England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		29/07/2016

Mr Justice Males :

National Bank Trust -- costs

1. In the judgment which I handed down yesterday ( [2016] EWHC 1913 (Comm) ) I held that there had been three failures by the claimant bank to disclose material facts when making a without notice application for a freezing order. Despite this, I decided in the exercise of my discretion that the first and fourth defendants' application to discharge the freezing order should be dismissed and the order should continue. I invited submissions as to whether, and if so how, the bank's failures of disclosure should be marked by an order as to costs.
2. The three failures in question were failures by the bank to disclose (1) the existence and significance in Russian law of the defendant's employment contract with the bank, (2) the fact that the bank had made a civil claim ancillary to criminal proceedings in Russia, and (3) the full terms of the Settlement Agreement with Mr Worsley. An explanation for the bank's non-disclosure of the employment contract was provided by letter on 28 April 2016 and an apology to the court was given in an affidavit sworn on 4 July 2016: see [32] of the judgment. However, it was only in the bank's skeleton argument for the hearing that this was conceded to have been a failure to disclose a material fact. The non-disclosure of the making of the civil claim was conceded to have been such a failure in the course of oral submissions. The failure to disclose the full terms of the Settlement Agreement was not conceded to have been a failure to disclose a material fact at all, though I held that it was.
3. I described the failure in relation to the employment contract as substantial but not decisive, the failure to disclose the Settlement Agreement as important but somewhat less so, and the failure to disclose the existence of a civil claim in the Russian criminal proceedings as relatively trivial. I concluded that all three failures were innocent in the sense that there was no intention to omit or withhold information which was thought to be material.
4. In considering whether to continue the freezing order despite these failures of disclosure, I referred to the need to encourage proper compliance with the requirements of full and frank disclosure and to deter non-compliance. This has been referred to in many cases and hardly needs to be emphasised. I drew attention to the fact that, as Teare J pointed out in U&M Mining Zambia Ltd v Konkola Copper Mines Plc [2014] EWHC 3250 (Comm) at [95] and [96], the requirement of deterrence can sometimes be met by an appropriate order as to costs even in a case involving various and numerous failures.
5. The parties have now made submissions as to costs both in writing and orally.
6. The bank submits that, consistent with the general rule, costs should follow the event, so that the starting point should be that it is entitled to its costs of the discharge application. It recognises, however, that the court is likely to wish to reflect its disapproval of the non-disclosures which have been established by a sanction in costs. It suggests that an appropriate order would be that the bank should recover 75% of its costs of the discharge application. The sanction, therefore, would be limited to non-recovery by the bank of 25% of its assessed costs.
7. The defendants submit that the starting point in a case where there has been a substantial non-disclosure by a claimant but the injunction has nevertheless been continued is that the claimant should pay the defendant's costs on the indemnity basis, but they recognise that there may be factors which require or justify a departure from that starting point. Here they accept that there are such factors, namely that there were some alleged failures of disclosure on which they did not succeed and that they failed on the issue of risk of dissipation. They submit that the right order is that the bank must bear the costs of its initial application for the freezing order in any event and that the bank should pay one third of the defendants' costs of the discharge application on the indemnity basis. This was in fact the order made by Teare J in the Konkola Copper Mines case, a case which bears some similarity to the present case: see [96] of his judgment. He described this as an order which, "whilst giving legitimate protective relief to U&M, will also reflect U&M's failure to comply with its duty of full and frank disclosure".
8. I requested both parties to provide some indication of the costs incurred by them, so that the impact of any order can be assessed. The bank says that its costs of the initial application for the freezing order were £127,000 and that its costs of the discharge application were £405,000. The defendants say that their costs of the discharge application were £400,000. These are only approximate figures which in any event would be subject to assessment, either on the standard or the indemnity basis.
9. The bank points out that I found the failures of disclosure in each case to be innocent, in that there was no intention to omit or withhold information which was thought to be material. That is true, but if I had found that there was an intentional omission or withholding of such material, that would in itself have been a very strong reason to discharge the freezing order and I would have done so, despite the other factors which I held to amount to a strong case for a freezing order to be made. That in my view will generally be the position. Accordingly the consideration of any costs sanction will generally arise only in circumstances where the failure to disclose has been found to be innocent in this sense, as it was in the Konkola Copper Mines case. That does not mean, however, that the claimant is free from any culpability. The obligation to disclose extends to matters which ought to have been ascertained on reasonable inquiry, which covers a wide range of potential conduct. A finding of non-disclosure presupposes that the fact in question ought to have been disclosed.
10. I deal first with the costs of the initial application for the freezing order. In my view, where there are failures of disclosure which are substantial, as I found to be the case here, the costs of such an application should normally be borne by the claimant in any event. That would be the position if, instead of allowing the order to continue but imposing a costs sanction, the order was discharged, as will sometimes be appropriate. In general, a claimant which is in substantial breach of important duties to the court in making a without notice application should not benefit from an exercise of the court's discretion in its favour to recover the costs of that application. While there may be exceptions, such a general rule provides strong encouragement of proper compliance with the requirements of full and frank disclosure and forms at least part of an effective deterrence against non-compliance. I consider that there is no reason to depart from this principle in the present case. I note that the order made by Teare J in the Konkola Copper Mines case was to this effect.
11. So far as the costs of the application to discharge the freezing order are concerned, I accept the bank's submission that it has been the successful party and that the starting point should be that it is entitled to its costs of the application. I consider, however, that it will generally be appropriate to make a deduction from the costs which would otherwise have been awarded in favour of a claimant where there have been failures of disclosure, and that this may be a very substantial deduction. In an appropriate case it may be right to deprive a claimant of costs in their entirety. The making of such a deduction will generally be a necessary sanction, to mark the failure in the particular case and, perhaps more importantly, to encourage proper compliance with the requirements of full and frank disclosure in the making of without notice applications for freezing orders and to deter non-compliance. Freezing orders can sometimes have devastating consequences for defendants and the court is heavily reliant on proper disclosure by claimants at the without notice stage. It will always take seriously a substantial failure to disclose material facts even if, in the interests of justice, it concludes that it is appropriate to continue a freezing order despite such failures. It is important that this should be recognised.
12. I acknowledge that there may be cases where, rather than making a deduction, even a very substantial deduction, from the costs to be awarded to the successful claimant which has succeeded in maintaining its injunction, it may be appropriate to make an award of costs in favour of the defendant, sometimes even an award for assessment on the indemnity basis. That was Teare J's approach in the Konkola Copper Mines case and nothing I say should be understood as casting doubt on his order. Every exercise of discretion depends on its own circumstances.
13. In general, however, I consider that the starting point must be that the claimant is the successful party. If the starting point were that costs, particularly on the indemnity basis, were awarded in favour of a defendant which has after all failed to obtain the discharge of the order, that could encourage disputes about failures to disclose to be litigated rather than promoting a realistic attitude on the part of defendants as to whether, despite a failure to disclose, a freezing order is nevertheless appropriate. An approach which, as it were, gives the defendant a free shot at discharging a freezing order so far as costs are concerned would not be helpful.
14. Accordingly, starting from the position that the claimant bank has been successful, I propose to make a deduction from the costs which would otherwise have been awarded in its favour. That deduction needs to be sufficient to represent a real sanction and to be an effective deterrent in other cases. I consider that the bank's proposal that it should be deprived of only 25% of its costs falls a long way short of satisfying this objective.
15. It is also a relevant factor if the admission of a failure to disclose material facts comes at a late stage or not at all. The consequence is that the defendant will have expended time and costs in seeking to establish what ought to have been admitted early on. That consideration applies here, in particular in relation to the significance as a matter of Russian law of the defendant's employment contract. It means that the deduction should be greater than it would otherwise have been in order to compensate the defendant for costs unnecessarily incurred.
16. In deciding what deduction to make in the particular circumstances of this case, I consider that four further factors are relevant.
17. First, as could always have been recognised, this is a strong case for a freezing order.
18. Second, the bank succeeded on an independent point, namely whether there was a risk of dissipation. That is a point to which considerable costs can be attributed, albeit the main part of the preparation and the hearing itself was devoted to the issues of non-disclosure.
19. Third, the defendants failed to establish a failure of disclosure on three of the six principal points on which they relied.
20. Fourth, the approach which the defendants adopted, described at [14] of my judgment, made identification of their complaints concerning disclosure difficult. I accept that this will have increased substantially and unnecessarily the bank's costs of dealing with the application. Even though, following service of the document identifying the six principal failures of disclosure relied upon, the other allegations rightly fell away, these wide ranging non-disclosure allegations had resulted in the expenditure of considerable time and money in preparing a response. That applies particularly to the defendants' complaint in its evidence, referred to at [52] of my judgment as misconceived, that the bank failed to disclose that the offshore companies in question were owned by and operated for the benefit of the bank.
21. I consider that the cumulative effect of these factors, and in particular the last, should be reflected in the costs order which I shall make. They need to be set against the need to mark the bank's failures of disclosure. In my judgment it is right to do so by making a smaller deduction from the costs to be awarded to the bank than I would otherwise have made.
22. In the result, taking all these matters into account and in the exercise of my discretion as to costs, I order that:

a. the bank must bear in any event its own costs of the application to Leggatt J for the freezing order; and

b. the defendants must pay 40% of the bank's costs of the application to discharge the freezing order, such costs to be assessed on the standard basis.

23. I decline to order a payment on account of these costs. That too represents an appropriate sanction for the failures of disclosure in this case.