A3/99/1023

Neutral Citation Number: [2001] EWCA Civ 942
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mr Justice Pumfrey)
                                     Royal Courts of Justice
                                    Strand
                                    London WC2
 
                               Monday, 11th June 2001
B e f o r e :

THE VICE CHANCELLOR

LORD JUSTICE MUMMERY

LORD JUSTICE KEENE

- - - - - - - - - - - - -

CANTOR FITZGERALD INTERNATIONAL

‑ v ‑

TRADITION (UK) LIMITED AND OTHERS

- - - - - - - - - - - - -
(Computer Aided Transcript of the Stenograph Notes
of Smith Bernal Reporting Limited
190 Fleet Street, London EC4A 2AG
Telephone No: 0171‑421 4040
Fax No: 0171‑831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - -
MR. S. THORLEY Q.C. and MR. F. ONSLOW (instructed by Messrs Norton Rose, London, EC3) appeared on behalf of the Appellant.

MR. P. PRESCOTT Q.C. and MR. J. MELLOR (instructed by Messrs Denton Wilde Sapte, London, EC4) appeared on behalf of the Respondent.
- - - - - - - - - - - - -

J U D G M E N T
1.	LORD JUSTICE KEENE: This is an appeal against a costs order made by Pumfrey J on 28th June 1999 in a breach of copyright action brought by the appellants, permission to appeal having been granted by Robert Walker LJ. It is agreed that the proceedings, because of their timing, were and are governed by the Rules of the Supreme Court and not by the new Civil Procedure Rules. An appeal against the substantive order in the proceedings was dismissed with costs at the invitation of the appellants, this court having indicated the view which it took on the issue of law raised therein as identified in paragraph (i) of the notice of appeal.
2.	The proceedings were started by the appellants on 20th June 1995. The essence of the claim for present purposes consisted in an allegation that the respondents had infringed copyright in certain computer software used to facilitate bond‑broking in the financial markets. Such computer systems commonly consist of a “front office” section being the screens on which brokers see their offers and bids, and a “back office” section that records the trades and runs accounts. The details of the case can be found in the judgments of Pumfrey J [2000] RPC 95.
3.	Certain programmers employed by the appellants resigned in January 1992 and went to work for the respondents where they developed by April 1992 a “front office” system. It subsequently emerged that they had taken with them to the respondents the source code for the appellants' computer system. This was not initially known to the respondents, who defended the breach of copyright claim on the basis that the programmers had not had access to the software files of the appellants. However, in early 1997 the respondents discovered that the programmers had brought the appellants' source code with them and had had access to it.
4.	As a result, the respondents applied to vacate the trial date on the basis that they would have to undertake an internal investigation before they could say how much copying of material belonging to the appellants had taken place. On 16th July 1997 Jacob J granted an adjournment on terms, one of which was an undertaking that the respondents' solicitors would use their best endeavours to interview all the programmers involved with a view to obtaining admissions as to what had been copied and communicate those admissions as they were made to the appellants. This process of interviewing and supplying the results to the appellants has been described as the “admissions process”.
5.	The first admissions were made by service of a schedule on 15th August 1997, and there then followed a series of further admissions schedules served over a period of nine months, the last (the twelth) being served on 22nd May 1998. The letter accompanying the first schedule made it clear that further admissions were to be expected and that the respondents reserved the right to correct any clerical or typographical errors in the admissions. In the event, the respondents subsequently went somewhat beyond this, withdrawing a few of the admissions earlier made. No objection was taken to that. All these admissions related to the “front office” system.
6.	Both sides had experts examining the available material in an attempt to ascertain the extent to which copying of software codes had taken place. The report of Dr McKenzie, the expert retained by the respondents, was served on 7th September 1998. On 30th September 1998 an open offer was made by the respondents. This was just one week before the trial began. In the letter the respondents offered, amongst other things, to admit liability in respect of certain lines of code and to submit to an inquiry as to damages in respect of that liability. That offer was not accepted and the trial proceeded.
7.	At trial the appellants were found by the judge not to have established liability significantly beyond the extent of the open offer. The judge noted that two aspects of the claim, one relating to the “back office” system and the other, added by amendment in June 1997, alleging copying of the structure or “architecture” of the “front office” system had never really had any foundation or did not survive to the end of the trial.
8.	In his decision on costs Pumfrey J divided the proceedings into three parts. So far as the trial itself was concerned, he ordered that the appellants pay all the respondents' costs on the basis that they had failed to beat the open offer. No appeal is brought in respect of that part of the order. He divided the period before trial into two parts. He held that the appellants were entitled to their costs from the commencement of the proceedings until a date three months after the service of the first admissions, ie up to 15th November 1997. From then until the start of the trial the appellants were ordered to pay 75 per cent of the respondents' costs.
9.	The judge's reasoning was as follows. He took the view that the appellants were, in the light of what they knew, entitled to bring the proceedings which were initially resisted in their entirety by the respondents. But he concluded that the situation changed once the first admissions had been served and a reasonable period for the appellants' advisers to consider those admissions had expired ‑ hence the three months allowed after 15th August 1997. He said this:
“The first admissions were made on 15th August 1997. While they were subsequently refined somewhat, no alterations of substance were thereafter made. In my judgment, it is clear that the plaintiffs are entitled to their costs down to the time when they had all the relevant information by way of tapes taken by the programmers and the admissions, and enough time for Mr Wise, Mr Bowden and Mr Tolmie to assess the case objectively. Thereafter the case should have been circumscribed. It was not, and the result was that instead of a trial at which the only issue would have been the copying of DLI.MAP, there was a trial in relation to which a very large number of issues had to be gone into and in relation to which large numbers of issues were abandoned along the way.
I think, having regard to Mr Wise's evidence in his first report and that in Mr Bowden's affidavit to which I have referred, and having regard to the fact that Dr McKenzie had finished his table of corresponding modules in March 1997, that at the latest the plaintiffs had all the material necessary to them sensibly to circumscribe the case three months after the receipt of the first round of admissions, that is to say, 15th November 1997.”
10.	It is clear that he took the view that the claim should have been limited in its extent as from 15th November 1997. That was the basis for his decision to award the respondents 75 per cent of their costs between that date and the trial, the reduction in percentage terms apparently being to reflect the fact that the first admissions were subject to certain reservations “which in fact never came to anything”. The judge was of course well aware that further admissions were made over the nine months after the service of the first admissions, but he took the view that the subsequent ones did not materially alter or add to the first set of admissions.
11.	It is that part of the order on costs which is now challenged by the appellants. On their behalf Mr. Thorley QC submits that they were in no position, as at the date of the first admissions or three months later, to decide whether and to what extent their case should be circumscribed. It was made clear in the correspondence that the admissions process was still continuing and was not complete. In addition, reference is made to a further order in the proceedings dated 1st April 1998, whereby it was ordered that the admissions process be completed on or before 15th May 1998. While it may have proved in the event that the later admissions added little to the first admissions, the appellants, it is said, were not to know that in August or November 1997. Mr Thorley contends that his clients were not to know that until the admissions process and indeed disclosure were complete. Consequently, the judge patently went wrong in approaching the exercise of his discretion in the way that he did.
12.	A number of subsidiary points are made on behalf of the appellants, but the main emphasis is placed on the admissions process argument. Hence it is argued that the first period, in respect of which the respondents were ordered to pay the appellants' costs, should be extended until three months after the service of the final admissions, that producing a date of 22nd August 1998.
13.	The respondents seek to uphold the judge's order. Mr Mellor submits that the judge was entitled to use hindsight and to rely on the fact that, whether they knew it or not, the appellants had all the relevant information to assess the case by the time the first admissions had been made and a reasonable period to consider them had elapsed. Any judge is entitled to have regard to the facts as they have emerged by the end of the trial, irrespective of when the parties were aware of them. Moreover, it is argued that in fixing a date for the end of the first period of time, the judge had to bear in mind that the appellants had brought certain claims which he regarded as unreasonable, in particular those relating to the “back office” system and to the structure or “architecture” of the “front office” system. The latter gave rise to considerable expert effort being expended by Dr McKenzie on behalf of the respondents. This had to be reflected in the order which is what the judge did by striking an appropriate balance.
14.	Finally, Mr. Mellor contends that, if the judge fell into error, this court should not substitute its own judgment on costs but should remit the matter to the trial judge.
15.	This court will always be slow to interfere with the exercise of a trial judge's discretion on costs. That will in practice especially be so where the trial has been of some length, as was the case here. That puts the trial judge into an excellent position from which to assess the argument on costs. The principles to be applied by an appeal court in such a case are not in issue. In A.E.I. Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507,1523, Lord Woolf MR reaffirmed that the approach of the Court of Appeal to costs appeals was as had been stated by Stuart Smith LJ in Roache v News Group Newspapers Ltd [1998] EMLR 161, 172:
“Before the court can interfere it must be shown that the judge has either erred in principle in his approach, or has left out of account, or taken into account, some feature that he should, or should not, have considered, or that his decision is wholly wrong because the court is forced to the conclusion that he has not balanced the various factors fairly in the scale.”
16.	In the present case the judge began from the position that the appellants were justified in beginning the proceedings and in continuing them until such time as the respondents' admissions should have led them to circumscribe their claim. He identified that point in time as being when the appellants' advisers had had sufficient time to consider the implications of the first set of the admissions made by the respondents. This was a judgment he arrived at expressly on the basis that those admissions were not added to subsequently to any significant degree.
17.	The problem I have with that reasoning is that it assumes that the appellants would have known at that stage that the rest of the admissions process was not going to increase significantly the scope of the admissions made on 15th August 1997. Yet how could they have known that? The position as at August 1997 and indeed November 1997 was that the admissions process was still continuing. The respondents made that very clear in the correspondence. It was not unreasonable for the appellants to contemplate that the extent of the admissions might be enlarged during the remaining process of investigation and admission. In that situation I find it very difficult to understand how the appellants could be criticised for refraining from limiting their claim until the admissions process had been completed. With hindsight one can see that they did not learn appreciably more during the remainder of the process but they were not to know that at the time. They were entitled to await the final outcome of this investigatory exercise which the respondents had undertaken to carry out before making an assessment of whether their claim was too broad or not.
18.	It is that feature, the investigation and admissions process, required as part of the order vacating the original trial date, which takes this case out of the ordinary run of proceedings. That indeed was recognised by the trial judge in the way in which he used the service of the first admissions as a point in time justifying different orders as to costs before and afterwards. In the normal case, a judge may well determine the issue of costs by reference to the facts as they have emerged at the trial and so use what Mr Mellor has described as hindsight. But here, for very understandable reasons, the judge chose to emphasize that at a particular point in time the appellants should have narrowed down their claim because of certain admissions which had been made by the other side. He was in effect considering the reasonableness of the appellants' conduct of the case at that point. But that is a matter which can only be assessed in the light of what the appellants knew, or ought reasonably to have known, at that time, and it is not to be influenced by the fact, known with hindsight, that the subsequent eleven sets of admissions did not greatly increase the scope of the first set.
19.	There were, as the judge found, certain claims included by the appellants which had no sound basis, those being in particular the “back office” system claim and the structure or “architecture” claim. But it seems unreasonable to expect the appellants to have dropped the”architecture” claim while the investigatory and advisory exercise was incomplete. Once it had come to an end the position was different. For my part, I can only conclude that the judge, in arriving at his costs order, left out of account the fact that the appellants did not know in August or November 1997 that the admissions would not be significantly added to during the rest of the process. In that respect he erred in the exercise of his discretion in a way which entitles this court to intervene.
20.	The decision on costs by the trial judge was made almost two years ago on 28th June 1999. To remit this matter to him now would require very considerable time and effort on his part before he could properly reconsider the exercise of his discretion in the light of the judgments of this court. There is no reason why this court cannot substitute its own judgment, bearing in mind the original reasoning of the judge and our assessment of it.
21.	Apart from the claim in respect of the “back office” system which should be dealt with separately, I would order that the respondents do pay the appellants' costs until 22nd August 1998, that being three months after the final admissions; that from 23rd August 1998 until 6th October 1998, the start of the trial, there should be no order as to costs, that reflecting my assessment of the parties' position at that time; and that the appellants pay the respondents' costs of the trial as the judge ordered. I would also order that the appellants pay all the respondents' costs in respect of the “back office” claim. On that basis I would allow the appeal. The formal order would be that the appellants pay the respondents' costs of and occasioned by the claim in respect of the “back office” system; subject only to that the respondents to pay the appellants' costs up to and including 22nd August 1998, and the appellants to pay the respondents' cost of the trial commencing on 6th October 1998, all the said costs to be subject to detailed assessment. No order as to costs made for the period 23rd August 1998 to start of trial.
22.	LORD JUSTICE MUMMERY: I agree with the judgment given by my Lord and the form of order proposed by him.
23.	THE VICE‑CHANCELLOR: I also agree.
Order: Appeal allowed with costs to be subject to detailed assessment, the costs of this appeal to be off‑set against the costs of the other appeal and the balance paid by the claimants to the respondents;application for permission to appeal to House of Lords refused.
(Order not part of the judgment of the court)