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REACTEC LTD AGAINST CUROTEC TEAM LTD [2021] ScotCS CSOH_72 (16 July 2021)
URL: http://www.bailii.org/scot/cases/ScotCS/2021/2021_CSOH_72.html
Cite as:
2021 GWD 24-330,
[2021] ScotCS CSOH_72,
[2021] CSOH 72
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OUTER HOUSE, COURT OF SESSION
[2021] CSOH 72
A140/18
OPINION OF LORD CLARK
In the cause
REACTEC LIMITED
Pursuer
against
CUROTEC TEAM LIMITED
Defender
Pursuer: Lake QC, Tariq, Harper Macleod LLP
Defender: no appearance
Rebound Technology Group Holdings Limited; O'Brien QC; Shoosmiths LLP
16 July 2021
Introduction
[1]
Following a proof before answer in this intellectual property action, the Lord Ordinary
granted an interdict against the defender preventing it from acting in infringement of the
pursuer's patent rights and made certain other orders against the defender. The
Lord Ordinary also assoilzied the pursuer from the conclusions in the defender's
counterclaim, which had sought revocation of the pursuer's patent.
[2]
The defender then went into voluntary liquidation. Rebound Technology Group
Holdings Limited ("RTGH") is the ultimate parent company of the Rebound group of
2
companies, which includes the defender. RTGH owns 75% of the shares in V&M Group
Limited ("V&M"). V&M owns the entire share capital of the defender.
The Rebound group's
consolidated financial statements include the defender.
The Rebound group had a turnover
in excess of £141 million in the financial year ended 31 December 2018. There are common
directors between the defender and RTGH, with two of the defender's three directors also
being directors of RTGH. Peter Griffith-Jones is a director and also the Group Chief Financial
Officer of RTGH. He explains in his affidavit that along with Michael Jones he provided
instructions to the defender's solicitors in the litigation. Michael Jones is not a director of
RTGH. In his witness statement, Michael Jones describes himself as an inventor, entrepreneur
and consultant retained or engaged by the defender, having been a director of the defender
until 13 February 2015.
[3]
The pursuer enrolled a motion to find (i) RTGH and (ii) Michael Jones liable for the
expenses of the action and the counterclaim as domini litis. RTGH opposed the motion. The
joint liquidators, on behalf of the defender, did not oppose it. The pursuer did not at this
stage move for Michael Jones to be found liable, but reserved its position in that regard.
Submissions for the pursuer
[4]
The essential features of a dominus litis were interest and control. Reference was made
to Mathieson v Thomson, 1853 16 D 19 (at 23-24), McCuaig v McCuaig 1909 SC 355 (at 357) and
Cairns v McGregor 1931 SC 84 (at 89). The element of control and, in particular, the power to
compromise an action, was an important feature of being the dominus litis. As the issue of
whether a party is considered dominus litis arises in the context of expenses, it was relevant
also to consider the general principle underlying awards of expenses. The cost of litigation
3
[5]
At the time of the proof before answer, the defender was a one-product company.
That product, and an earlier product no longer sold by the defender, were found to infringe
the pursuer's patent. The defender had, since at the latest 31 December 2018, been dependent
on the provision of working capital from Rebound Electronics (UK) Ltd, another company of
which RTGH is the ultimate parent. The undertaking from that company was that, for a
period of 12 months, it would continue to make funds available and would not seek
repayment of funds advanced. The ability of the defender to meet its liabilities as they fell
due and, accordingly, to trade was at all relevant times wholly dependent on RTGH. This
arrangement was the source of funds that meant that the defender was in a position to defend
the action. As at 30 June 2019, the defender had assets of £259,000 and liabilities of £2,335,000.
It made no profits. The Rebound group of companies had advanced around £2,200,000 to the
defender, secured with a charge created on 4 December 2015, held by RTGH over the assets,
property and undertakings of the defender. RTGH has preferential rights of recovery as
regards the repayment of loans from the defender. The loans are repayable on demand.
Mr Griffith-Jones stated in his affidavit that if the defender was wound up, the Rebound
group would lose about £2.2million. RTGH's position as creditor was dependent on the
defender's ability to sell its product and become profitable. RTGH accordingly had the direct
and dominant interest in the litigation both as ultimate owner of 75% of the shares in the
company and as a substantial creditor. The combination of this ownership interest and the
secured loans was such that it met the requirement for interest noted in McCuaig and Cairns.
[6]
In his affidavit, Mr Griffith-Jones stated that he and Michael Jones gave the
instructions to the defender's solicitors in relation to conduct of the litigation. Neither is an
officer of the defender. The position was accordingly unlike that in Eastford Ltd v Gillespie
2011 SC 501, which really concerned a refusal to allow piercing of the corporate veil to find
4
directors liable. However, Mr Griffith-Jones is a director and Group Chief Financial Officer of
RTGH. He provided instructions to the defender's solicitors in that capacity. RTGH's claims
that Mr Griffith-Jones was "seconded" to the defender for the purpose of the litigation was
itself indicative of RTGH's control of the litigation. He was seconded to the defender with a
view to him giving instructions as to conduct of the litigation. Putting their own man in spoke
volumes for RTGH taking control. RTGH had the power to compromise the case. In
early 2019, the pursuer and the defender held a "round the table discussion" at which
potential settlement of the case was discussed. The defender was represented by Mr Griffith-
Jones with Michael Jones present for "technical input". No officer of the defender was present
at this meeting to discuss settlement of the case. RTGH accordingly had control of the
litigation. In the circumstances, RTGH was the dominus litis.
[7]
Reference was made to Travelers Insurance Co Ltd v XYZ [2019] UKSC 48, at [95]. It was
clear that the defender was not the master of its litigation. Officers of the defender did not
direct the litigation. The instructions for the litigation came from Mr Griffith-Jones and
Michael Jones. The financial interest in the products and the financial wherewithal to conduct
the litigation lay with the party who did assume the role of directing it, namely RTGH.
Submissions for RTGH
[8]
The pursuer relied upon interest and control as the key factors in the test, but had
failed to identify any basis on which these elements might be met. What was required was
not merely interest and control, but the whole interest and control; in effect, a party who has
the real interest and control to the exclusion of the nominal litigant. This was apparent in
Mathieson v Thomson, from the requirement that the control should arise through the interest.
Other cases, however, made the point more clearly. Reference was made to dicta in Fraser v
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Malloch (1896) 23 R 619 (at 621), approved in McCuaig v McCuaig (at 357): the question was
whether the nominal party to the cause was suing (or defending) for his own behoof or as the
agent of another. The third party had to have the true interest, meaning the whole interest for
all practical purposes. The passages relied upon had been cited with approval by Lord Reed
in the Supreme Court: Travelers Insurance Co Ltd v XY (at [98]). Reference was also made to
Cairns v McGregor (at 89). Accordingly, it was not sufficient merely to show that the alleged
dominus litis has an interest of some sort in the outcome of the action. It must be the sort of
interest that in effect supplants the interest of the nominal party and confers the right to
control the action, for example, where an insurer brings or defends a claim in the name of its
insured.
[9]
In Eastford v Gillespie, where two directors of a company instructed the raising of an
action in the company's name, the Inner House held that it could not be said that the two
directors have the whole interest in the litigation for all practical purposes. It was not relevant
that the respondent was a shell company. There were many situations in which companies
with little or no assets might initiate court proceedings. Where a company was party to a
litigation, it was the company that had the primary interest in that litigation. That primary
interest was not displaced merely because of the concurrent interest of its shareholders. The
shareholders' interest was merely indirect, derivative and reflective. It was dependent upon
the company's primary interest. Therefore, the shareholders' interest cannot be the "whole
interest in the litigation for all practical purposes". In Eastford, even if the shareholders'
interest had been of the relevant type, 50% of that interest would not have been enough. This
was for the simple reason that the dominus litis must have "the whole interest". A large
percentage was also not enough. As regards the element of control, the pursuer required to
show something more than the sort of control that is inherent in any corporate structure.
6
Companies are legal constructs. As such, they always act under the direction of their directors
and shareholders. That is not the sort of control (or interest) which can make a person
dominus litis. Were it otherwise, the separate legal personality of companies would be
undermined.
[10]
The pursuer's reliance upon Shepherd v Elliot was misplaced. The principle in that case
was applied in determining which of the parties should bear the expenses of an action. It was
not concerned with the exceptional circumstances in which expenses awards may be made
against third parties. It provided no basis for lowering the test clearly established in the case
law on dominus litis status.
[11]
On the factual matters relied upon by the pursuer, the suggestion was that t he
combination of the ownership interest and the secured loans provided the necessary interest.
However, no example was cited of any case which would support that conclusion. Even
taken as their highest, the matters identified by the pursuers were incapable of meeting the
test of dominus litis as set out in the authorities. In particular: the interest of a shareholder
(and a fortiori a creditor) was merely secondary and indirect. Even if the interest of a
shareholder was relevant, RTGH has only a 75% interest qua ultimate shareholder. That was
not "the whole interest for all practical purposes". Even taking the pursuer's position on
instructions at face value, it would amount to nothing more than the normal support that a
company might expect to receive from its shareholders, and the normal control which
shareholders might be expected to influence over a company's affairs. Mr Griffith-Jones could
not be equated with RTGH, and Michael Jones was not said to be interested in RTGH at all.
Although the pursuer asserts that RTGH had the power to compromise the case on its own,
no basis for that was given. The mere possibility of control being exercised by a majority
shareholder did not establish dominus litis status.
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[12]
So far as RTGH is aware, there was no case in which even a 100% parent company has
been held to be a dominus litis on account of its interest and actions as such, let alone a 75%
ultimate owner. Nor was there any authority where dominus litis status has arisen merely
from being a substantial creditor. Such interests are merely secondary, and they do not
detract from the primary interest of the defender. In any event, Mr Griffith-Jones did not give
instructions "on behalf of" RTGH. He was seconded to the defender to help deal with the
litigation because it was considered that he and Michael Jones had the relevant knowledge
and skills to do so. That did not amount to an exercise of control by the board of RTGH, of
which Mr Griffith-Jones was only one member.
[13]
The fact that the pursuer reserved its right to have Michael Jones found to be dominus
litis as well as RTGH put it in a position very far removed from the approach taken in the
authorities.
Decision and reasons
[14]
In Travelers Insurance Company Ltd v XYZ, the appellant challenged the making of a
non-party costs order, under English law, made against an insurer. When considering for
comparative purposes the law in other jurisdictions, Lord Reed explained (at [95]) that in
Scots law the court is prepared to look beyond the person who is formally a party to t he
action, and to exercise its power to award expenses on the basis that another person is the real
party in all but form, who is in reality conducting the suit and interested in its outcome.
Lord Reed then set out the relevant dicta from the key Scottish authorities on the concept of
dominus litis. From these, for present purposes, I note that the alleged dominus litis must have
a direct interest in the subject-matter of the action which, as put by Lord President Dunedin in
McCuaig v McCuaig (at 357) must be:
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"... the true interest in the cause, and by true interest I mean the entire interest, using
that term not in the absolute sense, but as denoting the whole interest for all practical
purposes."
In Mathieson v Thomson (at 23) Lord Rutherford explained that the dominus litis was "a party
with a direct interest in the subject matter of the litigation, and, through that interest, master
of the litigation itself, having the control and direction of the suit". Thus, control should arise
through having the direct or true interest. As recognised by Lord President Dunedin and also
by Lord Rutherford in the passages mentioned, control would require having the power to
bring the case to an end, or compromise it. As also explained by Lord Rutherford it is not
sufficient that the non-party has some "ultimate consequent benefit". The alleged dominus litis
must also, of course, have caused the expense for which he is sought to be made liable: Kerr v
Employers' Liability Assurance Co Ltd (1899) 2 F 17 (at 22); Main v Rankin & Sons 1929 SC 40 (at
43). The former case also established that the requirements of a dominus litis might be satisfied
by a liability insurer conducting the defence of proceedings in accordance with a policy of
insurance.
[15]
A clear theme emerges from these authorities and Lord Reed's observations: to meet
the test of dominus litis the person must have the true interest, being the whole interest in the
case for all practical purposes, with complete control, the corresponding result being that the
nominal party did not have the true interest for all practical purposes and was not in control.
This is reinforced by the question posed in Fraser v Malloch by Lord Kyllachy (at 621,
approved in McCuaig v McCuaig at 357) as to whether the nominal party to the cause was
suing for his own behoof or suing as the agent of another. The requirement of the nominal
party not having the true interest and not being in control is emphasised by expressions such
as the true interest having to be that of the dominus litis and the reference to that person being
in effect the principal (although with no required agency relationship).
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[16]
The defender in the present case is of course a limited liability company and a separate
legal entity from its shareholder, V&M, as well as from RTGH, the holder of 75% of the shares
in V&M. There is nothing to suggest that the defender did not operate its own business and
indeed the material before the court was to the contrary. It was a trading entity, with its own
directors, employees, customers, assets and creditors. The basis for the case against the
defender was that it had acted unlawfully by infringing patent rights. The result of the action
was not immaterial to the defender. There is no evidence of an absence of interest in this
litigation on the part of the defender. Indeed it plainly had an interest, as the outcome of the
litigation could give rise to substantial financial loss to the defender, and even insolvency. It
cannot therefore be made out that RTGH had the whole interest in the case for all practical
purposes. It had a different and limited type of interest, as a 75% shareholder in the parent
company and as a creditor of the defender. RTGH is described in the debenture and floating
charge as security trustee of each group member. It is correct that the result of the case would
have consequences for RTGH as well as at least one other group company, but that does not
suffice to meet the test. The fact that the defender's financial position was part of the
consolidated accounts is simply a feature of the defender being a company in a group and is
of no relevance.
[17]
In relation to control, as that must arise "through that interest" and RTGH did not
have the whole interest for all practical purposes, the required link to alleged control is
missing. In any event, there is a factual dispute about precisely what Mr Griffith-Jones was
doing, with RTGH expressly asserting that he did not give instructions on behalf of RTGH.
There was no evidence that RTGH, by its board or through someone with authority to do so,
had given authority to Mr Griffith-Jones to control or run the action on behalf of RTGH.
There was also no evidence of the board of directors of the defender having agreed that RTGH
10
would have control. The reference to Mr Griffith-Jones having been seconded to the defender
is of little assistance, given that his secondment could have been to assist the defender in
defending the action for its own good, rather than to exercise control on behalf of RTGH. In
the absence of evidence of authority to do so on behalf of RTGH, one cannot equate
Mr Griffith-Jones with RTGH. A person from a group company, including the ultimate
holding company, being made available to deal with a matter on behalf of a subsidiary is not
unusual. There was no material showing that RTGH had the power to compromise, even if
Mr Griffith-Jones attended a meeting where such discussion took place as the pursuer
contended. There was no evidence either way as to whether Mr Griffith-Jones was acting
with or without the authority of the defender. The pursuer relied upon Mr Griffith-Jones
stating that he was one of two people (the other being Michael Jones) who gave instructions
on behalf of the defender. The fact that he was giving instructions does not mean that he was
excluding those who have the right of control of the defender (its board). It was not suggested
that Michael Jones has an interest in RTGH.
[18]
However, even if Mr Griffith-Jones was acting for RTGH, that would simply show the
ultimate parent company having an involvement in the litigation. The case law does not
support the view that because an entity is the parent company or shareholder or the major
creditor of the nominal party that will suffice to make it the dominus litis. Actual control,
through having the whole interest for all practical purposes, is required. If, as senior counsel
for the pursuer appeared to accept and is in my view plainly correct, it is not sufficient to
expose a holder of 75% of the shares in the parent company to liability as dominus litis simply
because it exercises its de facto control as shareholder, it would make no difference if one of its
directors is seconded to give instructions. It is true that there was financial support from
another RTGH subsidiary, but this was a general funding of its activities and not specific
11
funding for the litigation. The defender was not some man-of-straw used by RTGH as a way
of avoiding any liability of its own.
[19]
In relation to the relevance of identifying the person who caused or created the
expense of the pursuer, if the key components of the test on interest and control are satisfied,
that will follow. It is not to be taken as a separate or free-standing criterion (although in any
event it would not be met here).
[20]
I see some force in the submission for the defender that the inclusion of Michael Jones
in the original motion as dominus litis indicates that interest and control were also being
asserted by the pursuer in respect of a person who, on the information before me, is entirely
separate from RTGH. This arguably further undermines the case against RTGH. However, as
the motion against Michael Jones was not moved at this stage and the matter can be
determined on the other factual circumstances, I have not taken that point into consideration.
Conclusion and disposal
[21]
In these circumstances, I am not persuaded that the requirements for satisfying the test
of RTGH being the dominus litis have been met. RTGH was not the real party in all but form.
It did not have the true or whole interest in the case for all practical purposes, nor did it have
complete control. It cannot be regarded as, in effect, the principal with the defender being no
more than an agent. I shall therefore refuse the pursuer's motion.
