England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		05/09/2008

Mr Justice Evans-Lombe :

1. On 5^th September 2008 I dealt with an application under subsection (3) section 51 of the Supreme Court Act 1981, following the decision of the House of Lords in Aiden Shipping Co. Ltd v Interbulk Ltd [1986] 1AC 965, for an order that Mr Matthew James ("MJ") be ordered to pay the costs of the Defendant, Rafi Manoukian ("M") consequent on M's successful defence of the claim against him of DNA Productions (Europe) Limited ("DNA"). That order for costs was made by me at the conclusion of the trial of DNA's claim against M in respect of which I handed down judgment ("the Judgment") on 30^th April 2008. At the conclusion of the submissions of counsel for MJ in opposition to the relief sought, I did not require counsel for M to reply, thereby indicating that I would grant the relief sought by him. I indicated that I would deliver my reasons for arriving at that conclusion in writing. These are those reasons.
2. I have used and will continue to use the same abbreviations as used in the Judgment.
3. The background facts of these proceedings are set out between paragraphs 2 and 32 of the Judgment and I will not repeat them. The important passages in the Judgment for the purposes of this application are paragraphs 16 to 44 inclusive which led to my "Conclusion on the facts" set out in paragraph 49 as follows:-

" 49. I have come to the clear conclusion that, at all material times, M believed that he had accepted DNA's offer to supply and arrange the 2005 Event upon a "cost plus" contract under which DNA was to be paid an overall price calculated as the sum of the charges to DNA of all the suppliers of goods and services for the purposes of the 2005 Event, being the best prices obtainable by DNA together with an arrangement fee of 12.5% of such amount, being DNA's commission for finding and negotiating the prices of the suppliers, remuneration for DNA's services as designers, arrangers, and supervisors of the event and their profit margin. I have arrived at this conclusion for the following reasons:-

i) It is common ground that, unlike the 2001 Event, there does not seem to have been any occasion or any document, at which or by which DNA and M sought to define the terms upon which DNA was to provide its services to M for the 2005 Event. It seems to have been assumed, at least by M, that the arrangements would be similar to those under which the 2001 Event took place, save that M would not be contracting directly with suppliers, with DNA acting as his agent to nominate suppliers and obtain prices from them. DNA would contract with M to provide the event itself contracting with suppliers to enable it to do so.

ii) The line by line negotiation, see paragraph 14 above, of what DNA was to provide, and at what price, was conducted by DNA in a manner so as to represent to M that what he was being offered, in respect of each item on the various proposals put before him, was the price at which DNA was obtaining the relevant supply or service from its suppliers. An example of this, in correspondence, is an e-mail from Angela Harvey, M's personal assistant, to MJ of 14th October 2005 as follows:-

"At the last Christening party the costs for services (kitchen & toilets) came to £13,540.

RM thinks that £7,200 + insurance and VAT seems a bit high – can you get a better price? If not can you provide a breakdown to show how they arrive at this figure?"

iii) That DNA was to be paid an event management fee calculated as 12.5% of the sum of the suppliers' invoices to DNA, without any indication, oral or in writing, that DNA was to receive some other benefit under the contract, carried the clear implication that that event management fee represented the entirety of DNA's remuneration for its services and its profit margin. That M was entitled to assume that this was so is all the clearer in the light of the arrangements for the 2001 Event where MJ's remuneration and profit margin was calculated as 10% of the sum of the suppliers' contracts to that event and, as his evidence was, no more.

iv) The representations made by MJ in the e-mail of 29th November 2005, the material text of which I have set out above, and are part of the parties' negotiations as to the amount of the event management fee, are quite inconsistent with an "all-in" contract but entirely consistent with a "cost plus" contract.

v) The concluding words of the final proposal which followed the meeting of 30th November showing the sum upon which the event management fee was to be calculated as being the "total cost including all discounts". Mr Fadipe for DNA submitted that "including all discounts" referred to the reductions in respect of tentage and sound equipment agreed after the first proposal had been submitted and which were incorporated by allocation to individual items of tentage and sound equipment appearing in the marked up proposal. I am not persuaded by this submission. It seems to me that M was entitled to take notice of the difference between the words "total cost including discounts" in the first proposal, where the two discounts were separately identified, and the words "total cost including all discounts", emphasis added, that appeared in the marked up proposal and all subsequent revisions of that proposal in which those reductions, referred to as "discounts", were shown as detailed price reductions scattered through the proposal.

vi) The unchallenged evidence of Miss Harvey, in particular at paragraph 7 of her witness statement as follows:-

"7. Our office diary shows that Mr Manoukian met Mr James of DNA at 44 Sloane Street to discuss the party on 7, 10 and 30 November. I attended all those meetings. Many practical matters were discussed but I know that at all times when Mr Manoukian and Mr James were discussing the cost of the party and DNA's fee, that DNA's fee was to be based on a percentage of cost. 12.5% was agreed. I know because I was present at the discussions that Mr James and DNA appreciated that when Mr Manoukian agreed that the cost of the party would be met plus a fee of 12.5% for DNA, he meant the actual cost of the goods and services to be procured on his behalf by DNA. Mr Manoukian was not agreeing that DNA could "mark-up" its suppliers' charges when re-invoicing to its client. This was never discussed. Mr Manoukian trusted Mr James and DNA to obtain the necessary goods and services at acceptable cost and that cost would then be paid. There was frequent discussion about the cost of items and the context of all of those discussions was that the client was paying the actual cost to DNA. It was my understanding that DNA made its money from its work on the party from its 12.5% fee. This was also clear to me from the email sent from Mr James to Mr Manoukian on 29 November 2005 – subject "DNA Event Management Fee" which is attached to this statement at page 4 and in which Mr James explains that he had to increase his management fee to pay increased overheads and that at 10% there would be very little or no profit."

I have also come to the clear conclusion that DNA, through MJ, intended to provide its services under an "all-in" contract but, at all material times, was well aware that M thought that DNA's services were being provided under a "cost plus" contract. I have arrived at this conclusion for the following reasons:-

1. MJ knew that M had refused an "all-in" contract for the purposes of the 2001 Event and there was no evidence that he had changed his mind by 2005, or of any attempt on behalf of DNA to persuade him to do so in the course of the negotiations leading up to the contract for the 2005 Event.

2. The campaign of concealment from M by DNA, of the fact that they were receiving discounts from their suppliers, evidenced by the documents produced in the course of late disclosure, are only consistent with DNA being aware of M's misapprehension as to the terms upon which DNA had at all material times intended to make its services available, and that it was likely that those terms would be unacceptable to him. It is true that there was partial disclosure by MJ to M of the discounts, which DNA was receiving from its suppliers, on 5th December, five days before the event was to take place, at a time when it would have been impossible for M to make different arrangements. MJ disclosed suppliers' discounts of £16,000 whereas, after the late disclosure, it is demonstrated that DNA was expecting to receive discounts or commissions of at least £58,000."

4. What is not mentioned in the Judgment is that the claim was originally presented on two bases, the first, that DNA was entitled to succeed in its claim for £201,000 on the basis of the provisions of its written terms and conditions which, it was suggested, were the terms upon which DNA provided its services to M in 2005, the second, and alternative basis, being that the contract was an "all-in contract" arrived at between the parties as a result of the events which I recorded in the Judgment. After a brief examination of DNA's written terms and conditions, counsel then acting for DNA conceded that those terms, even if they had been incorporated into the contract between the parties, did not assist DNA's claim which accordingly proceeded on the second basis.
5. After the Judgment was handed down and, consequent upon it, DNA was placed in members' voluntary liquidation in June 2008. The Director's statement of affairs in that liquidation shows no assets apart from a claim for a VAT refund of £3,119, all the company's assets having previously been sold. It was known, in the course of the proceedings, that all the company's staff had been laid off by the time of the hearing. The statement of affairs showed "trade and expense creditors" of £389,892 and an indebtedness of £91,491 on Director's loan account which, it was MJ's evidence, represented a loan by him from his money or from sources which he had guaranteed. In the course of the proceedings an application for security for costs was made by M which resulted in an order for payment of £45,000 into court as security. That sum was paid. It was MJ's evidence that a friend or friends advanced money to the company to finance its legal costs including payment of the security, all of which advances were guaranteed by him.

The law

6. Applications for the payment of costs by non-parties under section 51(3) of the Supreme Court Act 1981, pursuant to the law as laid down in the Aiden Shipping case, where the losing litigant is a company that has been procured to make or defend a claim by a director, or other person having control of it such as a liquidator, have given rise to a distinct line of authority. In my judgment in BE Studios Ltd v Smith & Williamson Ltd [2005] EWHC 2730 (Ch) reviewed and, it would seem, approved by the Court of Appeal in Mills v Birchall & Gilbertson [2008] EWCA Civ 385, I reviewed these authorities in a case where no impropriety in the conduct of the litigation had been established against a director, who had financed and conducted it, but against whom I nonetheless made a non-party order to pay costs. From these authorities it seems to me that the following principles emerge:-

i) The fundamental contrast is between a director who bona fide pursues unsuccessful litigation in the name of the company for the benefit of the company, but where the company cannot pay the order for costs against it, for the benefit of its creditors, and where the director in question is the real litigant in the sense that the court can be satisfied that without his initiative and finance the litigation would not have been pursued by the company, and who stood, albeit with others including creditors, to benefit materially from its success.

ii) The decision whether or not to make a non-party order for costs is essentially a matter of discretion for the court to be exercised on a review of all the facts of the case and the conduct of the proceedings.

iii) An important factor for the court to bear in mind in exercising that discretion is any impropriety or unreasonableness in the presentation or conduct of a claim or defence by a company at the instance of the respondent director, but the absence of such impropriety or unreasonableness does not exclude the making of an order; see the judgment of Lord Justice Collins in the Mills case at paragraph 69.

iv) Another factor in the exercise of the court's discretion is the availability of an order for security for costs, whether advantage has been taken of that availability and whether any order which is made and paid could reasonably have been treated as covering the successful applicant's likely costs of the proceedings if he is successful. However, again the availability of security does not exclude the making of an order; see Lord Justice Collins in the Mills case at paragraph 62.

Conclusion

7. At the conclusion of the submissions of counsel for MJ I was satisfied that I should make an order in this case for the following reasons:-

i) It is not in issue that, without the benefit of the amount claimed, DNA was insolvent. Albeit that there was evidence that MJ had discussed DNA's impending claim with some of DNA's suppliers and creditors, there is no evidence that he consulted them on the merits of DNA's claim and whether it should be brought at all. He might have left the decision whether to make a claim against M to a liquidator. If the claim had succeeded in full it was MJ's evidence that he stood to obtain a small financial return as the company's only shareholder and director. In fact the statement of DNA's affairs sworn by MJ shows that DNA was substantially insolvent even had the claim succeeded in full. However, DNA seems to have been a substantial player in the "party-organiser" business and it does not seem to have been beyond the possibilities that had the claim succeeded DNA would have survived and could have been revived to trade successfully. I am satisfied that that was MJ's objective in launching the litigation which would not have happened, or not have been launched in the way that it was, save on the initiative of MJ.

ii) As paragraph 49 of my judgment makes plain, I was satisfied that DNA's claim was prosecuted at the instance of MJ in circumstances and in ways which amounted to impropriety. I have found that MJ was aware, at all material times, that M believed that the contract between him and DNA for the 2005 event was a "cost plus" contract in which DNA's profit derived from an arrangement fee calculated at 12½% of the cost to DNA of supplying the services which constituted that event. MJ did not take any steps to correct M's misapprehension. The fact that the costs presented to M as those which DNA had to pay for those services did not take into account the discounts subsequently available amounted to deception by DNA of M.

iii) That deception was compounded by steps taken by DNA's staff on the instruction or, at least, with the knowledge and consent of MJ, to suppress documentary evidence of those discounts.

iv) That deception was further compounded in the course of the litigation by the failure to disclose the documents and other records, in particular computer records, which would have demonstrated that it was taking place.

v) It can never have been the understanding of either of the parties to the litigation that security for costs of £45,000 was sufficient to protect M from being unable to enforce against DNA the likely order for costs in his favour should he be successful after a full trial of these proceedings if DNA should prove unable to meet those costs.

Order

8. I will make an order in the terms of the draft submitted by counsel for the Defendant, M, save that:-

under paragraph 4 I will order the Respondent to pay the Defendant's costs of this application to be assessed.

Since handing down a draft of these reasons a question has arisen with relation to the payment of the balance of the sum of £100,000 which the Claimant was ordered to pay to the Defendant on 30^th April 2008. The matter has been dealt with by written submissions. In agreement with the submissions of the Defendant the order will be in the form attached, namely that the balance of £53,653.84 should be paid forthwith with interest at 1 percent over base rate from 28^th May 2008 until payment.