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Cite as: [2003] 1 Costs LR 1, [2002] 1 WLR 2722, [2002] CP Rep 37, [2002] WLR 2722, [2002] EWHC 233 (Ch), [2003] 2 All ER 1017, [2002] FSR 59

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		Neutral Citation Number: [2002] EWHC 233 (Ch)
		Case No: HC0004329

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

4 March 2002

B e f o r e :

THE HONOURABLE MR JUSTICE STANLEY BURNTON
____________________

	ADMIRAL MANAGEMENT SERVICES LIMITED	Claimant
	- and -
	(1) PARA-PROTECT EUROPE LIMITED
	AND OTHERS	Defendants

____________________

Alistair McGregor QC and Nigel Porter (instructed by Boyes Turner) for the Claimant
Harvey McGregor QC and Gerard Clarke (instructed by Field Fisher Waterhouse) for the Defendants
Dates of Hearings: 11 December 2001 and 19 February 2002.
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Stanley Burnton:

The proceedings

The Claimant's business includes the provision of consulting and forensic services in relation to the security of computer systems. The individual Defendants are former employees of the Claimant. The First Defendant is a competitor of the Claimant. It was incorporated in England and Wales on 29 June 2000 by its American parent company Para-Protect Inc.. Between July and August 2000 all of the individual Defendants left the Claimant to join First Defendant.

In these proceedings the Claimant alleged that the Second and the Third Defendants, while still employees of the Claimant, had orchestrated the exodus of the Claimant's staff to First Defendant and solicited the Claimants' customers to transfer their business to it. They also alleged that the Second Defendant and the Third Defendant had stolen or copied documents of the Claimant for use in the First Defendant's business.

On 20 September 2000, the Claimant applied without notice for a search and seizure order and interlocutory injunctions against the First Defendant, and for other relief against the Second and Third Defendants. An order was made by Hart J on 22 September 2000. It provided for the imaging (i.e., copying) of the hard discs of computers on the First Defendant's premises and the copying of other electronic storage media. The execution of the order was to be supervised by a Supervising Solicitor, and he was to have the benefit of an independent computer expert if he so required. The order also provided for the delivery up of documents by the Second Defendant and the Third Defendant.

On the same date, the Claimant's Claim Form was issued. It included claims for injunctions, accounts of profits and damages in relation to the Defendants' alleged use of confidential information derived from documents of the Claimant, an injunction restraining the first three Defendants from entering into or fulfilling any contract for the provision of IT security services with any client of the Claimant who had been approached by the Second Defendant or Third Defendant while they were employees of the Claimant and accounts of any profits earned as a result of any such contract, damages for breach of confidentiality, breach of contract and breach of the individual Defendants' fiduciary duties, conspiracy and breach of copyright. In addition, various injunctions were sought restraining allegedly wrongful acts of the Defendants competing with the Claimant's IT security business.

The search and seizure order was executed on 25 September 2000. Documents and floppy discs belonging to the Claimant were removed from the First Defendant's premises, and the imaging of the First Defendant's computers was begun. The Claimant alleges that the documents removed contained confidential information belonging to it. The orders against the Second Defendant and Third Defendant were served on them on 25 and 26 September 2000.

Draft Particulars of Claim were prepared but never formally served. The Claimant's applications for injunctive relief came back before the Court on 3 October, when undertakings were given on behalf of the Defendants.

On 1 November 2000, the proceedings were settled by a consent order of that date ("the Order"). The Defendants made no express admission of liability. The Order was in Tomlin form, staying the proceedings except for the purpose of carrying into effect or enforcing the terms of the Order. It contains extensive undertakings on the part of the Defendants in relation to the Claimant's documents and in relation to the protection of its business, and an agreement by the Defendants to pay the Claimant "by way of agreed damages the sum of £40,000 …. in full and final satisfaction for all claims for financial compensation in whatever form arising within the Claimant's claim herein except the Claimant's claim to the sums set out in paragraph 1 of the order herein …" In addition, the Defendants were ordered by paragraph 4 of the Order to pay to the Claimant the costs of "the claim and all proceedings therein including the costs of and occasioned by the applications herein made on 20 September 2000 and adjourned to 22 September 2000 such costs to be the subject of a detailed assessment if not agreed". Paragraph 1 of the Order is as follows:

"1. That the following issues be referred to a Judge of this Division for determination, namely:

1.1 whether the sums of £120,000, and/or £67,500 and/or £6,500 claimed by the Claimant for work done by employees within its forensic department and by Andrea Cumming and by a consultant as part of its costs of the claim and/or of any proceedings within this claim and/or occasioned by the application on 20 September 2000 and adjourned to 22 September 2000 constitute costs in whole or in part properly recoverable by the Claimant subject to detailed assessment of those costs; or

1.2 If the same do not constitute costs in whole or in part properly so recoverable, whether the same may be claimed in whole or in part against the Defendants as damages subject to assessment of damages."

It is common ground that the "work done" referred to in paragraph 1 of the Order was work carried out in investigating and obtaining evidence of the torts committed by the Defendants complained of in these proceedings.

By a consent order dated 30 July 2000 it was ordered that the issues set out in paragraphs 1.1 and 1.2 of the Order of 1 November 2000 be determined by way of preliminary issue, and directions were given for pleadings and evidence. The preliminary issue was heard before me on 11 December 2000.

Andrea Cumming, referred to in paragraph 1.1 of the Order, is an employee of the Claimant whose responsibilities extend beyond its forensic department. The Claimant has abandoned its claim in respect of the consultant referred to in paragraph 1.1 of the Order.

This is my judgment on the preliminary issues. It follows that I have not considered any questions of fact or detail other than those relevant to the questions of principle.

Costs

The issue raised by paragraph 1.1 of the Order is whether and to what extent may the Claimant company recover by way of costs sums in respect of the time and work of its own employees.

The Claimant concedes that in the ordinary way a company cannot recover by way of costs any payment for the time of its employees engaged in investigating or prosecuting its claim. It contends that some of its employees were experts in the field of computers, and that it is entitled to recover sums for their work in connection with the claims against the Defendants. It also contends that its employees provided expert services in determining whether documents found on the Defendants' computers were the Claimant's documents or copied or derived from its documents or contained the Claimant's confidential information.

The Defendants dispute that they have accepted liability for the costs claimed. They deny that costs may be awarded in respect of the time of a company's expert staff working on a claim. In addition, they dispute that any of the staff in question were experts for this purpose. They dispute that the level of expertise involved was sufficient to qualify them as experts. It was also submitted on their behalf that, since none of them would or could be called as expert witnesses in the proceedings, on account of their lack of independence, accordingly nothing could be recovered for their time or work.

I can deal with the question of liability in principle shortly. If any of the costs referred to in paragraph 1.1 of the Order fall within paragraph 4 of the order, the Defendants are required to pay them. Paragraph 4 is in the normal wide terms, including not merely the costs of the application for a search order and injunctive relief but in addition the costs incidental to the application. As will be seen, in Re Gibson's Settlement Trusts [1981] 1 Ch 179, Megarry V-C pointed out that the costs "incidental to" proceedings go beyond those "of" the proceedings.

Furthermore, the wording of paragraph 1.1 indicates that the Defendants are to pay such costs referred to in it as are "properly recoverable". These words must be taken to refer to the rules for the recovery of costs, of which the most basic is that costs "of and incidental to" proceedings are in the discretion of the Court: section 51 of the Supreme Court Act 1981. Whether the costs referred to in paragraph 1.1 of the Order are in principle "properly recoverable" is one of the issues before me. Apart from paragraph 4 of the Order, it would be implicit in paragraph 1.1 that if the costs claimed by the Claimant are "properly recoverable", they are to be recovered from, that is are payable by, the Defendants. Paragraph 1.1, like paragraph 1.2, cannot sensibly be interpreted as creating an academic issue that has no relevance to the enforceable rights and liabilities of the Claimant and the Defendants.

The time from which costs may be recoverable

The time during which work was done in respect of which payment is claimed by the Claimant was divided into 3 periods:

(a) The period of investigation of the Defendants' conduct and their possible liabilities to the Claimant. This period began in mid-August 2000.

(b) The execution of the order of 22 September 2000.

I think that it is helpful to sub-divide period (a) into the period between the arousal of suspicion and the decision to instruct solicitors, and the period after that decision was made and the making of the without notice application on 20 September 2000.

Mr Alistair McGregor QC submitted that the time from which work may be carried out for which a claimant is entitled to be reimbursed by way of an order for costs is in the discretion of the Court: in some cases, costs start to run only when proceedings are issued, while in others they may start at an earlier stage.

Essentially, of course, all costs are in the discretion of the Court: see section 51 of the Supreme Court Act 1981 and CPR Part 44.3. The real question is: what costs are subject to that discretion? In considering this question, I leave out of account cases where a party may be deprived of costs because of his conduct or because the costs incurred were disproportionate. I am considering under the present heading the question when the work which is capable of being the subject of a costs order may begin.

The relevant authorities are the decisions of the Court of Appeal in Pêcheries Ostendaises (Soc. Anon.) v Merchants' Marine Insurance Company [1928] 1 KB 750 and in Frankenburg v Famous Lasky Film Service Ltd [1931] 1 Ch 428, and that of Megarry V-C in Re Gibson's Settlement Trusts referred to above. The relevant costs rules at the dates of those decisions differed from the present rules, but I do not think that any difference of principle or of application has been introduced.

At the date of the Pêcheries Ostendaises case, the relevant rule was Order 55, r. 27, sub-r. 29, which provided that "on every taxation the taxing master shall allow all such costs, charges and expenses, as shall appear to him to have been necessary or proper for the attainment of justice or for defending the rights of any party". In that case the judge had disallowed costs incurred by the plaintiff before the commencement of its action. The Court of Appeal reversed his decision. Lord Hanworth MR said, at 757:

"It appears to me … that there is power in the Master to allow costs incurred before action brought, and that if the costs are in respect of materials ultimately proving of use and service in the action, the Master has a discretion to allow these costs, which he probably will exercise in favour of the party incurring them, because they have been made use of during the course of the action."

The decision in the Pêcheries Ostendaises case was followed by the Court of Appeal in Frankenburg. In that case (taking the facts from the judgment of Lawrence LJ at 440):

"the plaintiff was in occupation of a house the enjoyment of which he feared would be interfered with by the erection of a building in close proximity to it: he thereupon consulted his solicitors and an expert with a view to obtaining legal advice and of ascertaining how the new building would affect his ancient lights: he obtained plans and advice from the architect and surveyor and ultimately brought this action."

Lord Hanworth MR said, at 435:

"It appears to me that Pêcheries Ostendaises (Soc. Anon.) v. Merchants' Marine Insurance Co., to which reference has been made, is both a binding and a guiding authority to us on this point. I do not at all shrink from or desire to vary the words which I used in that case: 'It appears to me, therefore, that there is power in the Master to allow costs incurred before action brought, and that if the costs are in respect of materials ultimately proving of use and service in the action, the Master has a discretion to allow these costs, which he probably will exercise in favour of the party incurring them, because they have been made use of during the course of the action.' It is said that those words are too wide, and that they ought not to be 'in respect of materials ultimately proving of use and service in the action,' but that they ought to be cut down to the words which Atkin L.J. used, in the same case, 'where necessary or proper for the attainment of justice.' As I say I do not shrink from the words I used. I think that when I speak of costs in respect of materials 'ultimately proving of use and service in the action' I mean as being proper for the attainment of justice in that case. They would not be of value or service in the action unless they were relevant to some of the issues which had to be tried and in respect of which justice was sought. I do not desire to embellish or to withdraw from the words I then used."

Lawrence LJ and Slesser LJ agreed with the Master of the Rolls.

These authorities were reviewed by Megarry V-C (sitting with Assessors) in Re Gibson's Settlement Trusts. In that case, as in the present, the costs order provided for the payment of costs "of and incidental to" certain applications. Megarry V-C held that the words "and incidental to" extended the scope of the order for costs, so that they were not restricted to the costs "of" the applications in question, though they had to be incidental to them. The familiar phrase "costs of and incidental to" proceedings was derived from section 50(1) of the (then) Supreme Court of Judicature (Consolidation) Act 1925 and RSC Order 62, r 2(4). (There is no material difference between the provisions of section 50(1) of the 1925 Act and the current section 51 of the Supreme Court Act 1981.) On the basis of the Pêcheries Ostendaises and Frankenburg cases, he held that "costs reasonably incurred" could include, and did in that case include, costs incurred before the proceedings in question were begun. He said, at 187:

"Obviously the test cannot be simply whether the materials in question proved in fact to be of use in the action, for otherwise when a case is settled before trial (as it was in both the Pêcheries case and the Frankenburg case) it would often not be possible to say with any certainty which materials had been or would have been of use in the action. Nor would it be right to penalise the successful litigant for obtaining materials which appeared likely to be of use in the action but which, in the event, were never used because the other party did not contest the point. Whatever may be the position on a party and party taxation, if the taxation is on the common fund basis I think that one must go back to the words "costs reasonably incurred"; and, as I have said, I think that this must mean the costs of and incidental to the proceedings in question. Neither the fact that at the time when the costs were incurred no writ or originating summons had been issued, nor the fact that the immediate object in incurring the costs was to ascertain the prospective litigant's chances of success, will per se suffice to exclude the costs from being regarded as part of the costs of the litigation that ensues. Of course, if there is no litigation there are no costs of litigation. But if the dispute ripens into litigation, the question then arises how far the ambit of the costs is affected by the shape that the litigation takes."

I have referred to all three of these decisions because in each of them the basis for taxation was different. In Pêcheries Ostendaises, the taxation was on a party-and-party basis, as, now termed "the standard basis", it is in the present case; in Frankenburg it was on a solicitor and own client basis; and in Re Gibson's Settlement Trusts it was on a common fund basis. It follows from those authorities that costs incurred before the commencement of proceedings may be "properly recoverable" if the costs were reasonably incurred in order to obtain material that was, or would have been but for the settlement of the proceedings, of use and service in the claim. The facts of Frankenburg show that in the present case costs could be recoverable from the time when the Claimant reasonably suspected that the Defendants or some of them had committed or were committing the wrongs that were the subject of the subsequent claim.

I add that in my judgment in principle costs may be recovered although they were incurred before the Claimant instructed its solicitors, provided the items of costs in question are eligible for recovery under the principle stated in Nossen's case, to which I refer below. I reject the submission made by the Defendants that costs are limited to the costs of and costs incurred by a party's solicitors.

The items of costs recoverable

As I mentioned above, the Claimant accepts that in general the work of a party's employees in investigating, formulating and prosecuting a claim by legal proceedings does not qualify for an order for the payment of the costs of and incidental to those proceedings. The Claimant relies on the exception to that general rule described in Re Nossen's Letter Patent [1969] 1 WLR 638. In that case, the respondent, the United Kingdom Atomic Energy Authority, had had experiments conducted by its expert employees for the purpose of proceedings it anticipated would be brought by the applicant, and subsequently for the purpose of those proceedings. Lloyd-Jacob J, sitting with Assessors, held that the reasonable actual and direct costs of those experts' work, excluding any overhead costs, were recoverable by the respondent. Lloyd-Jacob J said, at 643:

"There remains for consideration the submissions which were directed to the scale of charges proper for allowance in respect of the activities of the respondents and their advisers between December 6, 1962, and November 22, 1963, excluding the hydrolysis project work of the Research Group at Harwell. The established practice of the courts has been to disallow any sums claimed in respect of the time spent by the litigant personally in the course of instructing his solicitors. In the case of litigation by a corporation, this has not been strictly applied, for it has been recognised that, if expert assistance is properly required, it may well occur that the corporation's own specialist employees may be the most suitable or convenient experts to employ. If the corporation litigant does decide to provide expert assistance from its own staff, as happened in this case, the taxing master has to determine the appropriate charge to allow. For an outside expert, the normal assessment would be based on current professional standards, and this in suitable cases would include a proper proportion of the overhead costs of running his office or laboratory, that is, of the costs necessarily incurred by him in his capacity as a consultant, as well as a profit element upon such expenditure. The taxing master, in the exercise of his discretion, took the view that it would be an unreasonable burden to place upon the chargeable party the inclusion of any items in respect of the respondents' own overhead expenses or any profit element referable thereto. As he himself expressed it:

'I allowed, broadly speaking, the fees and salaries of those actively engaged in the experiments. I also allowed the costs of the materials and stores used, and electricity, steam, water, etc. I did not allow the overhead expenses for buildings, plant and equipment, nor did I allow works and group overheads. The expenses in connection with the respondent's qualified staff carrying out these experiments are allowable only on the basis of qualifying fees in connection with expert evidence necessary to the defence of the action. This I considered right as the experiments would otherwise have been carried out by outside experts. I allowed not only the charges I have indicated for the experiments, but also certain charges of the patents staff on making searches and enquiries.'

In this he was plainly right, covering as he did the actual and direct costs of the work undertaken in the sense of indemnifying the respondents for the salaries, materials and out-of-pocket expenses of those engaged in the conduct of the experiments. No part of the respondents' expenditure on overheads was occasioned by this litigation and it would be unreasonable to transfer to the applicant the burden of meeting some part of it by reason only of the respondents' decision to prefer the services of their own staff to those of independent experts.

In summary, and since I have been asked to state the principle involved, it is, as the taxing master appreciated, that: when it is appropriate that a corporate litigant should recover, on a party and party basis, a sum in respect of expert services of this character performed by its own staff, the amount must be restricted to a reasonable sum for the actual and direct costs of the work undertaken."

I find it curious that a more liberal principle for the recovery of costs should be applied to a corporation than to an individual or to a partnership, but since the Claimant in the present case is a corporation, I do not have to consider this aspect of the decision in Nossen's further.

Mr Harvey McGregor QC disputed that the statement in Re Nossen's Letter Patent that the costs of expert employees may be recoverable is good law. He referred me to London Scottish Benefit Society v. Chorley (1884) 13 QBD 872, in which the general principle was stated that no costs are recoverable for the time of a non-lawyer litigant in person; on the other hand, a solicitor acting for himself is allowed to recover his reasonable professional fees. Bowen LJ said:

"… only legal costs which the Court can measure are to be allowed, and that such legal costs are to be treated as expenses necessarily arising from the litigation and necessarily caused by the course which it takes. Professional skill and labour are recognised and can be measured by the law; private expenditure of labour and trouble by a layman cannot be measured. It depends on the zeal, the assiduity, or the nervousness of the individual. Professional skill, when it is bestowed, is accordingly allowed for in taxing a bill of costs; and it would be absurd to permit a solicitor to charge for the same work when it is done by another solicitor, and not to permit him to charge for it when it is done by his own clerk."

London Scottish Benefit Society v. Chorley was followed in Buckland v Watts [1970] 1 WLR 70, in which a lay litigant in person was refused recovery in respect of his time spent on his case. Sir Gordon Willmer said, at 37 (with my italics):

"It is because there has been an exercise of professional legal skill that a solicitor conducting his own successfully is treated differently from any other successful litigant in person conducting his own case. We are not concerned with the exercise of other professional skills. Other professional people, who become involved in litigation and conduct their own cases, may recover something in respect of their own professional skill in so far as they qualify as witnesses and are called as such. Nobody else, however, except a solicitor, has ever been held entitled to make any charge, as I understand it, in respect of the exercise of professional legal skill and it is this which the appellant has sought to do in the present case."

London Scottish Benefit Society v. Chorley and Buckland v Watts were followed by the Court of Appeal in Jonathan Alexander Ltd v Proctor [1996] 1 WLR 518, in which it was held that no costs were recoverable by the plaintiff company in respect of the time and work of its director who had represented it in proceedings in the County Court.

Mr Harvey McGregor submitted that the decision in Re Nossen's Letter Patent is inconsistent with London Scottish Benefit Society v. Chorley, Buckland v Watts and Jonathan Alexander Ltd v Proctor, and is accordingly not good law. I disagree. Re Nossen's Letter Patent was concerned with a relatively narrow point, namely whether costs could be awarded in respect of the work of experts who were employees of a party, a point that was not considered in or relevant to Buckland v Watts or Jonathan Alexander Ltd v Proctor. Indeed, Re Nossen's Letter Patent was not cited in either of the later Court of Appeal decisions. Lloyd-Jacob J's judgment in Nossen's described an established practice in patent actions. As far as I am aware, his judgment has not been the subject of adverse judicial comment, and it is in practice applied by Costs Judges. I see nothing unjust in reasonable recovery of the costs of in-house experts, and it is certainly not obvious why the costs of outside experts should be recoverable but not those of in-house experts. In this connection, it is worth bearing in mind that the perceived injustice of the decision in Buckland v Watts was reversed by statute, by the Litigants in Person (Cost and Expenses) Act 1975, and that similarly the costs unsuccessfully claimed in Jonathan Alexander Ltd v Proctor are now recoverable by a company: see CPR Part 48.6 (6)(a).

Mr Harvey McGregor also relied on the italicised sentence in the above citation from the judgment of Sir Gordon Willmer in Buckland v Watts. He submitted that the experts in respect of whose work the Claimant claims costs were not and could not have been called to give evidence as expert witnesses, since they could not fulfil the requirement of independence, and he referred me to Liverpool Roman Catholic Archdiocesan Trust v Goldberg (No. 3) [2001] 1 WLR 2337, in which Evans-Lombe J rejected as inadmissible the evidence of an expert (Mr Michael Flesch QC, the tax barrister) on the ground of his personal relationship with the defendant, a member of the same chambers, on whose behalf his evidence had been tendered. I have to say, with respect to Evans-Lombe J, that I have some difficulty in reconciling his decision with that of the Court of Appeal in Field v Leeds City Council (8 December 1999), reported in The Times of 18 January 2000, and referred to at paragraph 35.4.3 of the White Book. In that case it was held that an employee of the defendant local authority with the appropriate expert qualifications was not disqualified from testifying as an expert witness. His relationship to the defendant went to the weight to be given to his evidence, but not to its admissibility, provided the expert appreciated that his paramount duty in giving expert evidence was to the Court. It is not easy to distinguish the personal relationship between the proposed expert and the defendant in the Goldberg case and that of the employer and employee in Field v Leeds City Council. Field v Leeds City Council was cited to, but not referred to in the judgment of, Evans-Lombe J in the Goldberg case. In any event, however, it follows from Field v Leeds City Council that in the present case the experts in question (assuming they qualified as experts) would not have been disqualified from testifying by reason of the fact that they were employees of the Claimant.

Since the expert employees in Re Nossen's Letter Patent were not called to give evidence (there having been no trial), the judgment in that case is inconsistent with the above-cited italicised sentence from the judgment of Sir Gordon Willmer in Buckland v Watts. However, neither of the other members of the Court of Appeal in that case agreed with his statement, and it was unnecessary to the decision. As will be already evident, I prefer to follow the decision in Re Nossen's Letter Patent to the above statement of Sir Gordon Willmer. Costs do not provide a complete indemnity to a claimant in a case such as the present. There is a conflict between on the one hand the principle of requiring an unsuccessful defendant to pay comprehensive remuneration for the time reasonably spent by a claimant's employees on its well-founded claim and on the other hand the consequence of so increasing recoverable costs as to render litigation even more prohibitively expensive than it is now. To permit recovery of a reasonable sum for the work of employee experts which, if done by someone who was not an employee, would be recoverable as an item of costs, is a relatively minor inroad into the general principle that payment for work done by employees of a litigant is not recoverable as costs; it does not strike me as unjust or as imposing an unfair burden on the paying party.

Lastly under this head, I accept Mr Alistair McGregor's submission that the principle in Re Nossen's Letter Patent is not limited to actions for patent infringement. It must be applicable to all litigation involving claims of wrongful use of intellectual property, and in the present case there were claims for wrongful use and disclosure of confidential information and for breach of copyright and for breach of the Claimant's database right. Indeed, I see no logical reason why a different principle in regard to the recoverability of costs should apply to intellectual property tort claims as against other claims.

I should mention that no reliance was placed by the Claimant on CPR Part 48.6 (6)(a), doubtless because the Claimant acted with legal representatives.

Mr Alistair McGregor referred me to the judgment of HH Judge Fox-Andrews QC in Cheffick Ltd v JDM Associates (No. 4) 22 Con LR 51. The judge required payment by plaintiff of a gross sum of costs covering the defendants' non-expert employee time as a condition of the grant of application to amend its pleading. I do not find it easy to reconcile his judgment with that of Bingham J in Richards & Wallington (Plant Hire) Ltd v Devon County Council (unreported, 11 June 1984), to which I refer below, but in any event in the present case no question of amendment of pleadings arises.

My conclusion is that the reasonable costs of the Claimant's expert employees in investigating, formulating and presenting the claims against the Defendants from the time that the Claimant formed its suspicion of their wrongs that were the subject of the claim in these proceedings may qualify for an order for costs. Such reasonable costs will not include any element of overhead recovery or of profit: Nossen's case of 643H-644B.

Whether the work of the Claimant's employees does qualify for inclusion in an order for costs depends on whether the employees are truly experts and on the nature of the work carried out. These issues are not issues for decision by me in this judgment, but are to be decided, if not agreed, at a further hearing. Since, however, argument and evidence has been presented touching on these questions, I shall comment on them.

Were the Claimant's staff "experts" and did their work qualify as expert work?

The narrowness of the principle in Re Nossen's Letter Patent is emphasised by the decision of Bingham J in the Richards & Wallington case. It concerned a claim made by a contractor against the County Council for building costs. The claim had been formulated and the necessary information obtained by a non-executive director who was paid a daily fee for his work and an employee of the claimant. The claimant had also retained a well known outside expert in the presentation of claims of the kind in question. Bingham J rejected the claim to have the cost of their work included in the costs recoverable from the County Council. He said:

"The dividing line between expert and factual evidence is never an easy one but it is relevant that the expert instructed on behalf of Richards & Wallington is Mr Quinlan and essentially what Mr Atkinson and Mr Kottler were doing, as I understand it and as I think the Master understood it, was to dig out the basic factual material which was necessary to prove the claim and on which Mr Quinlan's expert evidence was to rest. I have no doubt that a great deal of work needed to be done, part of this perhaps being attributable to the difficulties of proof in which Richards & Wallington found themselves and various problems that they had to overcome. But essentially, I think, these two gentlemen were engaged on a factual exercise; they were certainly not independent experts; they were not, in truth, acting as experts at all and, in my judgment, these costs fall within the ordinary costs that a litigant must bear of digging out his own factual material, through his own employees, to prove his own case. Had outside experts been introduced to carry out this work then it by no means seems to me to follow that it would in any event have been recoverable as a cost of the litigation.

…. the principle is not, I think, in doubt. …. the facts of Nossen's case were very special and the work that was being done was there work which the client was himself carrying out at the behest of an independent expert, saving the independent expert the cost of doing the work, and it was, I think, essentially work of an expert character."

The question therefore arises whether the work done by the Claimant's staff in the present case was of expert work of the kind that may be the subject of an order for costs under the principle stated in Nossen's case, or was fact-finding work of the kind for which costs were refused in Richards & Wallington. As I stated above, in order for Nossen's case to be applicable, the staff in question have to have a sufficient level of expertise to qualify as experts, and in addition the nature of the work carried out must qualify for a costs order. As Bingham J said in Richards & Wallington, the dividing line between factual evidence and expert evidence may be difficult to draw. In addition, there is are now special rules applicable to expert witnesses, leading to a distinction between an expert advisor and an expert witness instructed to prepare a report for the Court: see paragraph 35.2.1 of the White Book. In general, of course, expert evidence is based on facts provided by others; factual witnesses depose to the facts on which expert evidence may be based. However, the fact that a particular computer was used by a particular defendant may qualify as a sufficient underlying fact. If a sufficiently high level of expertise is required in order to recover from such a computer documents evidencing wrongs committed by that or other defendants, in my judgment the recovery of those documents might be the subject of expert evidence, and in any event may properly be the subject of an order for costs. There is no sufficient distinction between such work and that carried out in Nossen's case and made the subject of a costs order. Similarly, if a sufficiently high level of expertise is required to ascertain whether documents saved on a computer are derived or copied from documents of the Claimant, that work too may be the subject of an order for costs.

However, someone whose computer abilities go no further than familiarity with Microsoft Windows and Microsoft Office applications and the equivalent products of other companies clearly is not an expert, even though his computer skills may still be relatively unusual. Some special skill or knowledge is required, skill or knowledge not available to the ordinary computer user. I was told by Mr Alistair McGregor QC, on behalf of the Claimant, that the Second Defendant's and the Third Defendant's laptop computers were examined during period (a), and that it was found that files on the hard disks had been erased by the use of proprietary software. The Claimant was however able to retrieve relevant information from the disks by accessing the slack space on the computer hard disk. In addition, it was suggested that special expertise is required to access information on a hard disk without over-writing existing data on the disk. It may be that special expertise is required to carry out these processes, in which case those who were qualified to and did carry them out may qualify as experts for the purposes of the recovery of costs. On the other hand, someone who did no more than access or examine a file and bring up its "properties" in Microsoft Word clearly would not be using a sufficient level of expertise for the present purpose. Similarly, if the imaging of a computer hard disc is as straightforward a task as is stated by Mr Ayres in his witness statement, it does not qualify as expert work and the costs of the work cannot be recovered under the principle in Nossen's case. Mr Ayres stated:

"The task of imaging was a mundane one which could have been performed by one junior employee. The process of imaging a computer requires a few minutes to configure the imaging computer and hook it to the computer to be imaged. After this set-up, the sole activity consists of sitting there patiently and waiting while the copy is made. Indeed, it is not even necessary to wait: you can go away and come back later when the imaging has been completed. On one occasion, Admiral did just this: leaving a machine to work overnight. Admiral has nonetheless put in an extravagant claim in respect of this work."

It was submitted on behalf of the Claimant that the familiarity of the Claimant's employees with the documents, clients and information of the Claimant qualified them as experts for the purposes of analysing information obtained from the Defendants' computers, including information obtained by the execution of the search order. I do not agree. There is no distinction between the examination of documents on or derived from a computer and the examination of hard copies of documents. Familiarity with a party's business does not make a witness into an expert either for the purpose of testimony or for the purpose of the recovery of costs. Work in this category is indistinguishable from that considered by Bingham J in Richards & Wallington. In this connection it seems to me to be irrelevant that the work might have been done at greater expense by employees of the firm of solicitors instructed by the Claimant. It is the nature of the work in question that qualifies for inclusion of a costs order, not the amount of cost incurred or saved. Doubtless a considerable amount of analysis of information obtained from computers and on execution of the order was carried out by the Claimant. That work does not seem to me to qualify for an order for costs under the Nossen's principle.

In general, however, I cannot in this judgment reach a decision as to whether the employees of the Claimant were sufficiently qualified to be experts, or whether individual items of their work constituted work of an expert nature so as to qualify as the subject of a costs order. The witness statement of Mr Ayers, the Second Defendant, gives powerful reasons why most of the work that is the subject of the Claimant's contentions does not so qualify, and indeed why some of the Claimant's staff involved were not experts. These questions are for the next stage of these proceedings.

Damages: must the Claimant prove its loss?

The Defendants submitted that the Order did not impose liability on them for the damages referred to in paragraph 1.2 of the Order, assuming that they would be recoverable in law. They submit that their liability for damages must be proved.

In my judgment the Defendants did impliedly accept liability for the damages referred to in paragraph 1.2 of the Order, for two reasons. First, I see no point in the reference of the issue in that paragraph for determination unless the Defendants accepted liability. Secondly, and consistently with the first point, the claim referred to in paragraph 1.2 is expressed as being subject to assessment of damages, not to liability. The real question is: has the Claimant established that the Defendants are liable to it for the damages referred to in paragraph 1.2 of the Order? In order to consider that question, it is necessary first to consider the possible bases of the claim for damages to which it refers.

The basis of a claim for damages

In certain circumstances, substantial damages in tort may be awarded even though the claimant has not been put to any expense as a result of the tort. Examples are claims for the wrongful detention or use of a chattel that the owner could have hired out: Strand Electric v Berisford Entertainments Ltd [1952] 2 QB 246. Many claims for breach of intellectual property rights are in a similar category, and wrongful use of confidential information, for example, may lead to an award of substantial damages even though the claimant has not incurred any loss in terms of expenditure caused by the tort. However, the claim referred to in paragraph 1.2 of the Order is not of this kind. It is not for the value of the intellectual property of the Claimant wrongfully obtained or used by the Defendants. It relates to moneys claimed for work done by employees of the Claimant. There are three possible bases for awarding damages in respect of such work:

(a) In consequence of the tort, the Claimant has incurred expenditure that he would not otherwise have incurred: for example, it employed additional staff to carry out the work in question and paid salaries it would not otherwise have paid, or it paid overtime to existing staff to carry out work made necessary by the tort. The claim is for expenditure loss.

(b) The Claimant has lost revenue as a result of the tort because, as a result of the tort and the work carried out in relation to it the employees in question were unavailable to carry out revenue-producing work, no other employees were available to carry it out in their place, and the revenue in question has not been merely postponed but lost. This is a claim for loss of revenue.

(c) In consequence of the tort, management and staff carried out the work in question, and the claimant is entitled to the value of that work irrespective of any expenditure loss or loss of revenue.

Mr Alistair McGregor put forward claims on all three bases. Mr Harvey McGregor submitted:

(a) that no claim for expenditure loss had been pleaded or proved;

(b) that a claim for loss of revenue, if recoverable at law (which he did not accept), is outside the scope of paragraph 1 of the Order, and had not been pleaded or proved;

It is convenient to consider these claims in the order (a), (c) and then (b).

The claim for expenditure loss

Mr Harvey McGregor did not suggest that such loss is not recoverable in principle, and it clearly is. Such a claim is clearly within paragraph 1 of the Order. He submitted that such a claim is subject to the qualification that it cannot include costs incurred in the preparation and conduct of the litigation. For reasons which will be apparent, I do not have to consider this qualification to the general principle of recoverability. The Claimant did not pay overtime to its staff who carried out the work referred to in the Points of Claim, and did not engage additional staff. There is no evidence that it incurred expenditure as a result of the Defendants' torts and the work carried out by its employees referred to in paragraph 1 of the Order. The Claimant has no claim under this head.

The claim for the value of the Claimants' staff's work as such

Mr Alistair McGregor relied on well-known authorities establishing that in cases such as the present damages are at large, and may be inferred, even if a precise calculation cannot be made: see, e.g., Exchange Telegraph Co v Gregory & Co [1896] 1 QB 147 and Goldsoll v Goldman [1914] 2 Ch 608. However, in the Exchange Telegraph case, no award of damages was made: the principle that damages are at large was relied upon only to establish that the plaintiff had a cause of action sufficient to justify the grant of an injunction. In Goldsoll v Goldman, the award of damages was of a low round sum (£10), where the judge felt "no fear that (he was) exceeding the amount of the actual damage caused to the plaintiff". These authorities do not relieve a claimant of the burden of pleading and proving facts from which actual damage and its approximate amount can sensibly be inferred: see the comments of Dillon LJ in Lonrho v Fayed (no. 5) [1993] 1 WLR 1489 at 1494B-G and those of Stuart-Smith LJ at 1505D. It is not sufficient for a claimant merely to say that damage is obvious, or to assert that but for a tort its staff would have been gainfully employed and would have brought in their alleged charge-out rate, particularly when a claim is made for substantial and precisely-calculated sums based on alleged charge-out rates of the employees concerned and the time allegedly spent by them in relation to the claims against the Defendants.

The judgment of Roxburgh J in British Motor Trade Association v Salvadori [1949] 1 Ch 556 was relied upon by the Claimant. The plaintiff was a trade association whose policy was to enforce the fixing of prices of motor cars, at a time when the demand for cars greatly exceeded the supply, so that there were large profits to be made by anyone who could acquire a new car free of any obligation to resell it at the manufacturer's price. The plaintiff established that the defendants had sought to attack the plaintiff's policy by conspiracy to breach the contracts entered into by purchasers of new cars, prohibiting resale within a specified period. The plaintiff sought an inquiry as to the damages to which they were entitled. Roxburgh J said, at 569:

"To resist such a counter-attack (i.e., by the defendants against the plaintiffs' pricing policy) and also counter-attacks from various other directions, the plaintiffs maintain, and must maintain, a large investigation department, and the money actually expended in unravelling and detecting the unlawful machinations of the defendants which have been proved in this case before any proceedings could be taken must have been considerable. I can see no reason for not treating the expenses so incurred which could not be recovered as part of the costs of the action as directly attributable to their tort or torts. That these expenses cannot be precisely quantified is true, but it is also immaterial. Accordingly, the plaintiffs have proved the damage which is essential to the tort of conspiracy, and they are entitled to an inquiry accordingly."

The Salvadori case was commented on favourably by Dillon LJ in Lonrho v Fayed (no. 5) at 1497:

"Subhead (d) (of the proposed amended particulars of claim) claims the cost of managerial and staff time spent in investigating, or mitigating the consequences of, the conspiracy. There is also a claim for out of pocket expenses in respect of extra security guards, small in amount, but obviously related to aspects of the conspiracy. I would allow the subhead to be pleaded. British Motor Trade Association v. Salvadori [1949] Ch. 556 indicates that time spent in detecting and countering a conspiracy can be included in a claim for damages, at any rate if, as in that case, there is also other pecuniary loss; in a simple case where there is other pecuniary loss, that seems elementary justice. Mr. Munby submits that, since, with a "lawful means" conspiracy, damage is the gist of the cause of action, it would be self-serving to allow the mere cost of staff time, or payment to third parties, to investigate and uncover the conspiracy to count as damage and warrant the bringing of the action if the acts done by the conspirators have caused no other damage to the victim. But that, in my view, is a matter better gone into at the trial when fuller facts are available to show what actually was done by Lonrho staff that is claimed under this heading."

Stuart-Smith and Evans LJJ agreed with this part of the judgment of Dillon LJ. However, it is not authority for the proposition that staff time spent in detecting and countering a conspiracy can be included in a claim for damages if there is no other pecuniary loss: that proposition was allowed to be pleaded on the basis that its correctness or otherwise would be decided at the trial. As it happens, that proposition is irrelevant in the present case, since by agreeing to the Order the Defendants accepted that the Claimant had suffered loss of £40,000, and in any event there is evidence of other losses suffered by the Claimant, such as the loss of a particular client, American Express.

The Salvadori case was unusual, because the plaintiffs were held entitled to recover the costs of their investigation department, although its existence was not due solely to the torts of the defendants in that case. However, the plaintiffs incurred the costs of the investigation department only because of the torts of the defendants and others like them. In the present case, there is no evidence that the Claimant has incurred any additional expense as a result of the torts of the Defendants or indeed of anyone else. The Salvadori case is not authority for the proposition that the salaries of staff investigating a tort committed to their employer are recoverable as damages if those salaries would have been paid even if there had been no tort.

In my judgment, a claimant in a case such as the present has no claim for damages in respect of the salaries paid to its employees during the period when they carried out work made necessary by the defendants' torts if those salaries would have been paid in any event. In such a case, the claimant has not incurred any expenditure as a result of the defendants' torts that it would not have incurred in any event. I therefore reject the Claimants' claim to be entitled to the salaries paid to their employees.

The claim for loss of revenue

Mr Harvey McGregor did not dispute the recoverability in principle of such damages in a case such as the present. His position, as stated in his skeleton argument, was tentative:

It may be that, as a matter of principle, loss of business profits which are proven to have been directly attributable to defensive measures taken in respect of wrongdoing may be recoverable in damages. There is no clear or binding authority on this.

Loss of business profits means, as I understand the skeleton, loss of revenue less the costs that would have been incurred to earn that revenue but have been saved as a result of the work to earn that revenue not having been carried out: i.e., the net loss of revenue.

I see no good reason why in a case such as the present the claimant should not be able to recover his net loss of revenue, and it seems to me to be just that the tortfeasor, who has sought unlawfully to damage or to destroy the claimant's revenue producing business, should bear that loss. In my judgment, net loss of revenue is recoverable in a case such as the present. Neuberger J came to a similar conclusion in Gold v Mincoff [2001] Lloyd's Rep PN 423, in a case in which the loss of revenue was less foreseeable and less direct than in the present case, that being a claim for damages for negligence by solicitors, and the loss alleged said to arise from work carried out to uncover the facts relating to that negligence. The torts in the present case were torts of intent, having the object of damaging the business of the Claimant.

However, Mr Harvey McGregor submitted that a claim for loss of revenue was not within paragraph 1.2 of the Order. I therefore turn to consider that issue.

Paragraph 1.2 of the Order

Mr Harvey McGregor submitted that paragraph 1.2 of the Order does not include a claim to damages on the basis of a loss of revenue or profits alleged by the Claimant to have been caused by the diversion by the need for its employees to investigate and to deal with the Defendants' actions that are the subject of the proceedings. The Claimant took issue with this submission.

Mr Harvey McGregor submitted that the words "the same" in paragraph 1.2 refer back to "the sums of £120,000, and/or £67,500 and/or £6,500 claimed by the Claimant for work done by employees within its forensic department and by Andrea Cumming and by a consultant as part of its costs of the claim and/or of any proceedings within this claim and/or occasioned by the application on 20 September 2000 and adjourned to 22 September 2000", and that so read the claim is restricted to the costs of the employee's work, so that any claim for loss of revenue or of profits is outside the scope of that paragraph. Mr Alistair McGregor submitted that the words "the same" referred back simply to "the sums of £120,000, and/or £67,500 and/or £6,500".

I do not think that Mr Alistair McGregor's submission is correct. His reading of paragraph 1.2 would leave the scope of the damages referred to in paragraph 1.2 entirely open, and given the entirely general wording of the Schedule to the Order it would be impossible for the parties or the Court to ascertain whether any item of damages claimed under paragraph 1.2 was already comprised in the agreed damages of £40,000. I accept Mr Harvey McGregor's submission on this point.

Mr Alistair McGregor also submitted that in any event the loss of revenue claim asserted by the Claimant is a claim for work done by its employees, consultant and Ms Cumming. He submitted that the difference between the Claimant and the Defendants was not whether the claim for loss of revenue was a claim for work done, but rather the basis of the valuation of the claim for work done.

The natural reading of paragraph 1.2 of the Order, read in isolation, is that it is a claim for the value of work done rather than revenue lost. However, it is not to be read in isolation. It must be read in its context, against the matrix of facts known or deemed to have been known to the parties. In my judgment, it also falls to be construed in the light of the claim referred to in paragraph 1. But before I do so, it is appropriate to point out that paragraph 1.2 may be paraphrased as follows:

"… whether the sums of £120,000, and/or £67,500 and/or £6,500 claimed by the Claimant for work done by employees within its forensic department and by Andrea Cumming and by a consultant may be claimed in whole or in part against the Defendants as damages …"

A possible answer to this question is:

"Yes, if and in so far as the Claimant lost revenue as a result of that work."

I would not therefore exclude a claim for loss of revenue by reason of the drafting of paragraph 1 of the Order. However, the Order is not to be construed in a vacuum. It is to be construed against the matrix of facts known to the parties or which they are taken to have known. Mr Harvey McGregor submitted that the matrix included a letter dated 31 October 2000 from the Claimant's solicitors to the Defendants' solicitors. Whether I may or should take that letter into account is the next issue that falls for consideration.

The admissibility and effect of the Claimant's letter of 31 October 2000

In an exchange of correspondence following the hearing on 11 December 2001 (at the end of which I had reserved my judgment), Mr Harvey McGregor placed before me a letter dated 31 October 2000 from the Claimant's solicitors to the Defendants' solicitors. He submitted that it showed that the parties had agreed that the damages referred to in paragraph 1.2 of the Order excluded any damages for loss of profits or loss of revenue. He submitted that, on the true construction of the Order, and as the letter made clear, any claim for loss of profits or loss of revenue was included in the agreed damages of £40,000 payable under the Schedule to the Order.

The letter of 31 October 2000 was sent as part of the negotiations leading to the settlement of the proceedings by the Order, was headed "without prejudice save as to costs", and was clearly when sent a privileged communication in relation to any dispute other than as to costs.

Mr Alistair McGregor objected to my considering the letter (other than de bene esse), on the ground that it was privileged as a without prejudice communication and his client had not waived privilege. He submitted that it was in any event inadmissible and irrelevant to the interpretation of the Order, on the general principle that negotiations leading to an agreement are inadmissible to construe it.

It is highly regrettable that this matter was not raised explicitly during the original hearing on 11 December 2001, particularly since it involved a question of the admissibility of a privileged communication, which should not have been put before me without notice to the Claimant. A further hearing was necessary; it took place on 19 February 2002.

In the hearing on 19 February 2002, I was referred to the well-known authorities on without prejudice communications, including Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 and the enlightening judgment of Hoffman LJ in Muller v Linsley and Mortimer [1996] PNLR 74 in which he said, at 79C-D:

"If one analyses the relationship between the without prejudice rules and the other rules of evidence, it seems to me that the privilege operates as an exception to the general rule on admissions (which can itself be regarded as an exception to the rule against hearsay) that the statement or conduct of a party is always admissible against him to prove any fact which is thereby expressly or impliedly asserted or admitted. The public policy aspect of the rule is not in my judgment concerned with the admissibility of statements which are relevant otherwise than as admissions, i.e. independently of the truth of the facts alleged to have been admitted."

Mr Harvey McGregor submitted that the Court would look at without prejudice correspondence whenever it is necessary to do so in the interests of justice or to ascertain the truth. That is too wide a submission, which would if accepted destroy the privilege, and I reject it. He also submitted that the privilege came to an end when the dispute to which it related was settled. That submission is inconsistent with the decision of the House of Lords in Rush & Tompkins.

However, when it is alleged that a settlement has been concluded as a result of without prejudice communications, those communications are admissible as to the issue whether a settlement has in fact been concluded: Tomlin v Standard Telephones [1969] 1 WLR 1378. Similarly, in the case of a settlement made in without prejudice correspondence, the correspondence, although privileged when sent and received, is admissible in the event of a dispute as to the terms and meaning of the settlement, on the same basis that any correspondence in which a contract is made is admissible. In such cases, the correspondence is not adduced in order to evidence an admission made by a party in a without prejudice communication, but in order to ascertain whether an agreement or what agreement has been made between them. However, when an agreement has been reduced to a formal document, antecedent correspondence is in general only admissible if it is sought to rectify the agreement or if it is expressly or impliedly referred to in the agreement. A difference between an antecedent proposal and the final agreement may be due to a mutual failure to set out in the agreement the terms agreed between the parties, in which case rectification may be available. But it may be due to an intended or incidental difference between the earlier proposal and the final agreement, in which case the earlier proposal is irrelevant to the effect or meaning of the formal agreement. Antecedent without prejudice correspondence leading to a formal written contract will therefore in general be admissible for two reasons: privilege and irrelevance.

In the present case, the settlement agreement between the parties is contained in a formal document, namely the Order. It is not suggested that the Order falls to be rectified. However, paragraph 1.1 of the Order refers to sums claimed by the Claimant, and thus refers to a claim by the Claimant for the sums referred to having been made. It follows, in my judgment, that the claim may be considered in order to determine the content of the claim, notwithstanding that it was put forward in a document that was sent as a without prejudice communication. The letter of 31 October 2000 is admissible for two reasons: for the reason given below, it is clear that the letter made the claim referred to in the Order and is therefore impliedly referred to in it; and secondly it is not sought to adduce it in order to put in evidence an admission made by either party. Effectively, by referring to the claim in the Order, the parties waived any privilege attached to the document containing the claim.

Mr Alistair McGregor submitted that if I were to have regard to the letter of 31 October 2000, I should also have to hear evidence as to the entirety of the negotiations leading up to the making of the Order. I do not agree. I propose to take the letter into account not in order to consider the negotiations between the parties, but to ascertain what is the claim referred to in the Order, and indeed what are the sums referred to in the Order. The letter of 31 October 2000 does refer to sums of £120,000, £6,500 and £67,500 claimed by the Claimant in relation to (to put it as neutrally as possible) what was done by its employees, its consultants and its head of security group, who was Ms Cumming, and it cannot be coincidence that these are the sums that are specified in the Order. It has not been suggested that there is any other document that sets out claims for these sums, and I do not understand Mr Alistair McGregor to suggest that the claim was made orally. It follows that the Order does impliedly refer to the letter of 31 October 2000, and it may be looked at in order to understand and to construe the Order.

The letter includes a demand for payment of the Claimant's legal costs amounting to £225,000:

"Together with the cost of the Admiral forensic team – 120 days at £1000 per day: £120,000.

Lost fee income through the dedication of Admiral systems consultants – 13 days at £500 per day: £6,500;

Lost fee income by the dedication of Admirals (sic) head of security group to this litigation - 45 days at £1500: £57,500."

The letter also seeks payment by the Defendants of:

"2. estimated damages in excess of £300,000 to include the following heads of losses:

2.1 estimated damages suffered by Admiral by the Second to Eighth Defendants actively carrying on the business of the First Defendant during their employment with Admiral;