FAILURE TO PAY INTERLOCUTORY COSTS LEADS TO PEREMPTORY BEING MADE: PAY UP OR BE STRUCK OUT

In Michael Wilson & Partners Ltd v Sinclair & Ors [2017] EWHC 2424 (Comm) Sir Richard Field (sitting as a Deputy Judge of the High Court) made a peremptory order following the defendants’ failure to pay interlocutory costs.  The relevant defendants were ordered to pay up costs ordered after an appeal or the defence would be struck out.

 

THE CASE

The claimant’s case against the defendants became involved in considerable interlocutory wrangling.   Eventually several orders against the claimant were overturned by the Court of Appeal.   Some of the defendants (referred to in the judgment as the “Sinclair defendants”) were ordered to pay interlocutory costs totalling £1,173,111.53.  The defendants did not pay the costs due.  A petition to appeal to the Supreme Court was dismissed on 5 September 2017. The claimant applied for an order that unless the first and second defendants in the action pay the sums due they be debarred from defending the action.

THE JUDGE’S CONSIDERATION OF THE RELEVANT PRINCIPLES

The authorities on the approach to be taken where costs orders are not paid by parties to ongoing litigation.

The judge considered the relevant principles in detail.
    1. In Crystal Decisions UK Limited v Vedatech Corp [2006] EWHC 3500 (Ch) Patten J said:
[9]. … The rules of court under the CPR do not prescribe any particular procedure or conditions which have to be satisfied on an application of this kind. The consequences of a failure to comply with an order for costs made during the course of the action in relation to the future conduct of the action is therefore a matter to be dealt with as part of the inherent jurisdiction of the court.
[10]. It is perfectly true, of course, that parties in the position of the claimants would, in these circumstances, have other remedies available to them. Those might include proceedings for contempt, but equally they might involve a more routine enforcement of the judgment for costs by, for example, seeking an order for payment and a charging order against any known assets. In the present circumstances, however, where they are faced with defendants who are not resident within the jurisdiction, and have no assets here, those remedies are likely to be of limited value.
[16] In any event I take the view that orders of the court, even in relation to interim costs, require to be complied with and that, unless there is some overwhelming consideration falling within Article 6 [ECHR] that compels the court to take a different view, the normal consequence of a failure to comply with such an order, is that the court, in order to protect its own procedure, should make compliance with that order a condition of the party in question being able to continue with the litigation.
    1. In dismissing Vedatech Corp’s application for permission to appeal the unless order granted by Patten J, Chadwick LJ (with whom Laws LJ agreed) said:
But thirdly – and, to my mind, most importantly – the court’s ability to make interlocutory costs orders following, in particular, the Access to Justice reforms in 1998, is a sanction which is available to it in order to encourage responsible litigation. The court marks what it regards as an irresponsible application by an immediate order for the payment of costs. That is intended to bring home to a party – when considering whether to make an application – that an unsuccessful application may carry a price which will have to be paid at once. If the court is not in a position to enforce immediate interlocutory orders for the payment of costs which it was thought right to make, then the force of that sanction is seriously undermined. It is important that, in cases where the court thinks it right to make an order for immediate payment on an interlocutory application, that it does have the power – and can exercise the power – to ensure that order is met. For the reasons which Patten J explained, the only effective sanction in a case of this nature is to require payment of interlocutory costs as the price of being allowed to continue to contest the proceedings. Unless the party against whom an order for costs is made is prepared to, or can be compelled to, comply with, that order, the order might just as well not be made. [17]
    1. In respect of paragraph 16 of Patten J’s judgment quoted above, Chadwick LJ said:
For my part, I would hold that – whether or not a statement in such general terms can be supported – the proposition can be supported in a case (such as the present) where there is no other effective way of ensuring that the interim costs order is satisfied. That, of course, is always subject to what the judge referred to as the overwhelming consideration falling within Article 6: that orders requiring payment of costs as a condition of proceeding with litigation are not made in circumstances where to enforce such an order would drive a party from access to justice. But, for the reasons that the judge explained and to which I have already referred, this was not such a case. [18]
    1. In Musion Systems v Activ8-3D [2012] EWPCC 5 the Defendants were in default of an order to pay the costs of the adjournment of the trial and the Claimant sought an order immediately barring it from defending the claim. HHJ Birss QC (as he then was) cited the paragraphs in Chadwick LJ’s judgment in Crystal Decisions set out above and went on to say:
I derive the following principles as being applicable to the case before me:
i) The matter is always one for the court’s discretion and all relevant circumstances fall to be considered;
ii) If the court is not in a position to enforce interlocutory costs orders the force of the sanction is seriously undermined;
iii) Other options apart from the order sought must be considered
iv) It is always important to have regard to Art 6 ECHR. Orders requiring payment of costs as a condition of proceeding with litigation are not made in circumstances where to enforce such an order would drive a party from access to justice. [24]
    1. HHJ Birss QC accepted the proposition that where there was an impending trial, an unless order was appropriate rather leaving the applicant to enforce the costs order by bringing insolvency proceedings and went on to make an unless order debarring the Defendants from defending the claim unless they paid the costs of the adjournment within 7 days. In his view, bearing in mind the observations of Peter Gibson LJ in Keary Developments v Tarmac Construction Ltd [1995] 3 All ER 534 that the court should consider not only whether the party can fund litigation out of its own resources but whether it can raise money from other sources such as backers, the Defendants’ assertion that they were unable to pay the costs was not sufficiently cogent for him not to make an unless order.
    2. In Gamatronic (UK) Limited v Mr Robert Hamilton and Ms Jayne Mansfield, 4th May 2016 (Case No. HQ 13 X 0094), Mrs Justice Cox agreed with HHJ Birss QC’s summary of the relevant legal principles and adopted what Lord Diplock had to say in Yorke Motors v Edwards [1982] WLR 444 at 449 C-E regarding an assertion of an inability to pay in satisfaction of a condition for leave to defend, namely, that the onus is on the defendant who makes such an assertion to put sufficient and proper evidence before the court and make full and frank disclosure.

THE JUDGE’S SUMMARY OF THE RELEVANT PRINCIPLES

“The applicable principles
    1. In my judgment, the following principles are applicable when dealing with an application that a party to on-going litigation should be debarred from continuing to participate in the litigation by reason of having failed to pay an order for costs made in the course of the proceedings:
(1). The imposition of a sanction for non-payment of a costs order involves the exercise of a discretion pursuant to the Court’s inherent jurisdiction.
(2). The Court should keep carefully in mind the policy behind the imposition of costs orders made payable within a specified period of time before the end of the litigation, namely, that they serve to discourage irresponsible interlocutory applications or resistance to successful interlocutory applications.
(3). Consideration must be given to all the relevant circumstances including: (a) the potential applicability of Article 6 ECHR; (b) the availability of alternative means of enforcing the costs order through the different mechanisms of execution; (c) whether the court making the costs order did so notwithstanding a submission that it was inappropriate to make a costs order payable before the conclusion of the proceedings in question; and where no such submission was made whether it ought to have been made or there is no good reason for it not having been made.
(4). A submission by the party in default that he lacks the means to pay and that therefore a debarring order would be a denial of justice and/or in breach of Article 6 of ECHR should be supported by detailed, cogent and proper evidence which gives full and frank disclosure of the witness’s financial position including his or her prospects of raising the necessary funds where his or her cash resources are insufficient to meet the liability.
(5). Where the defaulting party appears to have no or markedly insufficient assets in the jurisdiction and has not adduced proper and sufficient evidence of impecuniosity, the court ought generally to require payment of the costs order as the price for being allowed to continue to contest the proceedings unless there are strong reasons for not so ordering.
(6). If the court decides that a debarring order should be made, the order ought to be an unless order except where there are strong reasons for imposing an immediate order.”

EXERCISE OF THE DISCRETION IN THE CURRENT CASE

The judge set out the arguments on behalf of each party.He rejected the defendants’ arguments that they did not have to make immediate payment.
    1. In my judgment, none of the submissions advanced by Mr Sinclair and Sokol, whether taken singly or together, amounts to a good reason for not imposing an unless order barring the Sinclair Defendants from defending the Max Action unless they pay the sums due under the immediate costs orders made against them.
    2. £958,091 of the £1,046,274[1] costs orders sought to be enforced by MWP arise from the ultimate failure of the Sinclair Defendants’ applications to strike out the Max Action culminating in MWP’s successful appeal against the decision of Teare J. Throughout the hearing of these applications and appeals, the Sinclair Defendants were represented by experienced leading counsel, Mr Philip Shepherd QC, and it is therefore to be readily inferred that they must have appreciated the risk of costs orders payable within a short period of time being made against them should they lose the strike-out application or lose the appeals by MWP against the orders of Lewison LJ and Teare J. Further, through Mr Shepherd, they had the opportunity to submit to the Court of Appeal for the reasons they now rely on to avoid an unless order that costs orders payable as you go ought not to be made against them. It follows that, either no such submission was made to the Court of Appeal when it could have been, or such a submission was made and it was rejected by the Court. The Sinclair Defendants’ case resisting the unless order application is therefore in substance an appeal against the costs orders made by the Court of Appeal which appeal would have stood almost no chance of success had it been brought, either because the cost orders had been made in conformity with the Court’s normal practice and in the exercise of the Court’s discretion or because no such submission was made to the Court when it ought to have been and in any event there was no merit in the appeal.
    3. The Sinclair Defendants implied that they lacked the means to pay the costs awarded against them. However, neither Mr Sinclair nor Sokol put sufficient evidence before the Court to support the suggestion of impecuniosity they somewhat obliquely trailed at the hearing.
    4. Neither Mr Sinclair nor Sokol is resident within the jurisdiction. Mr Sinclair testified that he resides in Bahrain; Sokol is a Delaware corporation. Mr Sinclair said that he had assets within the jurisdiction in the form of shares in an English company, Eurasian Fertilisers Group plc, but he did not state what they are worth and their ownership is not admitted by MWP. In these circumstances, the chances are remote of MWP recovering the costs due to it through the mechanisms of execution before the Max Action ought to continue towards to trial, or at all.
    5. In advancing the submission that it would be unfair to debar them from defending in circumstances where MWP is itself in serious default on the judgment enforcing the quantum award, the Sinclair Defendants effectively invited the Court to draw up a consolidated balance sheet showing, on the one hand, the sums due or likely to be due by MWP to various parties arising out of the arbitration and other judicial proceedings MWP has launched in connection with the events alleged in the Max Action and, on the other hand, the sums owed to MWP arising out those proceedings by Mr Sinclair, Sokol, Mr Emmott and the other defendants in the Max and Temujin Actions. (The sums likely to be recovered but not yet due were the orders for costs and damages on the cross-undertaking that would follow on from the success of the Sinclair Defendants’ defence in the Max Action).
    6. In my judgment, such an approach is impermissible in the circumstances of this case. This is because the equitable basis for a set-off is predicated on there being debts going both ways between the same parties and there is no justification on the facts of this case for substituting a vague notion of fairness for the doctrinal requirements of equitable set-off. It follows that regard should be had only to the state of account directly between MWP and each of Mr Sinclair and Sokol. Thus, the fact that MWP’s failure to comply with the enforcement judgment may be preventing Mr Sinclair from recouping the loan made to Mr Emmott is not a reason for not making an unless order. Nor can the Sinclair Defendants rely on the possibility that Mr Emmott may attach the costs debt owed by Mr Sinclair to MWP or on the possibility that MWP may succeed in attaching the loan debt owed by Mr Emmott to Mr Sinclair.
    7. I also reject the Sinclair Defendants’ submissions predicated on the alleged strength of their defence in the Max Action arising out of Simon LJ’s observation in allowing MWP’s appeal against Teare J’s strike out order that it will be for the trial judge to decide whether and if so for what purposes the liability award could be relied on at the trial of the Max Action. The paragraph in question in Simon LJ’s judgment is paragraph 102:

The admissibility of the award in the litigation

This is the question identified in [14] above at (1)(b). Mr Samek submitted that the rule in Hollington v. Hewthorn (see above) would preclude the admission of the award in the present litigation; whilst the Judge considered that Mr Emmott could not be cross-examined by MWP in a way which was inconsistent with the award, on the basis of an issue estoppel. Since this point does not strictly arise at this stage, I would be hesitant to express even a provisional view on these matters. Much will depend on the shape of the case as it develops, for example, who seeks to rely on the award and for what purpose. It will be for the Commercial Court to determine in due course the issues that arise in relation to the award and how they should be dealt with.

    1. The Sinclair Defendants appeared to be suggesting at the hearing that this passage comprehended the possibility of the trial judge dismissing MWP’s claim in the Max Action on the basis that it was inconsistent with the liability award. This suggestion is misconceived. The Court of Appeal unmistakably held that the liability award did not render the Max Action an abuse of process and for that reason set aside Teare J’s strike-out order. That finding cannot be circumvented or challenged at the trial. How the liability award might otherwise impact the trial is profoundly uncertain and it is quite impossible to derive from Simon LJ’s observations the conclusion that the prospects of success of the Sinclair Defendants’ defence are so good that justice and fairness require that those Defendants should not be required to pay the costs ordered against them as a condition of being allowed to defend MWP’s claim.
    2. Nor is it open to the Sinclair Defendants to submit that, given the liability award, MWP’s claim is so unfair that the Sinclair Defendants should not be debarred from defending it even though the cost orders against them remain unpaid.

Conclusion on the unless order application

  1. There is but a remote prospect of MWP recovering the £1,173,111.53 due or any significant part thereof through the mechanisms of execution whether before the Max Action ought in fairness to continue towards trial, or at all. The Sinclair Defendants have also failed to adduce proper evidence to support a case of impecuniosity. Article 6 ECHR is not implicated. Further, the Sinclair Defendants’ various submissions that it would be unfair to require payment of the costs as a condition of defending the Max and Temujin Actions are not sustainable for the reasons given in paragraph 33 and 36-39 above. It follows that this is a case where the only effective sanction is to impose an order debarring the Sinclair Defendants from defending the Max Action and there are no good reasons for not adopting this course.
  2. The order sought in MWP’s unless order application notice is an order that unless the Sinclair Defendants pay the costs due to MWP within 14 days they shall be debarred from defending the claim in the Max Action. In his skeleton argument, Mr Doctor sought an unless order debarring the Sinclair Defendants from defending both the Max Action and the Temujin Action, but he advanced no submissions at the hearing as to why MWP should be permitted to seek an order not pleaded in the application notice that the Sinclair Defendants should be debarred from defending the Temujin Action or as to the justification for such an order when the outstanding costs orders were made in the Max Action and not in the Temujin Action. In these circumstances, I shall order that unless the Sinclair Defendants pay £1,173,111.53 within 28 days they shall be debarred from defending the Max Action and I will permit Mr Doctor to serve short submissions on the justification for extending the debarring order to the Temujin Action as well as the Max Action. The Sinclair Defendants will of course have the right to serve written submissions in reply.