Case No HT-10-293
Neutral Citation Number: [2011] EWHC 2209 (TCC)

IN THE HIGH COURT OF JUSTICE  
QUEEN’S BENCH DIVISION
TECHNOLOGY & CONSTRUCTION COURT

Royal Courts of Justice
Monday, 8th August 2011

Before:

MR. JUSTICE AKENHEAD

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B E T W E E N :

	RBIL	Claimant	
			
	-  and  -		
			
	RYHURST & Ors.	Defendants	

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MR. ROGER TER HAAR QC  (instructed by Hogan Lovell) appeared on behalf of the Claimant.
MR. MARK ROWLANDS  (instructed by Fenwick Elliott LLP appeared on behalf of the Defendant.
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J U D G M E N T
MR. JUSTICE AKENHEAD:  

1	This is an application by defendants for security for costs.  The background is that the proceedings were brought by the Claimant originally against the party who is now the First Defendant alone.  The claim was issued on 5 August 2010.

2	Briefly the background to the claim is that the Claimant specialises in investment and development and management of real estate and other business activities, and it is part of the Rydon Group of companies.  The First Defendant is a company specialising in real estate investment.  It is now the owner of what is called the Maze portfolio which is 11 special purpose vehicle companies.  Those are the other Defendants added by way of amendment.  These had been established to carry out building works and provide facilities and management services to 11 hospitals or other healthcare facilities under long term project management arrangements with NHS Trusts.  In return for the provision of services, project agreements provided for annual service payments by the NHS Trusts to the project companies for the lifetimes of those agreements.  These are part and parcel of various Government private finance initiatives.

3	The Claimant and the First Defendant in this case entered into a management services agreement in January 2006 whereby the Claimant undertook to provide or to procure the provision of managerial, company secretarial and administrative services to each of the project companies in return for annual management fees paid by both those companies.

4	There came a time in the relationship between the parties when the First Defendant decided that it could, would and should terminate that contract, and it purported to do so in late 2009.  Nothing I say here should be taken as imposing any findings of fact in the ultimate trial.

5	The Claimant regarded that termination as wrongful, but purported to accept it as repudiation by the First Defendant of that agreement.  It then issued its proceedings seeking in effect the loss of profit it would have earned over the lifetime of the contract in question.  The original Defence was served, but an amended Defence was served on 15 November 2010.  At that stage it does not appear there was any counterclaim.

6	Amended Particulars of Claim were served on 20 December 2010.  That led to a Defence and Counterclaim being lodged by the second to twelfth defendants whose addition to the proceedings had been approved by Edwards-Stuart J shortly before.  That added the counterclaim of the Second to Twelfth defendants.  Although that has been amended, substantial sums are claimed back from the Claimant.  

7	It is accepted by both parties that the breaches relied upon by the Defendants in the counterclaim are those which arise in the primary proceedings brought by the Claimant against the First Defendant raising the same area or types of default against the claimant.

8	The proceedings have been case managed, initially by Edwards-Stuart J, who dealt with matters at a CMC on 26 November 2010.  He listed the matter for trial for 11 July 2011.  One can tell from the date this judgment that that had to be adjourned.  Disclosure was ordered to take place in terms of hard copy by 28 February 2011, and the parties were encouraged to agree parameters for electronic disclosure within a fairly short timescale.

9	The matter came before Ramsey J on 13 April 2011, probably in Edwards-Stuart J’s absence.  There had been problems with electronic disclosure, apparently on both sides, because he ordered that both parties were to provide the balance of their disclosure by 20 April 2011.  He vacated the July trial date and fixed the trial date for 28 November to 15 December 2011, for 12 days, which is the same period of time which it was originally listed for.

10	He made this order with regard to costs, the claimants having issued an application, supported by a witness statement to the effect that the defendants take further steps with regard to e-disclosure:

	“The costs of, caused by and thrown away by the postponement of the trial to be the Claimant’s, and that the costs of the Claimant’s e-disclosure application to be awarded to the Claimant on a standard basis”.

11	This current application for security of costs was issued on 21 July 2011, and it has been supported by two witness statements from Miss Phillips, and in terms of the Claimant’s position by Mr. Tolson and Mr. Etheridge.

12	It is accepted that the threshold for security for costs has been met, namely that the Claimant would, if unsuccessful, probably, on all the available information, be unlikely to be able to pay for the Defendants’ costs if the Defendants were successful.  It is clear from the published accounts of the Claimant that that is the position.  The profit and loss account for the Claimant for the 13 month period ending 31 October 2010, for which the accounts were published in March 2011, showed a loss on ordinary activities before taxation of £2.6 million, and a retained loss after taxation of £2.1 million.  That compared with a £679,000 retained loss for the 12 months ending, I assume, 30 September 2009.  The balance sheet showed net liabilities for the 13 months ending 31 October 2010 of £1.9 million.  For the equivalent period up to 30 September 2009, the published accounts being, I am told, published in June 2010, showed net assets of £176,427.  The position now is that the threshold has been well established.

13	Given the amount of costs, however, that were indicated in the latter half of last year were likely to have been incurred by the Defendant, the £160,000 net asset figure was obviously not going to be anything like enough to cover those costs.  That cost estimate put in for the purposes of the case management hearing before Edwards-Stuart J in November 2010 indicated costs of some £1.2 million.

14	The real question, therefore, is how and if I should exercise my discretion at this stage to allow security for costs to the defendant.  The first point of principle taken by the Claimant is that no order for security should be made because this is a case in which the costs relate as much to pursuing the counterclaim as the claim.  Reliance is placed on the decisions of the Court of Appeal in Crabtree 59 BLR 43, a decision of Hamblen J on 20th October 2010, Dumrul v. Standard Chartered Bank [2010] EWHC 2625 (Comm), and the recent decision of the Court of Appeal in Anglo Irish Asset Finance v. Flood & Anor [2011] EWCA 799 (Civ).

15	It seems to me that that principle is not quite engaged in this case.  It seems to me that the evidence demonstrates that the Defendant would not have pursued the Counterclaim if the Claimant had not commenced proceedings.  There is evidence to that effect, and although that is in one sense partly undermined by some of the correspondence, the most recent correspondence makes it absolutely clear that the Defendants will not pursue the Counterclaim if the action is dismissed or otherwise not pursued.  The Defendants have made it clear through Counsel and indeed through correspondence, fairly recently I should say, that they will not pursue their Counterclaim in the absence of a claim against the Defendants by the Claimant.

16	In Crabtree Bingham LJ addressed the point at page 53 of the Building Law Report saying:

		“It may in some cases be fair and just to make such an order even though the defendant is, himself, counterclaiming, but I am persuaded that it would be wrong to do so, because the costs that these defendants are incurring to defend themselves may equally and perhaps preferably be regarded as costs necessary to prosecute their counterclaim.  The fact that the plaintiffs are plaintiffs and the defendants are counterclaiming defendant instead of the other way round appears on the facts here to be very largely a matter of chance.”

17	In the Anglo Irish case the Court decided in any event that the threshold had not been met and made some obiter comments which are obviously helpful and persuasive dicta on what the Court would have done if it had been exercising its discretion.  It goes on to deal with the matter of chance.  As I said, I do not think that it what is involved here is a matter of chance.  It has certainly not been established that it is a matter of chance that the Claimant is the claimant and the Defendants are the defendants.  For instance, there has been no suggestion that there was aggressive correspondence from the Defendants before proceedings threatening substantial money claims in any event against the Claimant.  That may be the case, but I have not been referred specifically to evidence to that effect.

18	It seems to me that in principle the discretion should be exercised to order at least some security.  I am, however, very concerned about the lateness of this application.  I have no doubt that if the Defendants had been so minded they could have ascertained in 2010 from the published accounts of the Claimant that it would have been unable to pay even their then estimate of costs of £1.2 million.  This application could, and no doubt many would say should, on that basis, have been issued in the latter half of last year.  It has not been brought until a date which equated to the date of the first trial, that first trial date having been now vacated, and it was very late.  However, there is no specific prejudice said to arise as a result of that in the sense that Mr. Tolson principally and Mr. Etheridge do not speak to specific prejudice as a result of the lateness of the application. 

19	It does seem to me that there is a very real risk at least of a commercial disadvantage to the Claimant.  The Claimant itself, it has been demonstrated, does not have sufficient funds, or is unlikely to have sufficient funds to pay the costs.  It is, therefore, the holding company which will have to provide the security in one form or another, probably, and preferably no doubt, by way of guarantee.  That will doubtless have some effect on its ability to trade, if it is to guarantee certain payments.  It seems to me that the Court can and should take that into account.

20	There are then a lot of arguments addressed by the parties about the amounts.  The Claimant points to the enormous rise in the estimate of costs from £1.2 million in November 2010 to £3.7 million now.  This is explained by Miss Phillips in her first witness statement.  With respect to her, I am not sure that the whole picture has been presented.  I am not saying that in any way as a criticism or anything of that sort, but she says that the increase is attributable to four factors:  the trial date being moved from July to November, the breadth of disclosure has been wider than foreseen, the deadline for exchange of witness statements being extended, and the scope of the case was widened by disclosure.  In short, she says adding six months to the timetable adds six months of extra costs.

21	It does seem to me that the one thing that may well have been left out of the picture, and it is not anything necessarily to be ashamed of, is that the first estimate may well have been an under-estimate.  A similar criticism, if it is a criticism at all, which I do not think it is, a similar comment can be made about the Claimant’s estimate of costs, which was similarly about £1.2 million, and that has gone up to something approaching £2.3 million, as referred to by Mr. Tolson in his witness statement.

22	It seems to me that within the current costs estimate put forward by the Defendants, £3.879 million, Miss Phillips herself says that some of that is attributable to the trial date having been moved.  Edwards-Stuart J effectively ordered that the Claimants should have its costs of postponement and that means, therefore, that the Defendants must bear their own costs of the postponement.  If that, itself, has led to a significant increase in costs, as Miss Phillips indicates that it has, then the estimate must be discounted to reflect that.

23	The fact that disclosure is wider than foreseen and the scope of the case has been extended by disclosure are factors which may well be correct, and that may well provide an explanation for a significant part of the increase in costs.  I find it difficult to accept that the costs have been increased by a factor of over three simply by an extension in the amount of disclosure and a widening of the scope in consequence thereof.

24	I have very significant doubts, not about the estimate as such, but about how much of it can properly be considered as allowable on any security application.  Certainly a substantial element of the increase is, on Miss Phillips’ own evidence, attributable to the postponement and those are costs that her clients must pay themselves.

25	I have formed the view, doing the best I can, and it is all that a court can do at this stage, that the gross amounts of costs which should be taken into account on the consideration of the security is £2 million, but it seems to me that I should take into account, and I do take into account, the lateness of the application.  It seems to me that a fair reduction before I come to determine what percentage of the net amount should be allowed by way of security to take off the £2 million is £500,000 for that factor.  So we are left with £1.5 million. 

26	It seems to me that a reasonable allowance is a sum that would reflect what is often thought to be a percentage which reflects a likely taxation.  The order for security must not be oppressive, or so oppressive that the Claimant, or those backing it, feel unable to pursue what may otherwise be a legitimate claim.  Certainly in this case the Court has not been asked to express or form any view as to the likely outcome, and I proceed on the basis that either party may win this litigation, and I certainly have not begun to form any view about it.

26	I have formed the view that a reasonable allowance would be two-thirds of that figure, which is £1 million and security for costs in that figure will be ordered.