Jersey Unreported Judgments

Costs - reasons for ordering plaintiffs to provide security for costs to the defendants.

[2013]JRC221A

Royal Court

(Samedi)

14 November 2013

Before     :

Advocate Matthew John Thompson, Master of the Royal Court.

 

Advocate M. L. Preston for the Plaintiffs.

Advocate M. H. Temple for the Defendants.

judgment

the master:

Introduction

1.        This judgment represents my reasons for ordering the plaintiffs to provide security for costs to the defendants.  The amount sought by the defendants for security was £127,982.78 up to the making of the application and £141,389.00 representing estimated time up to and including discovery.  A total sum of £269,371.75 was therefore sought. 

Procedural History

2.        The summons, which I heard on 14^th November, 2013, was issued on 17^th April, 2013.  However, the same summons also contained an application brought by the defendants to strike out all or alternatively part of the plaintiffs' order of justice.  In light of the strike out application, the application for security for costs was left over until the strike out application was determined.  Judgment on the strike out application was given by Master Wheeler on 17^th July, 2013, when parts of the order of justice were struck out.  The plaintiffs were also given leave to file an amended order of justice. 

3.        At the hearing of the security for costs summons I was told that an amended order of justice had been produced.  I was also told that, although the defendants were critical of the plaintiffs for not amending their order of justice further in light of arguments advanced by the defendants at the strike out application, the proposed amendments to the order of justice were acceptable and the defendants would be amending their answer in response.  These procedural skirmishes meant that part of the summons seeking security for costs has only now come before me for determination. 

4.        The action itself commenced on 22^nd September, 2011.  The order of justice comprises 22 pages.  An answer of some 31 pages was filed on 28^th September, 2012, and a reply of 13 pages on 3^rd December, 2012.  The strike out application, as noted above, was issued on 17^th April, 2013.  It was not explained to me why it took a year to file an answer or why a strike out application was only issued 7 months after close of pleadings.  The net effect of these delays is that more than 2 years has passed since the issue of the claim and the matter has not yet progressed to a summons for directions.  Neither party has conducted this claim within the time frames expected by the Court. 

The Plaintiffs' Claims

5.        The plaintiffs' claims against the first and second defendants are in respect of the latters' capacities as former custodian and administrator of two collective investment funds, (1) Belgravia Property Funds Limited ("BPFL") and Belgravia European Property Funds Limited ("BEPFL").  The second and third plaintiffs via the Bank of Valletta made investments of approximately £3,100,000 in BPFL and BEPFL.  The claims are made on the basis of misrepresentation and negligent misstatement against both defendants; claims for breach of statutory and fiduciary duty were struck out by Master Wheeler by his decision given on 17^th July, 2013.  

6.        The position of the first plaintiff is a little more complicated than that of the other plaintiffs.  At all material times the first plaintiff acted as investment advisor to the second and third plaintiffs.  Paragraph 59 of the order of justice pleads that the first plaintiff is liable to the second and third plaintiffs in respect of loss caused to them as consequence of the investment advice given by the first plaintiff.  The first plaintiff therefore seeks an indemnity or damages from the defendants in respect of its liability to second and third plaintiffs.  The amount of this loss has not been pleaded.  The first plaintiff's claim avers that in advising the second and third plaintiffs it relied on alleged misrepresentations and negligent mis-statements said to have been made by the first or second defendants.  This firstly means that there is a potential issue of double recovery.  The defendants assuming they are unsuccessful on liability and causation arguments can only be required to compensate the plaintiffs once for the same category of losses.  Secondly, the second and third plaintiffs did not come into existence as legal entities until after some of the representations forming the basis of the plaintiffs' claim were made.  This means that the plaintiffs have to contend that any duties owed at the time any statements were made were owed to future investors for there to be sufficient proximity for a duty of care to arise. 

7.        The second and third plaintiffs seek to recover damages based on the difference between the sums invested and their current value or alternatively by reference to amounts overpaid by the plaintiffs for shares or units in BPFL and BEPFL.  The shares in BPFL and BEPFL are now said to be worthless or of a nominal value. 

8.        Liability is disputed by the defendants and issues of causation and quantum are also raised.  I address these defences later in this decision. 

Key Factual Issues

9.        By reference to the pleadings filed to date, the key factual issues relate firstly to what was said at a meeting between Mr Hart and Mr Garrood, directors of the second defendant, and representatives of the first plaintiff in August 2005. 

10.      The second key factual issue relates to the provision of net asset valuations.  These calculations were carried out by the second defendant although they were sent out to investors in the name of the relevant Belgravia Fund.  The plaintiffs allege that these net asset valuation calculations were relied upon as part of the decision to invest in February to April 2007.  The calculations were produced on a monthly basis.  In the case of BPFL they were produced with effect from August 2004.  In relation to BEPFL they appear to have been produced from January 2006. 

11.      In relation to the accuracy of these calculations the plaintiffs rely heavily on a public statement made by the JFSC on 27^th July, 2010, which related to a number of Belgravia Funds, including BPFL and BEPFL.  In particular they rely on key findings listed at paragraph 2.2 of the public statement.  The plaintiffs therefore allege in particular that the second defendant did not calculate the net asset value of BPFL or BEPFL properly or accurately and therefore the calculations were made recklessly or alternatively negligently. 

12.      The defendants plead a positive case that the calculations provided were either accurate or alternatively did not contain any manifest error.  The relevance of the reference to manifest error is that investments in BPFL and BEPFL were made on the basis of a document called a private placement memorandum which included a certification provision that stated that any certificate as to the net asset value of each class of either fund was "conclusive in the absence of a manifest error". 

13.      I set out the above factual issues because they are relevant to the scope of what discovery may be required from the defendants in this action and therefore relevant to the question of the quantum of any security to be provided.  It was accepted in argument that the key factual issues were as I have summarised in this decision. 

The Relevant Legal Principles on the Granting of Security for Costs

14.      The approach to the granting of security for costs underwent a sea-change in the decision of the Court of Appeal in Leeds United Association Football Club Limited v Phone-In Trading Post Limited (t/a Admatch) [2009] JLR 186.  In that case the Court of Appeal concluded that requiring security for costs from a plaintiff simply because it was resident outside Jersey constituted discrimination and therefore the previously accepted practice of requiring a non-resident plaintiff to provide security for costs was no longer appropriate. 

15.      I was specifically referred by Mr Preston to paragraph 20 of the Leeds United v Admatch decision where the Court of Appeal stated:-

"In the first place, we do not accept the Deputy Bailiff's view that, if a plaintiff's claim is not stifled by an order for security, he suffers no substantial prejudice by providing it.  The plaintiff is forced to lay out funds equal to the other side's costs in addition to paying his own, at a time when the court is rarely in a position to form any view of the merits.  The provision of cash security by the usual method of paying it into court has implications for his cash flow which are likely to be significant, even if they are not ruinous. It ties up funds which would otherwise have been used in his business or deposited at interest.  If the security is not funded from cash balances, it will cause him to incur borrowing or guarantee charges."

16.      While that statement was made in the context of the Court of Appeal setting aside the blanket presumption, I also accept that paragraph 20 is relevant to the discretion I have to exercise firstly as to whether to order security at all and secondly as to the amount of that security. 

17.      I was also referred by the defendants to the Royal Court's decision in Café de Lecq Limited v R. A. Rossborough (Insurance Brokers) Limited [2011] JLR 031.  The relevant paragraphs of the decision in relation to the principle of whether or not to grant security are as follows:-

"20. A presumption or principle as found by the Master that Jersey-resident plaintiffs, whether natural or corporate, should not be required to provide security is inconsistent with the decision in Leeds in that it discriminates between plaintiffs on the ground of their residence.  We agree with Mr Journeaux that such a general presumption based on residence would be unlawful.  In our view, the protection hitherto given to resident plaintiffs must now be extended to all plaintiffs so that the practice following Leeds should be as follows, namely that consistent with the policy that there should be access to the courts for all, rich or poor, and without detracting from its wide discretion to order security where justice so requires, it will be the general practice of the court not to require plaintiffs (wherever resident) to provide security because there is reason to believe that they will be unable to meet orders for costs against them save in the case of:-

(i) Corporate plaintiffs (wherever resident), where security may be ordered on such grounds following the principles set out by the Court of Appeal in A.E. Smith (9); and

 (ii) Non-resident plaintiffs, who may be required to provide security to meet the legitimate objective of protecting the ability of defendants to enforce costs judgments outside the jurisdiction, such applications to be assessed on an individual basis.

...............................................

42. As is clear from the above, we have with respect reached different conclusions to those of the Master on the principles to be applied in this application for security for costs.  Our conclusions are as follows:-

(i) There is no presumption or principle that Jersey-resident corporate plaintiffs are not required to provide security for costs or that security for costs orders will only be made against Jersey-resident corporate plaintiffs in exceptional circumstances. 

(ii) The principles to be applied when considering an application for security for costs against a corporate plaintiff are those set out in A.E. Smith (9). 

(iii) The court is concerned with the effect of such an order upon the corporate plaintiff, not upon its directors, beneficial owners or other backers. 

(iv) The possibility that the successful defendant may be able to apply for a costs order against a third party in the event that the assets of the unsuccessful corporate plaintiff are insufficient to meet its costs should not be taken into account."

18.      The current approach of this Court is therefore not to require a plaintiff wherever resident to provide security.  If a plaintiff is a corporate plaintiff, then I have a discretion whether or not to order security based on the grounds set out by the Court of Appeal in A. E. Smith & Sons Limited v L'Eau des Iles (Jersey Limited [1999] JLR 319.  I can also require non-resident plaintiffs to provide security, but again this is a matter of discretion and I am required to assess each application on an individual basis. 

19.      The relevant principles in L'Eau des Iles were also summarised in the Café de Lecq judgment at paragraph 13 as follows:-

"It is helpful to set out in full the relevant part of the judgment of Southwell, J.A. in the Court of Appeal (1999 JLR at 322-323):-

"The principles of law relevant in considering whether an order for security for costs should be made by the courts of England and Wales were well-summarized by Peter Gibson, L.J. in Keary Devs. Ltd. v. Tarmac Constr. Ltd.-‰.-‰.-‰. ([1995] 3 All E.R. at 539-542).  For the purposes of the present application I am content to treat that statement of principles as generally suitable for adoption in Jersey law, while reserving for future consideration some of the details of this statement which may need some reconsideration in the different circumstances in Jersey.  That statement is too long to be quoted fully here, and I summarize the principles as follows:-

(a) The court has a complete discretion whether to order security. 

(b) That the plaintiff company will be deterred from pursuing its claim by an order for security is not, without more, a sufficient reason for not ordering security. 

(c) The court must balance, on the one hand, the injustice to the plaintiff company if prevented from pursuing a genuine claim by an order for security, and, on the other hand, the injustice to the defendant if no security is ordered, the plaintiff's claim fails and the defendant is unable to recover its costs from the plaintiff.  So the court will seek not to allow the power to order security to be used oppressively by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the circumstances underlying the claim and/or the failure to meet the claim may have been the cause or a material cause of the plaintiff company being indigent.  The court will also seek not to be so reluctant to order security that the impecunious plaintiff company can be enabled to use its inability to pay costs as a means of putting unfair pressure on the more prosperous defendant company. 

(d) The court will broadly take into account the prospects of success in the action, and the conduct of the action so far. I mention here that it is common ground that the present application is to be decided without dealing with the merits of the cases put forward by either of the parties to the action. 

(e) The court has a discretion to order security of any amount, and need not order substantial security. 

(f)  If the plaintiff company alleges that the effect of an order for security would be unfairly to stifle its genuine claim, the court must be satisfied that, in all the circumstances, the claim probably would be stifled.  The test is one of probability, not possibility. 

(g) The stage of the action at which security is sought is one aspect of the conduct of the action which the court will take into account. 

In summarizing the principles, I have referred in principle (b) to a party being 'deterred' from pursuing its claim and in principles (c) and (f) to a claim being 'stifled.' It seems to me to be important to appreciate that there is a range of effects which an order for security may have on a plaintiff, extending from, at one end, possible deterrence, through probable deterrence, possible stifling, probable stifling to inevitable stifling at the other end of the range. There are shades of grey, not black and white, dividing 'deterrence' from 'stifling.'"

The Submissions

20.      The defendants in their skeleton argument advanced eight reasons in support of their application for security for costs as follows:-

(a)       All three of the plaintiffs are corporate plaintiffs;

(b)       all three plaintiffs are resident overseas;

(c)       third plaintiff as a legal person;

(d)       failure to provide any accounts or financial statements;

(e)       failure to prosecute their claim properly and timeously;

(f)        conflict of Interest between the plaintiffs;

(g)       prospects of success in the action; and

(h)       other matters. 

21.      In oral submission the primary focus of Advocate Temple centred on the fact that the plaintiffs were corporate entities and that they had failed to provide any accounts or financial statements.  This was despite the fact that accounts were requested by the defendants shortly after the commencement of proceedings in a letter from their legal advisers dated 14^th October, 2011, and again by a letter dated 1^st March, 2013.  No response was ever received to either request for accounts.  The defendants contended that the provision of accounts is important because it enables the defendants and the Court to form an assessment of the effect on a corporate entity of an order for security for costs as well as the entity's ability to pay.  As the Court of Appeal noted at paragraph 19 in Leeds United v Admatch "protecting the interest of a defendant in being able to enforce a judgment for his costs if he succeeds is, in principle, a legitimate objective of the practice (of ordering security for costs)."  In this case the plaintiffs, despite being asked twice and despite knowing of the application for security for costs since April of this year, have not provided accounts.  The question arises whether this is sufficient to require the plaintiffs in principle to provide security for costs. 

22.      I was informed in submission by the defendants that it is the practice of the English Courts on security for costs applications to look at the accounts of a corporate plaintiff to see whether security for costs should be ordered.  While no authority was produced to me indicating this is the practice adopted, I also note that in Leeds United v Admatch the Court of Appeal appeared to have looked at the accounts of the plaintiff in that case in deciding whether or not to order security (see paragraph 22 of the decision).  I consider this is a practice that should be followed on future applications as the accounts are likely to provide useful information for the Court. 

23.      The effect of a failure to provide accounts on an exercise of discretion arose in Goldtron Limited v Most Investment Limited [2002] JLR 424.  In that case the Royal Court, having decided to discharge injunctions on the basis of a material non-disclosure, then considered whether it should re-impose those injunctions.  The case concerned enforcement of an arbitration award and whether there was a risk of dissipation.  One of the issues concerned the lack of any accounts of the defendants in evidence.  At paragraph 32(e) the Court stated as follows:-

"As to the question of dissipation of assets, it is often the case that there is no concrete evidence of an intention on the part of a defendant to remove assets from the jurisdiction.  The case of Third Chandris Shipping Corp v Unimarine S.A. (5) and the comments of Bingham, J. in Siporex (4) ([1986] 2 Lloyd's Rep. at 439) make it clear that the facts that the party against whom a Mareva injunction is sought is a company which has no published accounts and about which nothing is known in relation to its business or financial position may be sufficient grounds for granting such an injunction.  That is the position here.  This is an application to set aside a Mareva injunction.  One might have expected the defendant to produce evidence to the court that it was quite wrong for an injunction to be granted because the company was clearly willing and able to meet the award if upheld on appeal.  Yet nothing of this nature was produced.  The affidavit is not even sworn by an officer of the company, merely by the Russian lawyer who represents the interests of the defendant.  We are told nothing of the nature of the defendant's business.  Was this the only transaction into which it entered or is it a substantial holding or trading company?  What is the nature of its financial position?  We have not been shown any balance sheet or other accounts and have been told nothing about the nature, location or substance of its assets.  Nor has the defendant put forward any particular grounds of hardship.  Mr O'Connell made the point that any freezing of a company's account is, by definition, an interference with its right to deal with its assets as it thinks fit and gives rise to hardship.  Nevertheless, in a case such as the present where, on the face of it, in the light of the arbitration award, the defendant owes a substantial amount of money to the plaintiff, the defendant has only itself to blame if it says nothing about any particular hardship it will suffer, e.g. the funds are committed to bona fide trading activities."

While in the present case the Court has not found that the plaintiffs owe the defendants any money in respect of costs, the ordering of security is to protect the interests of a defendant to enable it to enforce a judgment for costs.  The reasoning I have quoted from Goldtron where accounts were not produced is reasoning I consider is helpful in deciding whether or not security for costs should be provided.  Just as in Goldtron, no published accounts have been produced, nothing is known about the financial position of the plaintiffs and the plaintiffs have not adduced any evidence to show that they are willing or able to meet any adverse costs order.  All I was told was that if security were ordered the plaintiffs would pay the relevant amount into Court.  I was not given an explanation about the nature of the plaintiffs' businesses beyond what is contained in the order of justice; I have not been shown any balance sheet or other accounts, or any evidence showing the nature, location or substance of their assets. 

24.      Advocate Preston did invite me to adjourn the application in order for him to produce accounts.  In my judgment that request came far too late in the day.  The plaintiffs have known about the request for accounts for two years.  The application for security was commenced some seven months ago.  The plaintiffs have also not pursued this action with any degree of urgency in terms of seeking to bring this matter to trial.  The suggestion of an adjournment to provide accounts was not even raised in the plaintiffs' skeleton argument.  Instead I was invited not to order any security as a matter of principle.  Yet the plaintiffs have invoked this jurisdiction in order to bring a significant claim against the defendants.  In doing so the plaintiffs must be taken to accept this Court's procedural rules or to have been advised as to the rules that apply here.  Accordingly I am not prepared to allow an adjournment. 

25.      I am therefore satisfied that the lack of accounts in respect of the plaintiff companies, where nothing is known about those companies other than what is described in the order of justice, is sufficient to require the plaintiffs in principle to provide security for costs. 

26.      In relation to the alternative ground advanced for ordering security, namely that the plaintiffs are non-resident, I am not satisfied that the defendants have established their case under this ground.  That is because the defendants have not produced any evidence identifying that there are issues in relation to enforcement of costs orders of this Court in Malta or South Africa.  The mere fact that a plaintiff is non-resident is of itself not enough for a defendant to get over the threshold set out at paragraph 20(2) of Café de Lecq.  I have to assess each case on an individual basis.  Had the application been advanced on this ground alone the defendants would not have succeeded. 

27.      The only evidence that was produced to me was an affidavit filed by the plaintiff, albeit late.  This evidence suggested in summary that there was nothing particularly difficult required to enforce costs orders of this Court in South Africa.  While the defendants in submission were critical of the experience of the deponent of the affidavit, the lack of any evidence from the defendants setting out any problems with enforcement in South Africa or Malta is fatal to their reliance on this ground.  The defendants are subsidiaries of a South African group so it would not have been difficult to adduce such evidence.  While it was explained that such evidence was not obtained to avoid costs being incurred, the starting point for a security for costs application is that a plaintiff, wherever resident, is not required to provide security.  The onus is therefore very much on a defendant when seeking to persuade the Court to order security against a non-resident plaintiff to adduce evidence as to the difficulties a defendant might face in enforcing a costs judgment in the jurisdiction where a plaintiff resides is incorporated or has its principal place of business. 

Other Grounds

28.      In relation to the other grounds advanced by the defendants I will deal with these shortly. 

29.      In relation to the issue of delay, while the plaintiff has delayed in pursuing this matter to trial, the defendants' application for security has not been pursued with particular urgency either.  I therefore regard the question of delay other than in respect of the plaintiffs' failure to provide accounts as one which is broadly neutral in relation to the principle of ordering security.  I deal later with the effect of delay on quantum. 

30.      In relation to grounds c, e and g, these are all contentions which go to the prospects of success in the action which I am required to consider.  In this case in the plaintiffs' favour is the statement made by the JFSC to which I have referred above.  That statement at least indicates that there are factual issues in relation to the provision of net asset value calculations and their accuracy.  The JFSC would not make such a statement lightly.  The statement also makes it clear that it is based on a report produced by accountants appointed under the regulatory powers available to the JFSC.  The plaintiff is therefore able to point to independent evidence to corroborate its assertions.  However the defendant pleads a positive case that the net asset value calculations provided were accurate.  While it is a matter for trial I consider I am entitled to take the view that evidentially the defendants, in effectively challenging parts of the public statement and the report underlying it, will have to produce sufficient  and material evidence to meet their pleaded case. 

31.      It is also right to note however that the defendants raise a number of other matters which the plaintiff will have to overcome.  I have already referred to the fact that at the time some of the matters said to amount to misrepresentations were made the second and third plaintiffs did not exist.  There is therefore a legal issue as to the scope of the duty of care owed by each of the defendants.  The defendants also rely on the fact that the first plaintiff was a professional investment advisor carrying out its own research.  They plead that any decision to invest made by the second and third plaintiffs was therefore made in reliance on advice received from the first plaintiff rather than any statements made by the defendants.  In support of this argument they also rely on the fact that there was direct correspondence between the first plaintiff and a company known as Belgravia Asset Management Limited who managed BPFL and BEPFL at the relevant times. 

32.      Furthermore, in their answer the defendants also invite the Court to construe the effect of the private placement memoranda which it is said represents the terms upon which the second and third plaintiffs invested through the Bank of Valletta.  In particular they refer to investment warnings and risk factors identified in the private place memoranda issued for both BPFL and BEPFL as well as in other documents. 

33.      The first defendant also disputes that it made any representations.  It avers that its role was simply as custodian. 

34.      The defendants also rely on the fact that the terms of an application form completed by Bank of Valletta expressly provided that Bank of Valletta was contracting as principal.  It is right to note however in the plaintiffs' favour that on the same form Bank of Valletta expressly recorded that it was applying as custodian for the Orange Property Fund. 

35.      There are also arguments about whether the contractual documentation excludes any duty of care that might otherwise be owed, whether the defendants can rely on an indemnity clause and whether in the case of the certification of the net asset value calculations the plaintiffs are required to prove manifest error. 

36.      Finally, there will be arguments on causation and quantum and whether these are affected by any role Belgravia Asset Management played in relation to the collapse of the two funds with which this case is concerned.  The Court will also have to evaluate the impact on what is claimed of the more challenging financial climate that has existed in broad terms since 2008 and it is alleged had a significant effect on property values including on BPFL and BEPFL. 

37.      In my judgment, the plaintiffs will have to address these issues, in order to succeed at trial.  In that sense the defendants have raised matters of substance which the plaintiffs will have to overcome.  However, I am not satisfied that those issues by themselves are so strong or so conclusive that the defendants are bound to succeed.  In this judgment both sides have arguments they can advance and while I consider there are more hurdles for the plaintiffs to overcome, I am not satisfied that the plaintiffs' case is one that of itself is bound to fail or is so weak that this of itself requires me to order security. 

38.      What I am satisfied about in relation to the merits is that the existence of the points that the plaintiffs will have to overcome in order to succeed is an additional factor that I can rely on as a matter of discretion in conjunction with the failure by the plaintiffs to produce any accounts to order that security for costs be provided.  This is a reasonably complex case with a number of legal issues to be addressed and where the accuracy of net asset value calculations is in issue.  The costs to be incurred will be reasonably substantial, which is a factor that I consider points to ordering security.  

39.      In relation to allegations of a conflict of interest between the plaintiffs, this is not a factor I have taken into account in deciding as a matter of principle that security for costs ought to be provided.  While Master Wheeler made observations as to whether the plaintiffs' case was pleaded as effectively as it might be and I have referred to issues the plaintiffs need to address, the existence of a possible conflict of interest is a matter for the plaintiffs and its advisors.  I am therefore not persuaded that this argument amounts to a matter which I should take into account in exercising my discretion so as to order security. 

40.      It is also right that I address the effect of ordering security.  While Advocate Preston, at the commencement of his submissions started to intimate that his clients' claims might be stifled, he subsequently clarified his position to confirm that if I ordered security to be provided such an order would not stifle the plaintiffs' claim. 

41.      Advocate Preston did remind me that, even though his client was not contending that the claim would be stifled by an order for security, in exercising my discretion I had to carry out the balancing exercise referred at paragraph 20 of Leeds v Admatch which I have set out at paragraph 15 above.  As was noted in Leeds v Admatch, requiring any party to provide security ties up funds which otherwise can be used in a plaintiff's business.  If security has to be borrowed then there will be both borrowing costs and interest to pay. 

42.      In this case, the plaintiffs' claim is at its highest in excess £3,100,000 plus interest.  The plaintiffs either must have known as experienced business advisors or should have been advised that any adverse costs order was likely to be significant and that there was a risk of security for costs being ordered.  The plaintiffs should have also been advised of the risk of having to meet adverse cost orders should their claims be unsuccessful.  The plaintiffs, by committing themselves to the process of litigation with the issues that arise in this case, should therefore be taken to have formed the view that such expense might have to be incurred with the resulting impact on their cash flow.  However the plaintiffs, in inviting me to weigh in the balance the effect of providing security on their cash flow, again have not helped themselves by not providing accounts because I am unable to ascertain the effect of the provision of security on their cash flow.  Therefore I believe that I cannot attach any significant weight to the effect on the plaintiffs of ordering security, albeit it will have some effect. 

Applicable legal principles on Quantum

43.      In relation to the approach I should take in assessing the quantum of security for costs in the Café de Lecq decision the Court, when considering the amount of security to order, cited at paragraph 48 of its decision Procon (G.B.) Ltd v Provincial Co. Ltd 1984 2 All E.R. at page 379 as follows:-

"I can see no sensible reason why the court should not order security in the sum which it considers the applicant would be likely to recover on taxation on a party and party basis if the court considers it just to do so.  This, as I understand it, is the practice of the judges in the Commercial Court and it is a practice that ought also to be followed in the rest of the Queen's Bench Division.  It is, of course, for the party seeking an order for security to put before the court material that will enable the court to make an estimate of the costs of the litigation.  In the normal course of things, it is to be expected that the court will, to some extent, discount the figure it is asked to award.  Allowance will have to be made for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation.  It is to be observed in the present case that it was this element that led Bingham, J. to make a substantial discount in the order of 19%.  If the estimate includes future costs, these discounts may be large to allow for the possibility of the settlement of the litigation and this will be particularly so if application is made at the commencement of the litigation and costs are assessed on the assumption that the litigation will proceed to a final trial.  In such cases it may be sensible to discount by as much as one-third and I strongly suspect myself that, because some of the masters were doing this where they were asked to estimate security at a very early stage, the note in The Supreme Court Practice emerged in its present form. 

Furthermore, if very little information is put before the court on which it can estimate costs, then again it will be reasonable to make a large discount, particularly when it is borne in mind that, if the security proves inadequate as litigation progresses, it is always possible for a further application to be made for more security. 

But, having said that, it would be quite wrong, in order to avoid the mental discipline involved in examining the particular facts of the case to determine what is a just figure, to apply a rule of thumb and just reduce every estimate by one-third to avoid trouble, and if any such practice has been insidiously developing it is, as I say, time that it was stopped."

44.      The Court then stated at paragraph 49 "We note from A.E. Smith (9) that we have discretion to order security of any amount and need not order substantial security."

Pre-application Costs

45.      In relation to costs incurred prior to the hearing of the present application, I was provided with a breakdown in a schedule showing the value of the time spent and billed to date amounting to £116,407.85.  This schedule involved two partners and eight other fee earners working on the matter.  I was told that the second partner had carried out three hours of work as he was a specialist in funds.  Nevertheless there were four fee earners involved in addition to Advocate Temple as the main partner on the file.  Their time spent ranged between 19 and 94 hours.  Advocate Temple himself had recorded nearly 140 hours.  The total time recorded and billed was 355 hours plus a further 44 hours of unbilled time. 

46.      The defendants' bundle also contained an earlier affidavit filed by Advocate Wauchope for the hearing on 12^th June, 2013, (which was the strike out hearing).  The total figure in this schedule was the sum of £80,000 on the basis of an uplift to the basic hourly rate of 50% but capping the rates claimed for the partners and two Advocates involved compared to the rates actually charged to their clients.  The process of capping rates does not appear to have been carried out for the schedule provided to me for this application.  This means that the figure of £116,407.85, being work billed and recovered, needs to be reduced by £15,000 because the costs claimed for Advocate Temple and Advocate Bridgeford were not capped in accordance with the rates permitted by the Court. 

47.      Furthermore I was not provided with any breakdown of the work in progress recorded which was also at actual rates.  That figure was £11,574.90.  Given that Advocate Temple has significant involvement in this matter, in assessing what security I might order for pre-assessment costs, I am going to cap the work in progress at a figure of £10,000 to reflect that Advocate Temple's actual hourly rate is in excess of what might be recovered. 

48.      I also note that the defendants on their strike out application had recovered 50% of their costs.  I raised with Advocate Temple that he had a costs order in his favour which could be assessed by the Court.  If costs, once assessed, were not paid the Court also has power to impose sanctions on the plaintiffs.  Security at this stage should not therefore be awarded in respect of the successful costs order.  Advocate Temple very fairly accepted that the total amount of costs incurred in relation to the strike out application was not more than £40,000.  I therefore consider that I should deduct the further sum of £20,000 from the figure of £110,000.  This leaves a balance of £90,000 which is the maximum I could order the plaintiffs to produce as security. 

49.      Although the schedules provided list the value of the work recorded and the hourly rates for each individual, I was not provided with any written summary of the work carried out to date by the defendants.  While on a security for costs application I do not expect to be provided with a detailed bill of costs for pre-application costs on the basis set out in practice direction RC 09/01, I was not provided with any written explanation or summary of what work had been carried out for the costs incurred.  All I can see from the Court file is that an answer has been filed (albeit a reasonably complicated one) raising a number of issues as I have set out above.  Otherwise a strike out application has occurred and this application has been brought before me. 

50.      What would have been helpful is to have been provided with a summary of the broad categories of work carried out, which lawyers were involved and how much time they spent in total in relation to that work.  This type of statement would be helpful for the future.  I would hope that such a summary is not difficult to produce as it should be something similar to estimates of costs that from my experience are frequently given to clients.  The provision of a similar schedule to the Court identifying the broad steps being taken, the people involved and the amount of time incurred would provide a much more accurate and helpful guide for future applications. 

51.      In this case, in the absence of any explanations in the manner I have suggested about the different steps that have been taken, I am concerned at the level of fees incurred and that the potential for duplication between all those involved.  On a taxation assessment it is likely the fees will be discounted significantly beyond the normal level of deduction that arises on any taxation.  In reaching my decision as to what amount of security to allow in respect of pre-application costs, I have also had regard to the submissions made by Advocate Preston in respect of paragraph 20 of the Café de Lecq case as far as I have been able to do so.  I consider I am entitled to take all these matters into account in exercising my discretion having regard to the principles in Café de Lecq that I have cited at paragraphs 43 and 44 above. 

52.      Accordingly, I decided in respect of the pre-application costs to require the plaintiffs to produce security for costs in the sum of £60,000. 

Post-application Costs

53.      In relation to post-application costs, I was provided with a schedule setting out the estimated time up to and including discovery. 

54.      The first part of the schedule claimed costs for the application for security for costs.  This claim was in respect of fees not already included in the work in progress figure, I have already referred to under the heading pre-applications costs.  What was claimed was 6 hours of Advocate Temple's time together with 8 hours for one legal assistant and 5 hours for another legal assistant.  Again it appears that these rates were not capped for Advocate Temple.  I am also of the view that much of the work relates to Advocate Temple presenting arguments to me and preparing for the same, so in my view a figure of £2,000 is appropriate. 

55.      In relation to the section headed miscellaneous costs, dealing with parties' correspondence, directions to trial and amendments to the answer, a figure of 14 hours for Advocate Temple and 20 hours for Ms Hooper was claimed.  Again the costs in respect of Advocate Temple were not capped.  I consider that a more appropriate apportionment of time is 10 hours for Advocate Temple.  I am prepared to allow 20 hours for Ms Hooper, I therefore reduce the amount claimed to £8000. 

56.      The most significant figure claimed for costs related to discovery and inspection.  What was proposed was a figure of £125,000.  What was contended in submission was that by searching for documents electronically over a million documents had been identified as potentially relevant which would have to be assessed using paralegals.  What was sought was a cost based on using paralegals at a rate of £100 per hour.  I have to test the reasonableness of the costs being claimed.  By applying the hourly rate of £100 per hour to the total sum claimed suggests 1,250 hours being incurred to produce relevant documents.  This would take one individual around 9 months. 

57.      However the claim that is advanced in terms of its factual issues is not that complicated.  The principal area where there may be extensive documentation to review relates to the accuracy of the net asset value calculations.  In terms of disclosure what is required is the methodology involved and ascertaining on a month by month basis (as the calculations were produced monthly) what calculations were produced by those who were responsible for the net asset value calculations, what information they received, what documents they relied upon and who approved the calculations.  This analysis is for the period from August 2004 until the decision to invest was made in 2007. 

58.      I have referred to the above because to try to produce relevant documents solely by means of electronic searches and paralegals runs the risk of an approach that might be said to be looking for a needle in a haystack in relation to this particular case.  This does not mean that electronic disclosure is not appropriate generally as it clearly is.  It may also be needed in this case.  However, it is also necessary to have regard to the extent of the factual issues between the parties and what documentation is relevant to those issues.  I suggest that the starting point for the defendants is to ascertain from those who were responsible for the calculations both their processes, and what documents they received and relied upon.  That should assist the defendants to track down those documents in a more cost effective form than just a search by electronic means. 

59.      The approach I have suggested does not mean electronic searches may not be necessary.  Rather I suggest they might follow on from ascertaining from those involved in producing net asset value calculations the approach they took at the time.  It is also right to make it clear that the defendants are free to approach the question of recovering documents as they see fit.  However they can only recover costs reasonably incurred which does therefore require me to form a view in deciding what security to require. 

60.      I raised the matters I have referred to above with Advocate Temple in the course of argument.  He informed me that the individuals who had carried out the calculations were no longer employees of the defendants.  While that may create a degree of difficulty for the task required, those individuals given the positive case advanced by the defendants, namely that the net asset valuation calculations were accurate, appear to be individuals who are likely to be material witnesses at trial in any event. 

61.      Furthermore, as Advocate Preston pointed out, given that accountants produced a report which led to the JFSC public statement, there must be some understanding already of how net asset valuation calculations were produced and what was relied upon in producing the calculations.  Although I of course accept that further work will need to be done in relation to that material (including excluding anything that does not relate to BPFL or BEPFL), it is a fair observation that some of the enquiries required will already have been made by the defendants in relation to production of the accountants' report and in relation to in the public statement made by the JFSC.  The defendants are not it appears to me starting from scratch. 

62.      For all these reasons I am not therefore satisfied that £125,000 is an appropriate figure for discovery and inspection.  Yet I consider I should order a significant sum.  At this stage in light of the views I have expressed on what is required the overall figure I am prepared to order for discovery is a further £50,000.  This represents 200 hours of Ms Hooper's time or 500 hours for a paralegal.  The total figure I therefore order for post application costs up to and including discovery is £60,000. 

63.      It is right to note, however, if I am wrong on the scale of the task to be carried out and evidence can be produced to show that it does require additional work, the defendants may apply to increase the sum allowed for security for discovery.  If they were to do so, I would require more information than I have received to date on any such application.  If such an application were made, I would also hope that any such application would be made at the same time as any application for security for costs for steps required after discovery. 

Conclusion

64.      For the reasons set out above, I am satisfied that it is right as a matter of principle for the plaintiffs to be required to provide the defendants with security for costs  The amount I order in respect of pre-application costs is £60,000.  The amount I order in respect of post-application costs up to and including discovery is also £60,000.  The combined sum of £120,000 is to be paid into Court within 28 days of my decision. 

Authorities

Leeds United Association Football Club Limited v Phone-In Trading Post Limited (t/a Admatch) [2009] JLR 186.

Café de Lecq Limited v R. A. Rossborough (Insurance Brokers) Limited [2011] JLR 31.

A. E. Smith & Sons Limited v L'Eau des Iles (Jersey) Limited [1999] JLR 319.

Goldtron Limited v Most Investment Limited [2002] JLR 424.

Procon (G.B.) Ltd v Provincial Co. Ltd 1984 2 All E.R. 379.