B e f o r e :
|REDBUS LMDS LIMITED||Claimant|
|THE PARTNERS IN THE FIRM KNOWN AS JEFFREY GREEN AND RUSSELL||Defendants|
Crown Copyright ©
4. The Facts
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.
4.2. The Articles
4.3. The Licence Agreement
"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".
The resignation of Mr French
The meeting of 22nd March 2004
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 …
The e-mail of 8th April 2004
The granting of the sublicence
Purported termination of the licence
4.5. The litigation
The Machine Recovery Action
The Licence Action
The Patent Action
infringement. The action depended on a valid termination of the Licence. If the Licence had not been validly terminated, it was bound to fail.
The trial and judgment
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.
4.6. The judgment on costs.
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.
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.
4.7. Events following the judgment
4.8. The Default Costs Certificate.
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.
4.9. The Costs now claimed
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 28th 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.
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  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  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).
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.
6. The basis of the assessment
6.1. The law
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  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)  1 WLR 1489. The only decisions to that effect are those of Carnwath J. in British Racing Drivers' Club v. Hextall Erskine & Co.  PNLR 523, and of Ferris J. in Yudt v. Leonard Ross & Craig, 24th 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 16th 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  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  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  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.
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.
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.
8.1. Stage 1
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…
8.2. Stage 2
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.
5  EWCA 15
JOHN BEHRENS Tuesday 17 November 2006