of achieving a fairer result for a claimant. If a defendant involves a claimant in proceedings after an offer has been made, and in the event, the result is no more favourable to the defendant than that which would have been achieved if the claimant's offer had been accepted without the need for those proceedings, the message of Part 36.21 is that, prima facie, it is just to make an indemnity order for costs and for interest at an enhanced rate to be awarded. However, the indemnity order need not be for the entire proceedings nor, as I have already indicated, need the award of interest be for a particular period or at a particular rate. It must not however exceed the figure of 10 per cent referred to in Part 36.

65. There are circumstances where a just result is no order for costs or no interest even where the award exceeds an offer made by a claimant. Part 36.21 does no more than indicate the order which is to be made by the court unless it considers it unjust to make that order."

The decision of the Court of Appeal in Petrotrade was that the case was not within CPR 36.21. The court did, however, consider whether, on the facts of that case, it would have been appropriate under CPR 44.3 to award indemnity costs and interest on costs on the basis of considerations equivalent to those which would have been applicable if the case had been within CPR 36.21. All three members of the Court indicated that they would have thought it right to order both interest on costs and indemnity costs, but as the arguments presented to the first instance judge were very different from those presented on the appeal they felt unable to say that the judge's exercise of his discretion was wrong.

I read the observations of the Court of Appeal in Petrotrade as amounting to an encouragement to judges to award indemnity costs where the facts make this appropriate, particularly where an offer has been made but not accepted and the party making the offer has achieved a more advantageous result. In particular the case emphasises the requirement of CPR 44.3(4)(c) that the court must have regard, inter alia, to "any ... admissible offer to settle ... (whether or not made in accordance with Part 36)". I think it also endorses an approach analogous to that made available by CPR 36.21 even in a case which is not strictly within that rule, so long as the main ingredients are present.

Mr Fletcher addressed to me a careful argument by reference to the factors stated in CPR 44.3(4). In this judgment I set out only a brief summary of the factors referred to by Mr Fletcher. Where relevant I include also any counteracting features relied upon by Mr Hirst.

(a) "The conduct of the parties"

Mr Fletcher submitted that the claimants had launched the proceedings in an aggressive manner with a letter before action dated 14th December 1998 peremptorily demanding Mr Haydon's agreement not later than 12th January 1999 to pay a sum in excess of Ł20 million followed by actual payment by 29th January 1999. Mr Fletcher justifiably said that this was a devastating claim to make against a private individual and one which would spell personal ruin for Mr Haydon. I agree that the claim was an aggressive one. It was however made in good faith and, granted that it was the claim which the claimants thought they were entitled to make, there was no particularly gentle way in which it could be made.

Mr Fletcher relied also on the fact that a claim for breach of fiduciary duty was made against Mr Haydon and, despite a marked failure to particularise it adequately, was persisted in until the second day of the trial when it was abandoned.

Mr Fletcher submitted that the claim in negligence was also unsatisfactory in that it was vague and general and did not clearly identify what Mr Haydon was alleged to have done or omitted in the relevant capacity. I do not propose to examine the pleadings in detail, but I think that this is a valid criticism. It was really only when the case was narrowed in the course of the closing submissions for the claimants so as to become focused on the two issues which I referred to in paragraph 278 of my judgment that it became possible to define precisely what the complaint was.

The impact of these last two features is that, in the case of the claim for breach of fiduciary duty, Mr Haydon will have incurred costs in meeting charges which were not persisted in and, in the case of the negligence claim, he is likely to have incurred greater costs than he would have incurred if the case had been more precisely pleaded.

Mr Hirst referred to the fact that the main ground on which I found in favour of Mr Haydon, namely that he was acting as an executive of JREL rather than as a director of any of the EJ companies, was only introduced into the pleadings at a late stage. It seems to me, however, that the point was one which the EJ companies should themselves have addressed from the outset, because the capacity in which Mr Haydon was acting was fundamental to their case. Mr Hirst referred also to Mr Haydon's admission that "we made a substantial mess of recharges of salaries and expenses". But the "we" in this statement is quite clearly JREL and does not amount to any justification for a suggestion that Mr Haydon brought the proceedings on himself as distinct from JREL. In any event the salaries and expenses claim was comparatively small in relation to the tour agents claim.

Mr Hirst also pointed out that some of the factors which are now relied upon in support of Mr Haydon's application for indemnity costs were relied upon in support of an attempt made on 3rd July 2000 to persuade the court to allow a striking out application to be listed and heard. This attempt was rejected by Rimer J. It appears to me to have been a somewhat ambitious attempt and I am not surprised that it failed. The costs of it were, I understand, dealt with by a separate order. I do not think this matter carries any real weight in relation to the application for indemnity costs.

(b) "Whether a party has succeeded on part of his case even if he has not been wholly successful"

Mr Haydon has been wholly successful in defeating the claim against him, although some of the arguments deployed on his behalf, notably the quasi rectification argument and the Jameson argument were not accepted. It was not suggested on 11th April that the rejection of these arguments justified awarding Mr Haydon less than the whole of his costs. This rejection was, however, an element in the EJ companies' resistance to an order that the costs be assessed on an indemnity basis. It is a factor which I must bear in mind on this issue.

On 22nd August 2000 Mr Haydon's solicitors wrote to the solicitors for the EJ companies arguing that the claim against Mr Haydon was bound to fail. The letter concluded with the following paragraph:

"Having said all of this, we, together with our clients, have tried to consider ways of avoiding a long and costly hearing (or at least minimising Mr Haydon's involvement). You and your clients have failed to respond at all to our suggestion that the parties meet. One of our reasons for suggesting such a meeting was to ensure that your clients appreciate the difficulties they face in their claim against our client. We are now instructed to make a Part 36 offer, relating to the entirety of the claim against Mr Haydon. The offer is that your clients forthwith discontinue their proceedings against Mr Haydon, who will bear his own costs up until the discontinuance. This offer will remain open until 5pm on Wednesday 13 September 2000."

The offer was not accepted within the time specified or at all. I was told that an attempt was made to arrive at a settlement by mediation, but this failed. Very properly I was not told anything further about the mediation.

There was some argument before me about whether the offer made in the letter dated 22nd August was or was not a Part 36 offer. Clearly it was not one which had the consequences set out in Part 36 itself because CPR 36.3 provides that an offer by a defendant to settle a money claim will only have those consequences if it is made by way of a Part 36 payment, which this offer was not. CPR 36.5(6)(b) also appears not to have been complied with.

Accordingly the automatic consequences provided for by CPR 36.20 are not applicable, as Mr Fletcher accepted. I think it is worth noting, however, that if the letter of 22nd August had offered nominal damages of, say, Ł100 and this sum had been paid into court, and if the formalities prescribed by CPR 36.5(6) had been strictly complied with, CPR 36.20 would have applied to this case. Under this rule

"Unless it considers it unjust to do so, the court will order the claimant to pay any costs incurred by the defendant after the latest date on which the payment or offer could have been accepted without the permission of the court."

In my judgment, however, the fact that, on somewhat technical grounds, the letter was not such as to attract this consequence is of comparatively minor importance. As Mr Fletcher contended the letter can still have effect as a Calderbank offer, the concept of which is preserved by CPR 36.1. Moreover CPR 44.3(4)(c) requires the court to have regard to any admissible offer to settle "whether or not made in accordance with Part 36"; and CPR 36.1 itself recognises that the court may order that such an offer has the Part 36 consequences.

Drawing together the various threads which I have mentioned I reach the conclusion that the circumstances relating to the claim against Mr Haydon are not such as to justify an order that all his costs are to be assessed on the indemnity basis. But I consider that the non-acceptance of the offer contained in the letter of 22nd August leads to a different result in respect of his costs incurred after 13th September 2000, the date specified for acceptance of the offer. Had CPR 36.20 been automatically applicable I would not have considered it unjust to make the order referred to in that rule. Having regard to the fact that the offer fails to come within CPR 36.20 on grounds which, in relation to the issues in this case, are of technical rather than substantive importance, and having regard also to what was said in the Petrotrade case, which I have quoted earlier, I have reached the conclusion that it would be right to order that Mr Haydon's costs incurred down to and including 13th September 2000 are to be assessed on the standard basis but his costs incurred after that date are to be assessed on the indemnity basis.

Mr Haydon's application that the amount to be paid on account of his costs be increased

My decision in respect of indemnity costs means that it is necessary to reconsider the amount payable on account of costs. My earlier order for a payment on account of Ł500,000 was based on the assumption that Mr Haydon's costs, estimated at Ł1.3 million plus VAT, would be assessed on the standard basis. It is difficult to gauge how much extra Mr Haydon will recover in respect of these costs which I order to be assessed on an indemnity basis and, as I indicated earlier, I think it right to adopt a cautious approach. I order that the amount to be paid on account of Mr Haydon's costs shall be increased from Ł500,000 to Ł650,000. Subject to any additional submissions which may be made to me, the additional Ł150,000 must be paid within 14 days of today.