England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		25/10/2018

Mr Justice Zacaroli:

1. This judgment deals with consequential matters following the handing down of the main judgment in this action on 30 July 2018, in which I dismissed the claimant's claims against the defendants. Three matters are raised for decision:

i) Whether the first defendant's costs of the action, which it is accepted are to be paid by the claimant, should be paid on the standard or indemnity basis;

ii) The rate of interest to be applied in respect of the costs payable to the defendants in the period prior to 30 July 2018; and

iii) The amount of further interim payments on account of the defendants' costs.

Basis of assessment of the first defendant's costs

2. The claimant has agreed that the second defendant's costs are to be assessed on the indemnity basis. He contends, however, that the first defendant's costs should be assessed on the standard basis.
3. The principles to be applied are not in dispute. I was referred to a number of cases where the matters to be taken into account in deciding whether to award costs on the indemnity basis have been set out. I take as an appropriate and short summary that of Coulson J in MacInnes v Gross [2017] 4 WLR 49, at [3]:

"(a) Indemnity costs are appropriate only when the conduct of a paying party is unreasonable "to a high degree. 'Unreasonable' in this context does not mean merely wrong or misguided in hindsight": see Simon Browne LJ in Kiam v MGN Ltd (No 2) [2002] EWCA Civ 66; [2002] 1 WLR 2810.

(b) The court must therefore decide whether there is something in the conduct of the action, or the circumstances of the case in general, which takes it "out of the norm" in a way which justifies an order for indemnity for costs: see Waller LJ in Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson [2002] EWCA Civ 879; [2002] CP Rep 67.

(c) The pursuit of a weak claim will not usually, on its own, justify an order for indemnity costs, provided the claim was at least arguable. But the pursuit of a hopeless claim (or a claim which the party pursuing it should have realised was hopeless) may well lead to such an order: see, for example, Wates Construction Ltd v HGP Greentree Allchurch Evans Ltd [2005] EWHC 2174 (TCC); 105 Con LR 47."

4. The defendants relied on Excalibur Ventures LLC v Texas Keystone Inc and ors [2013] EWHC 4278 (Comm), an example of a case where indemnity costs were awarded in the context of a speculative and opportunistic claim. In that case, Christopher Clarke LJ considered the following summary by Gloster LJ, in European Strategic Fund Limited v Skandinaviska Enskilda Banken AB [2012] EWHC 749, fairly to apply to the case before him, namely that the case was: "(i) speculative involving a high risk of failure; (ii) grossly exaggerated in quantum; (ii) opportunistic; (iv) conducted in a manner that has paid very little regard to proportionality or reasonableness giving rise to the incurring of substantial costs on both sides; (v) pursued on all issues at full length to the end of the trial."
5. For his part the claimant emphasised, by reference to the decision of Sir Anthony Colman in National Westminster Bank plc v Rabobank Nederland (No.2) [2008] 1 All ER (Comm) 243, at [28], that where one is dealing with the losing party's conduct, except in rare cases, the minimum that is required is a "significant level of unreasonableness or otherwise inappropriate conduct."
6. The question whether there is something which has taken the case out of the norm is to be considered against the backdrop that the consequences of an award of indemnity costs are, first, to reverse the burden of proof as to the reasonableness of the costs incurred and, second, to remove the requirement of proportionality.
7. The first defendant contends that the claimant's pursuit of the claim was well outside the norm in a number of ways.

i) The claimant made only one without prejudice save as to costs offer to settle, requiring a payment of £6.3m just before trial.

ii) The claim was hopeless.

iii) The claimant failed to engage in any pre-action communication. The principal investments which formed the subject matter of the claim occurred between June 2005 and October 2007, with the latest of two further investments occurring in February 2009. The claim was issued in December 2013, but not served until April 2014. No prior notice of the claim was given, and no attempt made to engage in pre-action correspondence. CPR 44.2(5)(a) singles out lack of compliance with pre-action protocols as a relevant factor on the question of costs.

iv) The claim was originally brought in fraud and conspiracy. This claim was struck out in November 2015.

v) The claimant failed to comply with his disclosure obligations by failing to conduct a proper review, leading to disclosure of far too many (around 16,000) documents. The first defendant contends that this conduct merits censure by way of an order for indemnity costs.

vi) The claimant's witness statements were prolix, consisting in large part of recitation of documents and irrelevant material.

vii) The only basis upon which jurisdiction was established as against the first defendant was the existence of the claim against the second defendant, but that claim was hopeless, as demonstrated by it being dismissed with an (agreed) order for indemnity costs.

viii) The claimant's conduct of the trial, including the overloading of the trial bundles with irrelevant material (including many examples of unnecessary duplication) and the cross-examination of the defendants on a range of irrelevant matters.

8. I regard many of these matters as insufficient, in the circumstances of this case, to take it out of the norm.
9. It is true that the claimant's approach to settlement, as the defendants submit, demonstrated that although the only relief sought in the claim was an account (in the sense of an explanation of dealings with his money and shares), in reality his motivation was financial. Nevertheless, I do not accept that this (or his refusal to accept a counter-offer on the eve of the trial which would have required him to pay the defendants' costs on the standard basis) was indicative of any improper attempt to pressure the defendants. Rather it was a product of his (ultimately) misguided belief in the strength of his case.
10. The claimant's failure to engage in any pre-action communication was not adequately explained. I do not accept that the complications in formulating the claim, or the fact that it was issued against the backdrop of a potential limitation backstop, justified the absence of communication with the defendants or (worse) of any communication in the four months between issue of the claim and its service on the defendants. However, in circumstances where the claim as originally formulated was struck out, and the claim which then proceeded by amendment was preceded by substantial correspondence, an award of indemnity costs of the action would be a disproportionate sanction for that non-compliance.
11. The fact that the case was originally brought in fraud and conspiracy does not justify an award of costs on the indemnity basis. The defendants' costs in respect of the struck-out parts of the original claim were substantially dealt with by the order of Newey J in 2015. While the pursuit to trial of a hopeless fraud claim may well justify an order for indemnity costs, in this case the reverse happened: the fraud claim was abandoned at an early stage, to be replaced by a claim of significantly narrower scope.
12. The claim against the second defendant failed, in addition to being unsupported by the facts, because the essential element of a claim in unconscionable receipt – that the alleged receipt was the result of a breach of fiduciary duty – was missing. In those circumstances it was always bound to fail. The first defendant complains, therefore, that he was compelled to face proceedings in England on the flimsiest of bases. While the defendants contend that a trial in Switzerland – had there been one at all – would have been a much cheaper prospect, it is difficult without evidence on the point to speculate what would have happened, had the second defendant not also been sued, and what the costs of any Swiss proceedings would have been. I do not regard this, therefore, as a ground for awarding indemnity costs to the first defendant.
13. The claimant undoubtedly disclosed a vast amount of documentation, only a fraction of which was relevant to the issues at trial. Although the defendants had originally contended that this was part of a deliberate plan to swamp them with irrelevant documents, in the face of an explanation on oath from the claimant's solicitors as to the process of review undertaken, that point was not pursued.
14. The disclosure by a claimant of an excessive number of documents will generally increase the costs incurred by the defendants. In a case where the claimant succeeded at trial, this may warrant a departure from the principle that costs follow the event, to reflect the claimant's failings in respect of disclosure. Where, as here, the claimant lost at trial and is liable for the defendant's costs in any event, however, it does not follow that the court should always mark its disapproval by awarding the costs of disclosure on an indemnity basis. The additional costs incurred by the defendant through having to review the claimant's disclosure will be recoverable from the claimant, provided that the costs were reasonably incurred and proportionate. On the facts of this case, I do not regard the fact that the disclosure of what turned out to be a large amount of irrelevant material is itself a reason to reverse the burden of proof or disapply the requirement for proportionality in reviewing those documents.
15. Nevertheless, in my judgment there are two factors which, in combination, do justify an award of indemnity costs for at least part of the claim. The first is the inherent weakness in the claim and the second is the disproportionate approach taken by the claimant to aspects of the claim, as I describe below. The weight of documentation both disclosed and included in the trial bundles is a feature of that disproportionate conduct.
16. Before addressing these two factors, it is important to remember that the scope of the claim, as ultimately cast, was exceptionally narrow. The claimant sought, principally, an account of the dealings by the first defendant with the purchase money and/or shares acquired by the claimant. This was in circumstances where it was common ground that the claimant had received, long before the proceedings commenced, all of the shares which he ought to have had, taking into account the purchases and sales of shares that he requested, or agreed to, in the intervening period. In addition, the claimant contended that the nature of the relationship which he entered into with the first defendant at the time of each acquisition gave rise to a duty on the first defendant to advise him of certain matters. He made no claim, prior to the taking of an account, however, for any breach of such duty if it existed.
17. The entire claim, therefore, turned on the nature of the relationship between the claimant and the first defendant that was created in relation to each transaction. Moreover, since it was the claimant's evidence that the relationship that was established in relation to the first transaction, in June 2005, was essentially the same as that established in relation to the remainder of the transactions, the principal focus was on the circumstances of that first transaction.
18. The fact that the claimant failed to overcome this first hurdle in the claim is not in itself a reason to depart from the normal costs order. What can justify such departure, however, is where the claim is very weak, carrying a high risk of failure. In my judgment, that is an accurate description of the claim here. My conclusion that no agency or trust relationship was created by the transactions entered into by the claimant was based on an objective interpretation of the contemporaneous evidence. This approach was dictated both by Swiss law (which I held applied) and by English law (which the claimant contended applied). The contemporaneous record consisted of written communications between the parties. In circumstances where the claimant gave no admissible evidence of things said or done at the time, that contradicted the written record (see paragraphs 92 to 98 of the main judgment), the weakness of the claim ought to have been apparent from the outset.
19. It is also relevant to note that in order to obtain the relief pleaded, principally a fiduciary duty to explain (with the burden on the first defendant) dealings with and relating to the purchase money and shares acquired, the claimant needed to establish that the transactions were governed by English law. In this respect, too, not only was the claim weak, but that weakness was apparent from the outset given that (a) the burden lay on the claimant to displace the presumption that Swiss law applied and (b) the relevant facts were not substantially in dispute.
20. As to the claimant's disproportionate approach to the claim, notwithstanding the narrowness of its scope, he used it as a spring-board to launch a wide-ranging investigation into both defendants' involvement, and that of companies with which they were concerned, in alleged dealings in relation to the shares acquired by the claimant over a number of years. This manifested itself in (1) the length of the claimant's witness statements for trial, much of which was taken up with matters that were irrelevant to the narrow focus of the claim; (2) the excessive amount of ultimately irrelevant material in the trial bundles; and (3) the lengthy cross-examination of both defendants, which focused to a large extent on allegations of mis-dealings with the claimant's shares prior to them being returned to the claimant.
21. The claimant contends there were three reasons why it was appropriate to investigate these matters. First, because in light of the potential limitation defences, it was necessary to explain when the claimant discovered various matters relating to his claim. Second, because the defendants had asked the claimant for the source of certain of the information he relied upon. Third, because an account is a discretionary remedy, and the claimant was being accused of bad faith and fraud.
22. While these points may explain certain parts of the evidence led by the claimant, they do not justify the investigation of, and attack upon, the defendants' alleged dealings with the shares. The claimant is entitled to point to the fact that the defendants did put the question of their knowledge of such dealings in issue by pleading that no account should be ordered in any event, because the defendants had already provided the claimant with the information he would be entitled to upon the taking of an account. That pleading, however, was made only in further information served in January 2018. More importantly, while it might have justified some attention being given to the gaps in the defendants' account of what, if anything, happened to the shares, the claimant's focus at trial on this part of the case was disproportionate to the relevance of that issue, particularly in circumstances where the issue was irrelevant unless the claimant first established there was a duty to account at all, and given the weakness of that claim.
23. In my judgment, the approach adopted was motivated by Mr Kent's desire to vent broader allegations against both defendants which were irrelevant unless and until an obligation to account was established partially, at least, in an effort to exert pressure on the defendants.
24. My conclusion that these two factors, in combination, take the case out of the norm justifies an award of indemnity costs for part, but not the whole of, the proceedings. It would be cumbersome and expensive to order indemnity costs for discrete aspects of the proceedings. It is simpler, instead, to order costs to be assessed on the indemnity basis from a particular time. In my judgment, the two factors I have identified impacted on the first defendant most acutely from the time of the service of witness statement onwards. I accordingly order that the claimant pays the costs of the first defendant, to be assessed on the standard basis up to 27 October 2017, being the date of service of the claimant's principal witness statement for trial, but on the indemnity basis thereafter.

The rate of interest on costs incurred prior to 30 July 2018

25. It is common ground that the claimant should pay interest on the defendants' costs up to the date of judgment pursuant to CPR 44.2(6)(g). The dispute is as to the rate. The defendants submit that it should be 4% above base and the claimant submits it should be 1% above base.
26. The defendants rely upon MacInnes v Gross [2017] 4 WLR 49, at [12]-[14]. Coulson J, following the approach taken by the Court of Appeal in two cases at the start of the century, there applied a rate of 4% above base. The first of those cases, McPhilemy v Times Newspapers Ltd (no.2) [2001] 1 WLR 934, was concerned solely with the rate of interest to be applied to costs in circumstances where a party had failed to beat a part 36 offer. The Court of Appeal explained that it was appropriate (under the relevant rule, which permitted an award of interest at a rate up to 10%) to award a higher rate of interest in those circumstances because neither an award of damages nor interest at a level normally permitted under section 35A would compensate for the inconvenience, anxiety and distress of proceedings. In the second of the two cases, Rowlands v Bryn Alyn Community (Holdings) Ltd [2003] EWCA Civ 383, the Court of Appeal followed McPhilemy.
27. Mr Weisselberg for the defendants, who appeared in the case before Coulson J, tells me that it was in fact a case where the claimant had failed to beat the defendant's part 36 offer, but that no distinction was drawn by Coulson J as to the rate of interest to be applied in respect of costs incurred before and after the date of expiry of the part 36 offer. It appears, however, that no argument was addressed to Coulson J to the effect that there should be any difference.
28. In contrast, in Marathon Asset Management LLP v Seddon [2017] 2 Costs LR 255, Leggatt J refused to follow those earlier Court of Appeal cases in which interest on costs was awarded at a rate of 4%, specifically because they were concerned with a rule that enabled interest to be awarded at an "enhanced" rate, whereas the case before him did not. He awarded interest at a normal commercial rate, which he assessed to be 2% above base.
29. The defendants point out that the decision of Coulson J does not appear to have been drawn to Leggatt J's attention. Given the points I make above as to the decision in McInnes, I do not think that assists the defendants.
30. The claimant relies upon Jones v Secretary of State for Energy and Climate Change [2014] 3 All ER 956, at [17]-[18]. The Court of Appeal there indicated that in exercising its discretion as to the rate of interest, the court conducts a general appraisal of the position having regard to what is reasonable for both the paying and the receiving parties. It was noted that in commercial cases the rate of interest is usually set by reference to the short-term cost of unsecured borrowing for the relevant class of litigant, although a party might displace that rule of thumb by adducing evidence specific to their case. It was further noted that the rate may differ depending on whether the borrower is classed as a first-class borrower, an SME, or a private individual. Typically, private individuals have tended to recover interest at a higher rate to reflect the cost of borrowing to that class.
31. In this case, there is no evidence either as to the cost of unsecured borrowing for an individual (being the class to which both defendants belong) or as to any circumstances peculiar to them. In the absence of such evidence, I adopt as a starting point the approach of Leggatt J in Marathon Asset v Seddon but, recognising that that case involved a corporate party, allow a slight increase in the rate to reflect the fact that the defendants are individuals, resulting in a rate of 2.5% over base per annum.

Interim payment on account of costs

32. By CPR 44.2(8) where the court orders a party to pay costs subject to detailed assessment, "it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so".
33. There is no good reason not to make such an order in this case. The dispute between the parties is as to the amount.
34. The defendants' combined overall costs are, as at 28 September 2018, £2,042,728.89 (of which approximately £1.7m is apportioned to the first defendant and approximately £330,000 is apportioned to the second defendant). The claimant has (pursuant to an agreed order made at the time of the handing down of the main judgment) paid £500,000 on account of the defendants' costs (apportioned as to £400,000 to the first defendant and £100,000 to the second defendant).
35. The principles to be applied are to be found in Excalibur Ventures LLC v Texas Keystone Inc [2015] EWHC 566 (Comm), per Christopher Clarke LJ at [23]-[28]. The task of the court is to identify a reasonable sum, having regard to all the circumstances, including the difficulty if any that may be faced in recovering the costs, the means of the parties, the imminence of any assessment and whether the paying party would have any difficulty in recovery in case of any overpayment. A reasonable sum will often be one that was an estimate of the likely level of recovery subject to an appropriate margin to allow for error in the estimation. It is appropriate to award an amount which is "not too much below" the likely level of recovery.
36. In considering the appropriate level to award in this case, I take into account, in particular: the fact that there is to be no appeal by the claimant; the absence of any indication of the level of costs incurred by the claimant (which is a factor that can count against a paying party, at least to the extent of diminishing the force of any generalised complaint at the size of the receiving party's costs); the fact that upon detailed assessment, on the standard basis, in respect of a previous costs order awarded to the defendants, they have recovered 80% of their costs; the length of time that these proceedings have already been on foot, and the likely delay before a detailed assessment is finalised; and the fact (which I have already considered in relation to the award of indemnity costs) that the claimant's approach to the litigation involved disclosure of a vast amount of documentation, lengthy witness statements, and a disproportionate focus on alleged conduct of the defendants which was unrelated to the principal issues in the case (all of which the defendants were obliged to deal with, thus increasing substantially the overall costs of the case).
37. I was told by counsel for the claimant, upon instructions, that the maximum amount that the claimant could pay would be £500,000 by mid-November 2018, a further £200,000 by the end of December 2018 and a further £200,000 by the end of March 2019. While I sympathise with the claimant's difficulties in this regard, those difficulties in fact emphasise the importance of an interim payment, as they put in doubt the ability of the defendants to recover the full amount of their costs following a detailed assessment.
38. Taking all of these factors into account, I consider that (a) the defendants are likely to recover, on a detailed assessment, a high proportion of the costs claimed, and (b) that this is a case where it is appropriate to set the level of interim payment at an amount only slightly less than the likely amount recoverable on detailed assessment. Accordingly I will order the claimant to pay, by way of interim payment on account of costs, to the first defendant 65% of the costs claimed (which equals – rounded to the nearest thousand – a further sum of £715,000, taking into account the £400,000 already paid) and to the second defendant 70% of the costs claimed (which equals a further sum of £130,000, taking into account the £100,000 already paid). The difference between the two reflects the fact that only part of the first defendant's costs are to be assessed on the indemnity basis.
39. The claimant points to his difficulties in being able to pay any amount other than those indicated by his counsel on instructions, as noted above, and asks for time to pay longer than the usual 14 days. The claimant has not filed any evidence to justify such an order (such as evidence as to his financial circumstances which would explain why he is unable to pay the amount ordered now, but would be able to do so after a certain period of time). In those circumstances, I am unable to accede to that request. The claimant has known since 30 July 2018 that he was likely to be faced with an order to pay a substantial further amount on account of the defendants' costs. Accordingly, I will order that the interim payments be made within 14 days of the formal handing down of this judgment. I do not shut out the claimant from making an application for time to pay, supported by proper evidence.
40. Finally, as to the costs of the hearing dealing with consequential matters, the defendants are substantially the successful parties, and I will order that the claimant pays the defendants' costs of that further hearing, to be assessed on the standard basis.