England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		17 November 2006

1. Introduction

1. This is the claim of Redbus LMDS Ltd ("Redbus") for professional negligence against a firm of solicitors Jeffrey Green and Russell ("JGR"). It arises out of the drafting in April 1999 of a licence agreement ("the Licence") between Redbus and a company called JR French Limited ("JRFL"). JGR admit that they were negligent in relation to the drafting but raise issues in relation to both causation and quantum.
2. Redbus was a joint venture company with an unusual constitution. There were 2 groups of shareholders and directors, "A" and "B". The Articles were designed to create deadlock in the Company if the "A" and "B" factions fell out.
3. The Licence concerned the Intellectual Property Rights in an invention of a machine to detonate land mines. The "A" faction was providing the finance to develop the machines. The "B" faction included the inventor of the machines. JRFL was a company set up by the inventor to which the Intellectual Property Rights were assigned.
4. It was intended that the Licence would be for a period of 10 years and that Redbus would be entitled to create a sub-licence without the consent of JRFL. However the Licence contained 2 errors which made the relevant clauses ambiguous. As a result of these errors it became arguable that JRFL could terminate the licence on 6 months notice, and that Redbus could not create a sub-licence without the consent of JRFL. JGR were acting for Redbus in relation to the granting of the Licence Agreement. They admit that they negligently failed to spot the errors.
5. The "A" and "B" factions fell out in a big way in 2004 and Redbus became deadlocked in the manner contemplated by the Articles. In an attempt to resolve the deadlock the "A" faction purported to grant a sub-licence to a company wholly under its control without the consent of JRFL.
6. This led to the purported termination of the Licence and litigation between the parties. There were in fact 3 actions. The actions were consolidated and tried in the Chancery Division in the spring of 2005 by Roger Wyand QC. The trial lasted some 6 days. A number of points were debated. Amongst other points JRFL argued that the Licence was terminable on 6 months notice and that Redbus could not grant a sublicence without the consent of JRFL ("the drafting issues"). A substantial amount of time at the trial was taken up with these issues as Redbus sought to argue that if they were wrong on the construction issue the Licence should be rectified to reflect the actual agreement between the parties.
7. In the event Redbus was substantially but not totally successful in the trial. It succeeded on a number of issues including both of the drafting issues. It lost on some other issues and was overall awarded only a proportion of its costs against JRFL. Those costs remain unpaid as JRFL is insolvent. Shortly before the liquidation of JRFL Redbus submitted a draft bill of costs to the Court for assessment. Following the liquidation (but without the permission of the Court) they obtained a default costs certificate.
8. In this action Redbus seeks to recover¹ from JGR all of the additional costs that were incurred as a result of the drafting issues. These are said to include all of the costs incurred by Redbus on a full solicitor and client basis in relation to the drafting issues. These include the costs of attempting to enforce the judgment. I am asked to take a "broad brush" approach and to assess this at 75% of the costs incurred by Redbus in relation to 2 of the 3 proceedings.
9. JGR seek to defend the action on a number of grounds2. Whilst they admit that they were negligent they deny that the negligence was the effective cause of the loss. They contend that it was merely an occurrence as a result of which no loss has been sustained. The principal points relied on in support of this submission were that the "A" Directors had no power to grant the sub-licence due to the Articles and that the grant of the sub-licence to a connected company without the consent of the shareholders in general meeting involved a breach of section 320 of the Companies Act 1985. It was the grant of the sublicence in breach of section 320 as a result of an inquorate meeting of directors that was the effective cause of the loss.
10. If contrary to its submission the breach was the effective cause of the loss, JGR take a number of points on quantum. It is not profitable to discuss them in detail in the introduction. The most important point of principle relates to the basis upon which Redbus can claim its costs against JGR. JGR contend that Redbus are limited to the standard basis upon which it claimed its costs against JRFL. Thus they contend that the Default Costs Certificate is good evidence of the amount of those costs. This is a developing area of the law where there have been a number of recent decisions from judges at first instance and where the distinguished author of McGregor on Damages has expressed strong views.
11. JGR also take a number of detailed points on quantum. For example they do not accept that a figure of 75% of the costs is appropriate. At the outset of the trial they contended that the figure should be 50% of 65% or 32½% of the costs certified in the Default Costs Certificate. By the end of the trial the percentage had increased.

2. Representation

12. Redbus has been represented by Christopher Parker instructed by Hamlins of Regent Street, London W1; JGR have been represented by Tom Leech instructed by Mills & Reeve of Norwich. Both Counsel have produced very full and helpful skeleton arguments. It will be apparent that I have "borrowed" extensively from each of the skeletons in this judgment. I am accordingly most grateful to them.

3. Witnesses

13. There was very little dispute as to the facts. In the event I heard two witnesses. Mr Hickling was called to give evidence on the authority of Redbus to commence these proceedings. He was, however, cross-examined on the events of May 2004 as to the extent of his knowledge of the limitations of the powers of the "A" Directors in the absence of the "B" Directors.
14. Mr Serota was the litigation partner in the firm of solicitors acting for Redbus. He is also a Deputy Costs Judge and thus has considerable experience in practical matters relating to costs. He gave evidence in relation to the bills of costs submitted and the difference between the amounts in the default costs certificate and the final bill submitted by his firm to Redbus. He was also asked to give an estimate of the proportion of the trial taken up with the drafting issues.
15. Both witnesses were honest and doing their best to assist the court. Mr Serota, however, made the point that many of the points of detail were obtainable from the disclosed documents, and/or the ledgers. He did not pretend to be able to remember all the details of what was a substantial bill of costs.
4. The Facts
16. Many of the detailed facts are contained in the judgment of Roger Wyand QC in the action between Redbus and JRFL handed down on 14^th July 2005. It is, however necessary to restate some of the facts in order to understand the issues.

4.1. Background

17. Mr French is the inventor of 2 machines for detonating land mines. In 1995 he applied for his first patent. Since that time he has made various other applications covering many countries round the world.
18. In May 1997 Mr French and Mr King set up a company LMDS Ltd to exploit the inventions. On 30^th April 1999 LMDS changed its name to Redbus LMDS Ltd. Thus it is the Claimant in these proceedings. In June 1997 Mr French granted an exclusive licence to LMDS to exploit his intellectual property rights throughout the world.
19. Mr French and Mr King did not have enough money to exploit the invention and by December 1997 they had found an investor Might SA ("Might"), a company owned as to 92% by a family trust of Mr Stanford. Mr Stanford was the Managing Director of Might. It was accepted by Mr Hickling that Mr Stanford largely controls the decisions made by Might.
20. In April 1999 Might invested £400,000 in Redbus for a 40% share in the equity. As part and parcel of the arrangements a number of events occurred:

1. Redbus changed its name and altered its Articles of Association so as to make possible a deadlock situation between what might be called the "A" directors/shareholders and the "B" directors/shareholders. In the light of the argument on causation it will be necessary to look at the provisions in more detail below.

2. Mr French set up J.R.French Ltd ("JRFL") at the request of Mr Stanford and the intellectual property rights were transferred to JRFL.

3. JRFL granted a fresh licence to Redbus in relation to the Intellectual Property Rights. It is this licence which gives rise to this negligence claim. It will be necessary to look at it in more detail below.

21. Between 1999 and 2004 Redbus did not perform as well as had been anticipated. A more detailed account is to be found in the judgment of Roger Wyand QC. By May 2004 Might had become the owner of 70% of the share capital in Redbus. The remaining 30% were held equally by Mr French and Mr King. In addition Redbus owed Might over £650,000 in unsecured loans and interest.
22. Unsuccessful attempts were made to sell Redbus. In the result relations between Mr French and Mr Stanford deteriorated.

4.2. The Articles

23. There is no dispute as to the effect of the Articles. It is thus not necessary for me to set them out in full. I can, in substance adopt the summary contained in Mr Leech's skeleton argument.
24. Following the change in the Articles in 1999 Redbus became a joint venture vehicle between Mr. Stanford (through Might) on the one hand and Mr. French and Mr King on the other hand whose interests were represented by the issue of "A" and "B" shares respectively. The constitution of the company built in no power by either side to control the company in the event of deadlock. Indeed, the Articles expressly so provided
25. A majority of "A" shareholders were entitled to appoint and remove "A" directors and a majority of "B" shareholders were entitled to remove and appoint "B" directors (Articles 29 to 32).
26. The Chairman of the board of directors had no casting vote (Article 39).
27. The quorum necessary for the transaction of any business at board level was one "A" director and one "B" director and if any of the "A" directors and "B" directors were not present their votes could be exercised by the "A" and "B" directors who were present (Articles 39 and 40).
28. The quorum to enable business to be transacted at a general meeting was one "A" shareholder and one "B" shareholder. No resolution could be passed unless one "A" shareholder and one "B" shareholder voted in favour of it (Articles 18 and 25)
29. The Articles were amended in this way to protect Might when it became a 40% shareholder in April 1999. By 2004 when Might owned 70% of the shares, they operated to protect Mr French and Mr King.
30. One consequence of these provisions was that Mr. Stanford and Mr. Hickling (the "A" directors) were not competent to authorise Redbus to enter into a sublicence agreement of the Intellectual Property Rights without at least one of the "B" directors voting in favour of the resolution.
31. Another consequence was that they were not competent to authorise the commencement of these proceedings. Thus the Claim Form was originally issued without Redbus' authority.
32. However following the judgment in the litigation in July 2005 there was a compromise to resolve the deadlock. At an EGM on 19^th January 2006 the Articles were changed; Mr King appointed Mr Hickling as his proxy with the result that the meeting was quorate. At a meeting of directors on 7 June 2006 these proceedings were ratified.

4.3. The Licence Agreement

33. Messrs Hewitsons acted for JRFL in the preparation of the Licence Agreement and JGR acted for Redbus. Two clauses were badly drafted and, when the two sides fell out, JRFL claimed that they had validly terminated the Licence Agreement (dated 30^th April 1999). Amongst other points they relied on their interpretation of these clauses.
34. The problems with the Licence Agreement are neatly summarised in paragraph 4 of Mr Parker's skeleton argument where he sets out paragraphs 8 and 9 of the Amended Particulars of Claim in these proceedings.

"8. In drafting the Licence Agreement Messrs Hewitsons by mistake inserted an "or" into the wording of clause 9.1 of the Licence Agreement as executed thus:

"This Agreement shall be deemed effective from the Effective Date and shall, unless otherwise terminated in accordance with its terms, continue in force until terminated by Licensor or Licensee serving on the other at least 6 months notice in writing or expiring on the tenth or any subsequent anniversary of the Effective Date".

The effect of this mistake was to make it arguable that the Licence Agreement could be terminated on 6 months notice in writing expiring at any time……

9. Further, Clause 12.1 of the Licence Agreement provided that

"Except as otherwise provided in this Agreement, this Agreement is personal to Licensee and Licensee shall not assign or delegate its rights or obligations under this Agreement in whole or in part Provided Always that Licensee may at any time after giving Licensor written notice of its intention to do so sub-contract and/or sub-licence its rights and obligations under this Agreement to any person".

This reflected the instructions of the Claimant to the Defendants that the Claimant should be at liberty to sub-contract or sublicence the Rights without the consent of JRFL. However, the Defendants failed to take account of the wording of clause 2.2 of the Licence Agreement which provided:

"Licensee shall not assign, mortgage, sublicence charge or part with possession of its rights duties or obligations under this agreement or any licences granted hereunder without prior consent of the Licensor."

The effect of the conflict between clauses 2.2 and 12.1 was that it was arguable that the proper construction of the Licence Agreement was that the Claimant could only sublicence the Rights with the consent of the JRFL".

35. In their Defence JGR admit that they negligently failed to spot the mistakes. 4.4. The Events leading to the Litigation

The resignation of Mr French

36. By the end of February 2004 matters were reaching a crisis. Redbus had ceased to pay patent fees for Israel, North Korea, South Korea, China and Hong Kong; the accounts for the year ending 31^st May 2002 had not been filed and Mr French alleged he had not been paid for the months from November 2003 to January 2004. Accordingly on 28^th February 2004 Mr French resigned as a director of Redbus. He subsequently resigned as an employee on 16^th March 2004.
37. Mr King had resigned as a director before March 2004. The effect of Mr French's resignation was that the deadlock situation contemplated by the Articles had come about. There were no "B" Directors with the result that no meeting of Directors could be quorate.

The meeting of 22^nd March 2004

38. Mr Hickling and Mr Stanford took the view that the actions of Mr French were leading to a point where JRFL might attempt to terminate the licence which had about 5 years to run. This would have rendered Might's substantial investment in Redbus valueless.
39. Accordingly on 19^th March 2004 Mr Hickling sent an e-mail to Mr French and Mr King giving notice of a board meeting to be held on 22^nd March 2004 "to discuss the future strategy of the Company". In the e-mail Mr Hickling suggested that if the "B" shareholders wanted to be represented they might like to consider the appointment of a director by the majority vote of the B shares.
40. The meeting was duly held on 22^nd March 2004. As there was no "B" Director there it was declared inquorate. There was then produced to the meeting a draft sublicence agreement between Redbus and Land Mine Disposal Systems Ltd ("LMDSL") – a wholly owned subsidiary of Might.
41. The Minute of the meeting reads:

Mr Stanford and Mr Hickling declared their interest in the matter for the purposes of s 317 of the Companies Act and the Articles of Association of the Company. It was noted that the sublicence provided for payment of an annual fee to the Company of £8,000 and royalties of 5% on sales but would not restrict the Company from continuing its business in accordance with the original licence dated 30 April 1999. After consideration of all the issues and in view of the fact that the Company was currently deadlocked it was considered to be in the best interests of the Company to enter into the sublicence …

42. In cross-examination Mr Hickling accepted that both he and Mr Stanford were aware that the meeting was inquorate. He stated that one of the reasons for the grant of the sublicence was to resolve the deadlock that had arisen between the shareholders. He was asked what he thought the reaction of Mr French and Mr King might have been if he had summoned an EGM to vote on the grant of the sublicence. He accepted that Mr French was opposed to it. Initially he said he could not speculate on Mr King's reaction. However when shown an e-mail of 8^th April from Mr King he accepted that Mr King was also opposed to it. It was suggested that he and Mr Stanford would have been forced to go back to Mr French and to negotiate. He made the point that they did try to negotiate with Mr French. Mr French was offered shares in LMDSL. Negotiation proved impossible.

The e-mail of 8^th April 2004

43. On 8^th April 2004 Mr French and Mr King appointed Group Captain Peter Moore as a "B" Director. On the same day Mr King sent an e-mail to Mr Hickling protesting at the decision taken on 22^nd March. Amongst other points he stated that the Board meeting was not properly constituted within the rules and any decisions taken were invalid. He pointed out that the meeting had decided to give away the 'raison d'etre' of the Company to another company, the ownership of which seems to exclude the minority shareholders.

The granting of the sublicence

44. On 9^th April 2004 Redbus purported to execute the sub licence. It was signed by Mr Hickling on behalf of the Company.
45. On 15^th April 2004 Mr French wrote to Redbus asserting that clause 12.1 of the Licence Agreement had to be read subject to clause 2.2 and that the consent of JRFL was necessary. He asked for information about the shareholding of LMDSL in order to enable him to consider whether consent would have been granted.

Purported termination of the licence

46. On 11^th May 2004 Hewitsons, on behalf of JRFL, Mr French and Mr King wrote a long letter to Redbus. The letter took a number of points. It alleged the sublicence was invalid for a number of reasons. There was no proper decision of the Board of Directors, there was a breach of clause 2.2 of the Licence and a breach of section 320 of the Companies Act 1985.
47. The letter purported to terminate the licence under cl 9.2.2 on the ground that Redbus was no longer trading.

4.5. The litigation

The Machine Recovery Action

48. On or about the same date Mr French and Mr King went to Redbus' premises and took away the prototypes. That precipitated the Machine Recovery Action by Redbus. On 28 May 2004, undertakings were given by Mr French and Mr King to the Court and the articles claimed were returned to Redbus. Mr French and Mr King accepted that they had no right to take or keep the relevant articles.
49. The matter came before Lightman J on 25^th June 2004. He made an order that Redbus's costs were to be the Claimant's costs in the case. The principal relief sought in the action was thus achieved at an early stage. It, however, continued to trial on an issue of whether Mr French was in breach of his contract of employment by becoming a director of a company called ODS Ltd.

The Licence Action

50. On 25^th August 2004 Mr French wrote a further letter purporting to terminate the Licence. He relied on the breach of clause 2.2 (granting the sublicence without consent) and the non payment of patent fees in breach of clause 8.3.
51. On 3^rd September 2004 JRFL issued the Licence Action against Redbus. JRFL claimed a declaration that the Licence Agreement had been terminated and for damages. In its Particulars of Claim JRFL relied on all 3 matters as giving grounds for termination of the Licence.

The Patent Action

52. On 29 September 2004 JRFL also commenced proceedings for a declaration that Redbus had infringed a number of patents and for injunctions to restrain further

infringement. The action depended on a valid termination of the Licence. If the Licence had not been validly terminated, it was bound to fail.

Interlocutory Applications

53. In paragraph 30 of his first witness statement Mr Serota sets out that there were 5 applications in the Licence action. In two of the applications the order for costs was costs in the case. In two of the applications JRFL was ordered to pay Redbus's costs. The fifth application was an application by Redbus for further security for costs. It was heard by Laddie J on 28^th April 2005. It was dismissed with costs assessed on an indemnity basis. They were assessed at £5,200. I have not been provided with details of the costs incurred by Redbus in relation to this application. However in the course of the trial it was agreed that I could treat them as equivalent to the costs incurred by JRFL or £5,200. It may be they were slightly higher.

The trial and judgment

54. The three actions were consolidated and came on for trial before Roger Wyand QC on 17-20 and 23-24 May 2005. Judgment was handed down on 14 July 2005.
55. The Judge identified five issues in the Licence Action:

1. The term of the Licence ("the first drafting point").

2. Whether a sub-licence could be granted without the consent of JRFL ("the second drafting point").

3. Whether Redbus was in breach of the Licence by failing to pay fees in respect of JRFL's patents.

4. Whether Redbus had ceased to carry on business.

5. Whether proper notice of termination had been given. On these issues:

1. The judge found for Redbus. If it had been necessary to decide the question of rectification, he also rejected Mr. French's evidence and would have found in Redbus's favour.

2. He found for Redbus. It was, however necessary to rectify the Licence Agreement and he ordered rectification.

3. He found for JRFL. He held that Redbus was in breach of the Licence Agreement by failing to pay patent fees. But he also held that this was not a repudiatory breach: He ultimately awarded damages of £13,318.55 to JRFL and ordered Redbus to pay £10,492.99 in unpaid fees to the patent agents.

4. He found for Redbus. He rejected the argument that Redbus had ceased to carry on business at the time of the notice.

5. He also found for Redbus. He rejected the argument that proper notice of termination had been given.

56. It follows that Redbus succeeded on four of the five issues in the Licence Action.
57. Further, because of his findings in the Licence Action, it was unnecessary for the Judge to determine the issues in the Patent Action. It failed. He did however express views in case the matter went further.
58. Mr French succeeded in the only remaining issue in the Machine Recovery action. The judge held that Mr French's involvement in ODS was approved by the Board of Redbus and thus there was no breach of duty.

4.6. The judgment on costs.

59. The question of costs was debated before Roger Wyand QC on 14^th July 2005 when the judgment was handed down. I have been shown the skeleton argument in relation to costs submitted on behalf of JRFL. It is clear from paragraph 6 that JRFL advocated an issue based approach. I have also been taken to the transcript of the argument on costs before the judge. Mr Parker drew to my attention a comment made by the Judge at 620A:

Let us say that you succeeded on an issue that took up 60% of the preparation and court time and you lost on an issue that took up 40%. There are two alternatives. One is to give you 60% of your costs and that reflects the fact that you won. But it is in no way compensating the other side for the fact that thy won on the 40% issue. One can do the compensation by saying "You need to take something towards their costs and I will do that by deducting something from your costs". Unless that is done in the percentage, it is not double counting to give them a percentage of their costs.

60. When he dealt with the question of costs he dealt first with the costs of the Machine Recovery action. He made the point that Redbus had been the winner and was entitled to its costs down to the order of Lightman J. Thereafter he ordered Redbus to pay 10% of Mr French's costs down to the trial. He also made an order in relation to Mr King.
61. He dealt with the Licence and the Patent action together. In paragraph 7 of his judgment he made the point that the commercial winner had been Redbus. He thought it right to reflect that in the costs order.
62. In paragraph 9 he ordered Redbus to pay Mr French's costs of the misrepresentation Counterclaim.
63. The crucial paragraph of the judgment is paragraph 10:

On all the other issues, taking into account the issues that have been won and lost, it is appropriate that JRFL should pay 65% of the costs Redbus. That is giving a discount for the costs which were incurred in relation to the issues on which Redbus lost.

64. As can be seen from the order he made an order for an interim payment on account of costs in the sum of £50,000

4.7. Events following the judgment

65. There was a further hearing on 6^th September 2005 when amongst other matters the amount due by Redbus in respect of patent fees was reduced.
66. The order for an interim payment of costs was not paid. In August 2005 Redbus served a statutory demand on JRFL. On 15^th September 2005 Redbus presented a winding–up petition against JRFL. The winding-up petition was unopposed and a winding-up order was made on 2^nd November 2005. Redbus incurred costs of £2,442.35 in respect of the winding-up petition. It is accepted by Mr Leech that those costs were reasonable.
67. Following the making of the winding up order Redbus sought to prove in the liquidation. Redbus incurred costs of £669 in respect of the proof. It is accepted for the purpose of these proceedings that those sums were reasonable.

4.8. The Default Costs Certificate.

68. On 10^th October 2005 Redbus gave notice to JRFL of the commencement of an assessment of the Bill of Costs pursuant to the order of 14^th July 2005. The assessment related to the 65% of the costs of the Patent and the Licence action.
69. The amount claimed in the Bill was 65% of £189,843.54 or £124,588.30. In submitting the Bill Mr Serota signed a certificate that included:

This Bill is both accurate and complete and that in relation to each and every item in the Bill of costs claimed herewith do not exceed the costs which the receiving party is required to pay my firm.

70. JRFL did not raise any points of dispute and on 7^th November 2005 a default costs certificate in the sum of £124,718.30 was sealed by the Court.
71. When he gave evidence Mr Serota said that he would have expected to have recovered at least 90% of the costs if the matter had been contested. For the purpose of this hearing Mr Leech accepted that the whole of the costs of £189,843.54 were properly incurred in relation to the Patent and Licence actions.

4.9. The Costs now claimed

72. Redbus now contend that the costs of the Patent and Licence actions are in fact £283,192. This is based on the evidence of Mr Serota coupled with the invoices submitted to Redbus and the Ledgers. According to Mr Serota 90% of the costs are attributable to the Licence action.
73. As this sum was substantially higher than the sum in the default costs certificate it seemed to me to be a useful exercise to attempt to identify the differences between the 2 bills.
74. This was not an easy exercise as it was not possible to correlate the invoices, the ledgers and the bills submitted for detailed assessment. Furthermore after the order for a joint trial in December 2004 the ledger entries for the 3 actions were not kept separate. However with the help of Counsel (to whom I am indebted) and Mr Serota, who did his best to help but (not surprisingly) was vague when it came to the detailed figures and openly admitted that he stood to be corrected, it was possible to make a considerable impact on the differences.

1. Redbus has included the costs it was ordered to pay in the second security for costs application together with its own costs of that application. On my assumption that amounts to about £10,400.

2. In evidence and in his witness statement Mr Serota stated that there were no costs attributable to the Machine Recovery action after 28^th February 2005. He must be wrong about this. As I have pointed out there was a live issue in those proceedings in relation to ODS. Some costs must have been incurred after that date and those costs must be wrongly attributed to the Licence and Patent actions.

3. The costs of the liquidation and subsequent proof were not included in the bill submitted for assessment. These amount to £3,111.35.

4. In his witness statement Mr Serota had identified costs of £3,167.50 that he accepted were extraneous to the Patent and Licence actions. He had deducted these from the bills before arriving at his figure of £283,192. The industry of Mr Leech has identified a number of other items that fall into the same category. These other items come to a total of £3,987.65 (excluding the costs of the liquidation and subsequent proof). In his closing submissions Mr Leech made the point that he only had sufficient material to identify matters that were plainly extraneous. He submitted that it is plain that other extraneous matters will be in the ledger even though they cannot now be identified.

5. In his witness statement Mr Serota stated that his charging rate was £300 per hour and his partner's - David Judah - £325 per hour. In fact the Ledgers show that these figures were an underestimate. For at least some of the time Mr Judah was charging at £385 per hour and Mr Serota at £365 per hour. Mr Serota points out that the charging rate recommended for a solicitor of his experience was £276 per hour for a West London firm. He included a rate of £300 per hour in the Bill submitted for assessment. The summary in the ledgers on page 864 of the bundle states that Mr Judah's profit costs amount to £59,272 and Mr Serota's to £30,687. This difference may produce a significant sum.

6. The matter in fact goes further. The 6 day trial was attended by both Mr Serota, Mr Judah and a third solicitor. Mr Serota (probably very wisely) did not include the costs of Mr Judah in the Bill for assessment. Mr Leech made the point that this was not limited solely to the trial. He identified in the ledger examples of duplication between the work of Mr Serota and Mr Judah. He pointed to items in the Bill that had been reviewed by both of them. He suggested that there was

plainly a large element of duplication with the result that Mr Serota may well not have included a substantial amount of Mr Judah's time in the Bill submitted for assessment. Mr Serota was unable to identify the differences in the bills but he did acknowledge that he would have been most surprised to have been allowed more than one partner at the trial. He also said that it was difficult to persuade costs judges to allow more than recommended rates. He said he might have tried his luck if costs had been ordered on the indemnity basis.

75. As both Mr Parker and Mr Leech recognised this analysis does not reconcile the £90,000 odd difference between the figure now alleged as the costs of the patent and licence actions and the bill submitted for assessment. It does, however, bring the 2 figures within a more acceptable bracket.
76. Causation
77. In his skeleton argument Mr Leech made a number of points in relation to the granting of the sub-licence

13. Mr. Stanford and Mr. Hickling had no authority to enter into the Sub-Licence on behalf of C and it is clear from the face of the minutes that they were fully aware of this fact.

14. Moreover, the transaction fell within section 320 of the Companies Act 1985 and required the authority of the company in general meeting. LMDS was a "person connected with" Mr. Stanford: see subsections 346(2)(b), 346(4)(b) and 346(8). The value of the asset (the intellectual property) was not less than £2,000 and more than 10% of the value of the company's asset value determined by reference to the last audited accounts. The total asset value of the company shown in the audited accounts for the year ended 31 May 2001 was £37,708 (C/690) (and in the draft accounts for the year ended 31 May 2002 was £35,039 (C/710)). The price paid was £8,000 per annum and a royalty of 5%: see clause 3.1 of the Sub Licence (C/744).

15. Ds submit that the express purpose of the Sub-Licence, namely, to avoid the deadlock and take control of C's intellectual property was not a proper purpose for which the directors could have exercised their powers (even if there had been a quorum present). In Howard Smith Ltd v. Ampol Petroleum Ltd [1974] AC 821 (tab 3) at 835C-E and 837G Lord Wilberforce stated this:

"To define in advance exact limits beyond which directors must not pass, is in their Lordships' view, impossible. This clearly cannot be done by enumeration since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase – such as 'bona fide in the interest of the company as a whole,' or 'for some corporate purpose'. Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: i.e. improperly favouring one section of the shareholders against another."

"Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed the majority of shareholders cannot control them in the exercise of these powers while they remain in office….so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority or creating a new majority which did not exist."

16. It is not necessary to show that the directors acted in bad faith or believed themselves to be acting against the interests of the company: see Hogg v. Cramphorn [1967] Ch 254 (tab 2) at 268F and Howard Smith at 834G.

17. Whilst the Court may have some sympathy for Mr. Stanford or Mr. Hickling in trying to break the deadlock between the parties, there is no suggestion that they took valuation advice on the terms of the Sub-Licence or satisfied themselves that its terms were in C's commercial interests. C has put forward no positive case in relation to the grant of Sub Licence. Mr. Stanford has not made a witness statement and the issue is not dealt with in Mr. Hickling's witness statement (A/343).

78. He elaborated these submissions with a detailed note on section 320 in which he sought to demonstrate that there was clearly a breach of section 320. He referred me to 2 authorities Young v. Purdy [1997] PNLR 130 and Barnes v. Hay (1988) 12 NSWLR 337 where different decisions had been made in different factual situations as to whether a particular act of negligence was "the effective cause of the loss".
79. In his oral submissions he made a number of points. He made the point that the agreement had been terminated and the litigation was on foot when the points were taken; litigation was inevitable. He made the point that irrespective of the drafting point Redbus could not have granted a sub-licence to LMDSL. The decision to grant the licence was taken after the "A" Directors had taken legal advice in full knowledge that it was being done in breach of the articles. He submitted that in those circumstances the drafting errors were not the effective cause of the loss. In his submission it was the decision of the "A" directors to take a calculated risk to take control of the main asset of Redbus. In his submission the drafting errors were the occasion for and not the effective cause of the loss.
80. In answer to these submissions Mr Parker made a number of points. He did not concede that there was a breach of section 320. Even if there was it made the sublicence voidable and not void. At no stage had the "B" shareholders commenced a derivative action in order to avoid the sublicence. Thus it was not avoided. Similarly the "B" shareholders did not start a derivative action seeking to avoid the sublicence on the grounds that the meeting was inquorate. Indeed they relied on the validity of the sublicence to advance JRFL's case that it could terminate the Licence for the grant of the sublicence without the consent of JRFL. Thus the points that were potentially open to Mr French and/or Mr King were not in fact taken at the trial at all.
81. Mr Parker points out that there is no suggestion of bad faith on the part of the "A" directors. He points out that in the litigation the negligent drafting by JGR enabled JRFL to take the 2 drafting points. If the drafting had been carried out with proper care they would not have been able to do so. In those circumstances the very substantial costs involved in the drafting issues were the direct result of the negligence. To put it another way the negligent drafting was the effective cause of the loss.
82. In my view Mr Parker's submissions are to be preferred. Without any disrespect to Mr Leech's careful and thorough research it seems to me to be clear that

the negligent drafting of JGR enabled JRFL to take the drafting points in the trial. The points were taken and they did cause loss. I do not, for my part, see that the chain of causation was broken by the granting of the sub-licence whether or not that grant involved the breach of s 320.

83. In my view Redbus' loss was caused by JGR's breach of duty.

6. The basis of the assessment

6.1. The law

84. This is an area of law that has received considerable attention recently from judges at first instance. Both Counsel were good enough to take me through all of the authorities on the point in considerable detail. It may be that this is an area ripe for consideration by the Court of Appeal but I doubt very much if anything would be gained by a further detailed analysis from a deputy judge at first instance. In those circumstances I propose to take as my starting point the detailed and clear summary of the law by Hart J in Pearce v European Reinsurance3

22. The second question is whether the fact that, as against ERCRO, the costs which are now claimed against ERCRO were not recovered under the assessment is now a bar to their recovery as damages against BDO. This raises a question of some difficulty on which the authorities do not speak with one voice.

23. At one time the rule clearly was that where costs incurred by a claimant incurred in other proceedings are recoverable in damages the amount recoverable would be his costs taxed as between solicitor and client less his costs taxed as between party and party recovered by him in the earlier proceedings. A line of cases commencing with The Tiburon [1992] 2 Lloyds Rep. 26 now stand as authority for the proposition that where costs are claimed as damages the appropriate machinery for their quantification is an assessment on the standard basis.

24. That proposition is supported by dicta of the Court of Appeal in The Tiburon and in Lonhro v. Fayed (No.5) [1993] 1 WLR 1489. The only decisions to that effect are those of Carnwath J. in British Racing Drivers' Club v. Hextall Erskine & Co. [1996] PNLR 523, and of Ferris J. in Yudt v. Leonard Ross & Craig, 24^th July 1998. In Yudt, Ferris J. noted that the decision in British Racing Drivers' Club v. Hextall Erskine & Co. and the dicta in The Tiburon and Lonhro v. Fayed (No.5) were the subject of vigorous criticism in the 16^th edition of McGregor on Damages, and confessed himself impressed by that criticism. However he held that in the circumstances, while not strictly bound by Carnwath J's decision, the correct course was for him to follow it.

25. The question has also been touched on in a third relevant decision in the Court of Appeal, Penn v. Bristol & West Building Society [1997] 1 WLR 1336, where it was held (without any explicit reference to the authorities) that, in a case where the court was obliged to deal with the claim through the mechanism of an order for costs, the mere fact that the claim could have been advanced as a claim for damages had a separate action been brought did not, by itself, justify the award being made on the indemnity basis.

³ [2005] EWHC 1493 at paragraphs 22 - 30

26. On behalf of the claimant Mr McDonnell QC advanced the following arguments as to why this line of authority did not justify me in striking out his claim at this stage.

27. First, he pointed out that in The Tiburon both Parker LJ. (ibid. at p. 34) and Scott LJ. (ibid. at p. 35) appear to have contemplated the possibility of the court departing from the standard basis in an appropriate case (whether the claim was being advanced as a claim for costs or as a claim for damages). Such a view would also be consistent with the way in which Waller LJ. expressed himself in Penn at p. 1366B-C. It would therefore be open to the trial judge in the present case to order that the costs claimed as damages should be assessed on the indemnity as opposed to the standard basis.

28. Secondly, he submitted that, whether or not Carnwath J's decision was correct, the position had changed with the introduction of the CPR. The alternatives which the authorities had been considering were the standard and indemnity bases as defined by the changes to the Rules of the Supreme Court introduced in 1986. The standard basis as defined by CPR Part 44.4(1) and (2) differs from the previous definition in containing a criterion of proportionality in addition to the criterion of reasonableness. Mr McDonnell also drew my attention to the provisions of CPR 48.8 which apply the indemnity basis, with some important modifications, to the assessment of a bill as between solicitor and client.

29. Thirdly, he submitted that even were I satisfied that Carnwath J's decision was applicable under the CPR regime, there was a point here which merited consideration by the Court of Appeal and which, if it was to be determined at that level, should only be so dealt with after the relevant facts had been found.

30. I was persuaded by those arguments that it was not appropriate for me to seek to decide the question summarily. There are plainly strong arguments of legal policy in favour of the view adopted by Carnwath J, and those arguments may survive the change in the nature of the standard basis introduced by CPR 44.4(2) notwithstanding the new notion of proportionality. On the other hand the "two stage" approach to the question of proportionality laid down by the Court of Appeal in Lownds v. Home Office [2002] 1 WLR 2450 is not obviously apt as a method of approach to the assessment of damages. Moreover, the basic rule applied by Carnwath J. is capable of giving rise to anomalies (to some of which Ferris J. alluded in Yudt). I do not think that the court can properly address the issues raised by those decisions without exploring in more detail than is possible at this stage in the action why particular items of costs claimed by the claimant in the bankruptcy proceedings were disallowed and/or reduced in the course of the assessment which took place on the standard basis. If, for example, the disallowance or reduction occurred as a result of ERCRO being given the benefit of the doubt on the item's reasonableness or proportionality, and the claimant is able to show that, but for BDO's breach of duty, it would have been able to surmount that doubt, it would seem to me unjust for the claimant to be debarred from claiming that as damages. A similar injustice would occur if the claimant were able to show that its inability to have sought or obtained an order on the indemnity basis against ERCRO was caused or contributed to by BDO's fault. It would in my judgment be wrong to shut the claimant out from putting his case in these possible ways at this stage. Furthermore, if it is correct that the judge trying this action would have jurisdiction to order an assessment on the indemnity basis, it cannot in my judgment be said that this is a case where the jurisdiction would stand no real chance of being exercised. While no dishonesty as such is pleaded against BDO, if the pleaded allegations against BDO were proved in every particular, the court would be entitled to take an extremely dim view of BDO's approach to its professional duties, and one which might justify it in ordering a method of assessment which gave the benefit of any doubt as to reasonableness of the costs incurred to the claimant.

85. It will be seen that Hart J recognised that the introduction of the proportionality test in CPR 44.4(2) might have affected the rule as laid down by Carnwath J and set out in the last sentence of paragraph 23 of his judgment. However he also recognised that there were strong reasons of public policy in favour of the view adopted by Carnwath J. He took the view that the matter was unsuitable for summary determination.
86. The matter was again considered by Evans Lombe J in Mahme Trust v Lloyds TSB4 In paragraphs 65 to 67 of his judgment he discusses the decision of Carnwath J in the Hextall Erskine case, the comments on it in McGregor and the judgment of Ferris J in Yudt. He then comments briefly on the Court of Appeal decision in Penn as being of limited assistance. In paragraph 68 he concludes:

68. Just as Mr Justice Ferris in the Yudt case felt constrained to follow the judgment of Mr Justice Carnwath in the British Racing Drivers Club case, so do I. However I do so willingly. It seems to me that where the costs of litigation are sought to be recovered as damages the appropriate method of assessment is the amount which would be awarded on assessment by a costs judge on the standard basis. I see no reason why a claimant should recover as damages costs referable to every step that he took in the proceedings in question however unreasonable. In my view it is at least arguable that costs in excess of those which a costs judge would award on the standard basis do not constitute foreseeable damage when sought to be recovered as damages.

87. Mr Parker points out that Evans Lombe J makes no reference to the judgment of Hart J in Pearce. More importantly he does not appear to have been referred to the proportionality point in CPR 44.4(2). He certainly makes no reference to it. Thus Mr Parker submits I am free to make my own choice and to state that the law is what it was believed to be before the decision in Hextall Erskine.

6.2. Conclusions

88. Although Mr Parker has invited me not to follow Carnwath J, Ferris J and Evans-Lombe J I feel that judicial comity requires me to do so in this case. There are a number of reasons for this:

1. Whilst I accept that the CPR regime as to costs adds proportionality to the matters to be taken into account in a standard assessment I find it difficult to accept that Evans-Lombe J was not aware of this. Even though he made no express reference to it in his judgment, it is, to my mind inconceivable that any judge, certainly such an experienced judge, was not aware of the requirement.

2. There are, as Hart J pointed out, strong policy reasons to support the views of Carnwath J. The steadily increasing amount of legal costs is a matter of real public concern. It is, as Mr Leech, pointed out extremely difficult for a third party, not involved in the litigation to be able to challenge the costs. If, as Mr Parker contends, the burden of establishing unreasonableness is thrown on the third party not involved in the litigation he faces an almost impossible task in having to show individual items are unreasonable.

3. It may be, as Hart J points out, that in individual cases there may be a good reason for allowing as damages costs which were reasonably but disproportionately incurred. I cannot for the moment think of an example of such a case. I do not, for my part, see that as a reason for going back to the rule that it is for the Defendant to establish that any item claimed is unreasonable. In my view it should in general be for the Claimant to establish that an item of costs claimed, though disproportionate, is reasonable and thus should be allowed to be included as an item of damage.

4. There is nothing in the facts of this case to suggest that items excluded from the costs certificate by Mr Serota were so excluded on the grounds that they were not proportionate. It has to be remembered that the bill of costs was prepared by Mr Serota and was not challenged by JRFL. It was thus allowed in full notwithstanding the charging rates were included at a rate higher than that normally allowed. This was, it has to be remembered, heavy commercial litigation in the Patents Court. Questions of proportionality more usually arise in the context of somewhat smaller litigation. When Mr Serota gave evidence he did not suggest that any items were left out on grounds of proportionality.

5. In respectful agreement with Evans-Lombe J it seems to me that many of the items that make up the difference between the 2 bills have in fact been shown to be unreasonable. Examples of this are the costs of the second security for costs application, the charging rate, and the costs of Mr Judah's attendance at trial. It has to be remembered that Laddie J dismissed the application for security for costs and awarded costs on the indemnity basis. There is an inference that the application was unreasonable yet Redbus are claiming not only their own costs – presumed to be £5,200 but also the costs they were ordered to pay. Similarly I do not see why JGR should pay for the fact that 2 partners were present throughout the 6 day hearing before Roger Wyand QC or pay charging rates of £365 or even £385 per hour when the guideline rate is £276 per hour. It is to be noted that Mr Leech is not challenging the rate of £300 per hour awarded in the Default Costs Certificate.

89. I would therefore hold that the costs of the Patent and the Licence action for the purpose of a damages claim against JGR are to be assessed at £189,843.54.
90. The liquidation and post liquidation costs.
91. Mr Leech submitted that these costs were not caused by JGR's negligence in that they would have been incurred in any event. In the alternative he submitted that they were too remote. Mr Parker submitted it was reasonable for Redbus to seek to enforce their judgment for costs and that the costs of enforcement were part and parcel of the costs that were incurred as a result of the negligence. Some of the costs were incurred as a result of the negligence. Accordingly an appropriate part of the costs of enforcement were recoverable.
92. No authority was cited on this part of the case, the sum is relatively small. It does not admit of much argument or discussion. Suffice it to say that I agree with Mr Parker. The fact that Redbus might have incurred the costs even if the drafting issues had not been argued at the trial does not to my mind break the chain of causation. Accordingly I would allow the costs of £3,111.35 to be added to the sum of £189,843.54 making £192,954.89.
93. The appropriate percentage.
94. Counsel are agreed that a two stage approach is necessary to determine the appropriate percentage. First it is necessary to determine the percentage of the Licence and Patent action attributable to the issues on which Redbus succeeded. It is then necessary to determine the percentage of those issues attributable to the drafting issues.

8.1. Stage 1

95. Mr Leech submits that as Roger Wyand QC awarded Redbus 65% of the costs of the Licence and Patent action I should adopt the same figure. He points out that Roger Wyand QC was in a far better position to assess this than this court.
96. Mr Parker accepts that the judge's award is a starting point. He however points out that to take a figure of 65% is to ignore the fact that the judge applied a discount to the figure he arrived at to reflect the fact that Redbus lost on some issues and ought to paying JRFL's costs on those issues. He says it is apparent that the judge did apply a discount here. Not only did he refer to it in paragraph 10 of his judgment on costs but he discussed the point with Counsel during the argument. He also makes the point that the judge's approach was in accordance with principle and he referred me to paragraph 27 of the judgment of Chadwick LJ in Summit Property Ltd v Pitmans⁵ where he said :

27. … An issue based approach requires a judge to consider, issue by issue in relation to those issues to which that approach is to be applied, where the costs on each distinct or discrete issue should fall. If, in relation to any issue in the case before it the court considers that it should adopt an issue based approach to costs, the court must ask itself which party has been successful on that issue. Then, if the costs are to follow the event on that issue, the party who has been unsuccessful on that issue must expect to pay the costs of that issue to the party who has succeeded on that issue. That is the effect of applying the general principle on an issue by issue based approach to costs. Further, there will be cases (of which this is not one) where, on an issue by issue approach, a party who has been successful on an issue may still be denied his costs of that issue because, in the view of the court, he has pursued it unreasonably…

97. Mr Parker went on to take a strictly mathematical approach to the discount. He submitted that the judge must have assessed the discount at 17½%. He submitted that means that Redbus succeeded on 82½% (100% - 17½%) of the issues. If you apply a discount of 17½% to that figure you arrive at the figure of 65% selected by the judge.
98. I accept Mr Parker's submission that an assessment of 65% ignores the question of discount. However he has failed to persuade me that an exact mathematical approach is necessary. The judge did not explain in detail how he reached his figure and it does not to my mind follow that he took the mathematical approach advocated by Mr Parker.
99. I have been invited by both sides to take a broad brush approach. In the circumstances doing the best I can I propose to assess the percentage of the Licence and Patent action attributable to the issues on which Redbus succeeded at 75%.

8.2. Stage 2

100. Mr Leech initially suggested that the appropriate percentage was 50%. He pointed out that Redbus had succeeded on 4 issues in the Licence and Patent action. 2 of these issues related to the negligent drafting. In the absence of other evidence he invited me to assume that an equal time was spent on each issue.
101. This proved a very crude analysis. Mr Parker took me through the judgment with some care. He pointed out that there was a substantial amount of evidence on the drafting issues – no doubt mainly because of the plea of rectification – whereas there was very little evidence called on the other issues. Indeed the question of the validity of the notice of termination appears to have been a very minor issue. He also relied on Mr Serota's estimate that 75% of the Court's time was spent on the drafting issues.
102. In answer to this Mr Leech conceded that his original estimate was too low and raised it to 66%. He pointed out that Mr Serota's memory had proved fallible and thus his estimate was to be treated with caution. He also made the point that the pre-trial work in respect of individual might be different from the time spent at trial on the issue. He drew my attention to the applications that were made in respect of all the issues.
103. I think there is some force in the points made by Mr Leech. In the circumstances doing the best I can I propose to assess the percentage of the costs attributable to the drafting issues as 75% of Redbus' costs on the issues on which they succeeded in the Licence and Patent action.

8.3. Conclusion

104. It follows that I would assess Redbus' damages at 75% of 75% of £192,954.89 or £108,537.13.

¹ At one time Redbus made a number of other claims for damages. Those other claims have either been struck out or discontinued.

² At one time JGR raised a large number of additional points in their Defence. The additional points have not been pursued.

⁴ [2006] EWHC 1321

⁵ [2002] EWCA 15

JOHN BEHRENS Tuesday 17 November 2006