DEFENDANTS REFUSED RELIEF FROM SANCTIONS: INADEQUATE EXPLANATIONS WILL NOT SUFFICE

In Consult II SRO & Ors v Shire Warwick Lewis Capital Ltd & Ors [2019] EWHC 286 (Comm) Andrew Henshaw QC (sitting as a High Court Judge) refused the defendants’ application for relief from sanctions. The lack of a candid explanation for the failure to comply with the order played a major part in the judge’s decision both a stage two and three of the Denton test.

“I  agree with the Claimants that when a party seeks relief from a sanction, the applicable standard of evidence required to explain its failure to comply with the obligation in question should be no lower than the standard that applies when the court decides whether to impose a sanction in the first place. It would be illogical and contrary to the underlying policy mentioned above for a party to be relieved from a sanction based on a lower standard of evidence than would have been required to avoid the imposition of the sanction.”

THE CASE

The claimants brought an action for  €4,448,416.24 alleging, amongst other things, fraudulent misrepresentation against the defendants.  The claimants obtained a freezing order. The defendants sought to set that order aside but were unsuccessful. They were ordered to pay the claimants’ costs.

On the 26th October 2018 the court made an order, by consent, that the defendants pay the costs of several applications totalling £102,700 or be debarred from defending.    The defendants failed to comply with the order. The claimants entered judgment.

A SERIOUS AND SIGNIFICANT FAILURE

There did not appear to be an issue that the defendants’s breach was both serious and significant. `

  1. I consider, and the Defendants did not seriously seek to contest, that the Defendants’ failure to comply with the Unless Order is serious and significant.
  2. The Jacobs Costs Order was for a significant sum of money representing expense to which the Claimants had been put as a result of the Defendants’ application, held by Jacobs J to be unmeritorious, to set aside the freezing injunction on the ground that the Claimants had no good arguable case. As Sir Richard Field pointed out in Michael Wilson & Partners v Sinclair [2017] EWHC 2424 § 29, the policy behind the imposition of costs orders made payable within a specified period of time before the end of the litigation is that they serve to discourage irresponsible interlocutory applications or resistance to successful interlocutory applications.
  3. The length of time for which the Jacobs Costs Order has remained unpaid since its original due date of 7 September 2018, and since the deadline of 9 November 2018 imposed by the Unless Order, increases the seriousness of the breach

THE REASON FOR THE FAILURE

The judge was not impressed with the quality of the evidence the defendants adduced to explain their failure to comply.
    1. CPR 3.9(2), which I have already quoted, expressly requires an application for relief from sanctions to be supported by evidence.
    2. I agree with the Claimants that when a party seeks relief from a sanction, the applicable standard of evidence required to explain its failure to comply with the obligation in question should be no lower than the standard that applies when the court decides whether to impose a sanction in the first place. It would be illogical and contrary to the underlying policy mentioned above for a party to be relieved from a sanction based on a lower standard of evidence than would have been required to avoid the imposition of the sanction.
    3. Relevant guidance, including as to the evidence required, was provided by Sir Richard Field in Michael Wilson & Partners v Sinclair at § 29 (subsequently followed and applied by Norris J in Jackson v Feeney [2018] EWHC 1490 (Ch)):
“(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.”
(my emphasis)
  1. As I have already noted (§ 17 above), Teare J on 16 November 2018 made clear both in the hearing and in his written order that any application by the Defendants for relief from sanctions needed to be supported by a witness statement attaching copies of such relevant documents as the Defendants were able to supply.
  2. The only evidence provided by the Defendants in support of their present application is the sixth witness statement of Mr Pachtinger, dated 30 November 2018. The witness statement provides no details of the Defendants’ general financial position, save to state that the freezing injunction has caused all the Defendants great difficulty in accessing funds from their bank accounts.

The judge considered the evidence in detail and concluded:

  1. For the reasons set out above, I conclude that the Defendants have failed, by a considerable margin, to provide any adequate explanation of the reasons why the Jacobs Costs Order has not been satisfied, whether from their own assets (in particular, the PTC Position) or from third party funding, still less full and frank disclosure of such reasons.”

STAGE 3: ALL THE CIRCUMSTANCES OF THE CASE

The judge was clear that “all the circumstances” of the case clearly militated against relief from sanctions being granted.  At this stage the inadequate explanations from the defendant played a major part.

    1. At this stage, the court has to evaluate all the circumstances of the case, so as to enable it to deal justly with the application, including the need (a) for litigation to be conducted efficiently and at proportionate cost, and (b) to enforce compliance with rules, practice directions and orders.
    2. I agree with the Claimants that the effect of the Defendants’ failure to pay the Jacobs Costs Order has been both:
i) to hamper the efficient conduct of the proceedings, seriously interrupting the flow of pleadings and thus progress towards trial; and
ii) substantially (and unreasonably) to increase the costs of the litigation to date.
    1. Had it not been for the Defendants’ failure to comply with the Jacobs Costs Order, their Defence would have been due for service on 16 November 2018, time having already been extended at their request on 3 October 2018 (until 2 November 2018) and on 26 October 2018 (until 16 November 2018). 16 November 2018 is already nearly three months ago, and even now no draft Defence is available. The delay is arguably longer, in that the Defendants’ requests for extensions of time for their Defence were in part said to be in order to enable them to respond to the Claimants’ application for the Unless Order. Further, service of the Defence had already been delayed by the Defendants’ unsuccessful challenge to the freezing injunction.
    2. The costs orders which the Defendants have been ordered, but have failed, to pay now total £203,083.88, comprising:
i) £102,700: the Jacobs Costs Order made on 17 August 2018;
ii) £62,700 ordered by Moulder J on 26 October 2018;
iii) £12,000 ordered by Teare J on 16 November 2018, and
iv) £27,683 ordered by Cockerill J on 14 December 2018.
    1. The first three of these, totalling £177,400, comprise the Jacobs Costs Order itself and further orders directly or indirectly resulting from the Defendants’ failure to pay that order.
    2. The Cockerill costs order related to the cross-examination hearing which resulted from the Defendants’ separate failure to comply with their disclosure obligations under previous orders, a factor which separately has some bearing on the overall justice of the matter.
    3. Further, bearing in mind the policy considerations stated in Michael Wilson and Barton, it is clear that the purpose of an unless order – encouraging compliance with the court’s rules and orders – would be undermined if parties who fail (particularly in a significant manner as in the present case) to comply with unless orders were permitted to avoid the resulting sanction without providing a clear, full and frank explanation of the reason for their failure that satisfies the court that it is just to grant relief. The Defendants in the present case have clearly failed to do so.
    4. The strength of a party’s case is of at best limited relevance when considering relief from sanctions. In Global Torch Ltd v Apex Global Management Ltd (No 2) [2014] UKSC 64 Lord Neuberger said at § 30:
“… it would be thoroughly undesirable if, every time the court was considering the imposition or enforcement of a sanction, it could be faced with the exercise of assessing the strength of the parties’ respective cases: it would lead to such applications costing much more and taking up much more court time than they already do. It would thus be inherently undesirable and contrary to the aim of the Woolf and Jackson reforms.”
    1. It is notable in the present case that (a) Jacobs J found the Claimants to have a good arguable case against the Defendants, including in relation to fraud, and (b) despite being invited to do so in the Mr Tuson’s witness statement of 14 December 2018, the Defendants have so far not produced a draft of their proposed Defence. Mr Lewis made the point in the hearing that the Defendants considered themselves disentitled, based on Teare J’s order and observations, from serving a defence unless and until they had obtained relief from sanctions. Mr Tuson’s witness statement was clear in distinguishing between service of a defence and provision of a draft defence, and the Claimants made the point in submissions that the Defendants had been legally represented until shortly after the hearing before Moulder J on 26 October 2018, and had obtained an extension of time to 16 November (only one week after the Unless Order sanction took effect) for their Defence, which one might therefore expect to have been reasonably well advanced by that stage. Mr Lewis explained in submissions that the Defendants had been unable to afford to pay their legal representatives since prior to the hearing before Jacobs J in August 2018, and so had had very limited support from them since then. In view of Lord Neuberger’s comments quoted above, I do not regard this factor as having great significant in the context of this application, but it does mean (as I indicated to Mr Lewis) that I am unable to give more than limited weight to the Defendants’ submissions to the effect that they have a compelling defence.
    2. Viewing the matter in the round, I conclude that relief from sanctions should not be granted. The Defendants, having consented to the making of the Unless Order, have now been in breach of it for three months. No adequate explanation has been provided for the breach, nor full and frank disclosure made. On the contrary, such explanations as have been provided have been highly unsatisfactory in the respects set out above, and almost completely unsupported by documentary evidence even on matters where it is probable that (were the account correct) documents would exist. The breach of the Jacobs Costs Order has delayed the litigation significantly, and given rise to further costs, both of which constitute prejudice to the Claimants. The Defendants’ record of compliance with previous orders, in particular in relation to asset disclosure is poor. In all the circumstances, and even making allowance for the Defendants’ lack of legal representation, it would not be just to grant relief from the sanctions imposed by the order of Moulder J.

(E) OVERALL CONCLUSION

  1. The Defendants’ application is therefore dismissed.