WHEN THE COURT LOOKS AT THE MERITS OF THE CASE IN A RELIEF FROM SANCTIONS APPLICATION: A RARE,BUT IMPORTANT, DEVELOPMENT

February 11, 2022 · by · in Bundles, Relief from sanctions, Summary judgment

In  Rapid Displays Inc & Anor v Ahkye & Anor [2022] EWHC 274 (Comm) HHJ Pearce (sitting as a judge of the High Court) refused the defendants’ application for relief from sanctions. That application was heard alongside the claimant’s application for summary judgment.  The case contains (i) an important reminder about the importance of bundles; (ii) an illustration of the need for a party seeking relief from sanctions to explain fully how the need for an application came about. (The judgment also contains a word or two about the inadequate state of the  bundles, this led to an adjournment. Even after the adjournment the bundles were incomplete).

“A party who is seeking relief from sanction can be expected to come before the court with a full explanation of how the need for the application comes about. It is not for the parties’ advocate to have to postulate matters that are not verified in evidence on a central issue, where the party is seeking the court’s indulgence.”

THE CASE

The claimant sought recovery of US $500,000 dollars paid into the account of the second defendant.  During the course of the litigation the court made an order that the  defendants pay £18,000 to the claimant, that order was a peremptory order. The defendants did not comply and made an application for relief from sanctions. The claimant made an application for summary judgment in response.

THE PROCEDURAL BACKGROUND

The judge set out the procedural background.  Earlier an order had been made for payment of £18,000 by the defendants.  The defendants had not complied.
    1. On 16 November 2021, I made an order with the consent of both parties, adjourning the summary judgment application (and therefore implicitly the application for relief from sanction) to 9 December 2021, providing for the service of witness evidence by the Defendants by 4pm on 22 November 2021, with reply evidence by 4pm on 24 November 2021.
    1. By application dated 24 November 2021, the Defendants sought relief from sanction in respect of the failure to serve a witness statement by 4pm on 22 November 2021. The statement from the First Defendant upon which the Defendants wish to rely was dated the same date, 24 November 2021. The application notice also recorded that the Defendants had paid £18,000 pursuant to the Unless Order. (It was common ground at the hearing before me on 7 February 2022, that this payment was made on 8 November 2021. The payment was said to have been funded by a private loan.)
    1. On 29 November 2021, His Honour Judge Halliwell considered on paper the application dated 24 November 2021 for relief from sanction relating to the late service of the witness statement. He granted that application. This then was the third occasion upon which the Defendants had been in breach of a rule or court order (the first relating to the Acknowledgment of Service and the second to the service of a statement pursuant to the order of HHJ Halliwell of 15 October 2021). Given that the statement was dated only two days after the date by which it was due to be served and that the application was made on that same date, it was clearly not the most serious of breaches.
    1. On 9 December 2021, the application for relief from sanction relating to the Unless Order and the Claimants’ application for summary judgment came before me. The bundle before the court was seriously non-compliant with the Guide for the Preparation and Service of Bundles in Manchester (which guidance was referred to in the notice of hearing) and further the Claimants had not served Particulars of Claim, notwithstanding the duty to do so within 14 days after service of the Claim Form pursuant to CPR7.4. The Claimants produced draft Particulars of Claim which were subject to adverse comment by counsel for the Defendants. Given the failure to serve the Particulars of Claim, Defences had not been filed. The Claimants required relief from sanctions for the failure to serve Particulars of Claim, which I granted, but I adjourned the hearing, given the combined problems from late service of the Particulars of Claim and the inadequacy of the bundle. I ordered that the Claimants pay the costs thrown away.
    1. The adjourned application then came on for hearing before me on 7 February 2022. Given that I had made adverse comments about the preparation of the bundle for the hearing before me on 16 November 2021, it came as a considerable surprise to find that the Second Defendant’s first witness statement was not in the main bundle and had to be incorporated in a supplemental bundle. Mistakes such as this can happen, though one might have expected that greater care would have been taken, given the previous history. In the event, no great harm was caused beyond the presumably limited additional costs flowing from the need to add this statement to a supplementary bundle that would have needed to be prepared in any event.

APPROACH TO THIS APPLICATION

    1. With respect, I agree with HHJ Cawson QC that the merits of the claims against the Defendants may be relevant. It is clear from the authorities that the strength of the underlying claim may be a relevant factor in considering the third stage of the test in Denton v TH White Ltd [2014] EWCA Civ 906 (“the Denton test”), at least where the party in default has a strong enough case to obtain summary judgment (see HRH Prince Abdulaziz Bin Mishal Bin Abdulaziz Al Saud v Apex Global Management Ltd [2014] UKSC 64).

 

    1. There is a further interplay between the two applications before the court. The Claimants contended that the circumstances in which the Unless Order were made involved the First Defendant lying in the witness statement relied upon in the hearing before me on 22 October 2021 as to whether the Defendants were still at that time in possession of any of the monies from the payment that had been due to the First Claimant. The Claimants contend that the First Defendant had lied on the same issue in the hearing before HHJ Halliwell on 15 October 2021, and that these two occasions of lying lend support to the contention that the Claimants are entitled to summary judgment on a claim based on the Defendants’ dishonesty.

 

    1. Logically speaking, the determination of the application for relief from sanction must precede determination of the application for summary judgment in the case of each Defendant, since, unless each Defendant gets relief from sanction, the Claimants are entitled to enter judgment against that Defendant regardless of the outcome of the summary judgment application. On the other hand, as I have indicated, the issues on the summary judgment application are closely related to the relief from sanction application and, if the Defendants are correct in their submissions, they would, one or both, be entitled themselves to summary judgment. I therefore propose to consider the merits of the summary judgment application first, before dealing with the Relief from Sanction application, and finally determining the appropriate order.

SUMMARY JUDGMENT: THE LAW AND ALLEGATIONS OF DISHONESTY

Firstly the judge considered the matters raised in the summary judgment application.
SUMMARY JUDGMENT – THE LAW
    1. CPR24.2(a)(ii) provides that the court may give summary judgment against a defendant on the whole of the claim or on a particular issue if it considers that the defendant has no real prospect of successfully defending the claim or issue and there is no other compelling reason why the case or issue should be disposed of at a trial.
    1. The principles to be applied on such an application are well established and are conveniently set out in the White Book at paragraph 24.2.3, where the authors summarise the principles formulated by Lewison J, as he then was, in Easyair Ltd v Opal Telecom Limited [2009] EWHC 339 (Ch):
i) The court must consider whether the claimant has a “realistic” as opposed to a “fanciful” prospect of success: Swain v Hillman [2001] 1 All ER 91;
ii) A “realistic” claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8];
iii) In reaching its conclusion the court must not conduct a “mini-trial”: Swain v Hillman;
iv) This does not mean that the court must take at face value and without analysis everything that a party says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10];
v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No.5) [2001] EWCA Civ 550;
vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 3;
vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725.
    1. To this statement of principles might be added:
i) The burden of proof lies upon the party applying for summary judgment – ED & F Man Liquid Products v Patel; and
ii) If the applicant produces credible evidence in support of the application the respondent become subject to an evidential burden of proving some real prospect of success, for which purpose of the standard of proof is not high – it suffices merely to rebut the applicant’s statement of belief that there is no real prospect of success.
    1. Given that this is an application that depends upon the Claimants proving that the Defendants have no real prospect of success in defending the assertion that the First Defendant (and through him, the Second Defendant) was dishonest, it is important to bear in mind both the test to be applied in making a finding of dishonesty and the caution about making findings of dishonesty (or findings that a person has no real prospect of success of defending an allegation of dishonesty – close to, but not exactly the same thing).
i) The test for dishonesty is set out in the unanimous judgment of the Supreme Court in Ivey v Genting Casinos UK Ltd [2017] UKSC 67: “When dishonesty is in question, the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people.”
ii) The care to be taken in considering allegations of dishonesty on disputed facts and the need to avoid conducting an inappropriate mini trial was neatly summarised by Sir Geoffrey Vos in Allied Fort v Ahmed [2015] EWCA Civ 841: “[81] although summary judgment is not precluded in a case in which the honesty of one or more of the parties is in issue, particular caution should be exercised before depriving a party of the opportunity of rebutting allegations of dishonest conduct.”
iii) Both the significance of a finding of dishonesty and the risk of a court wrongly deriving a party of the opportunity to proceed to full oral hearing because it considered an argument to be hopeless were considered by Sir Igor Judge PQBD in Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237, cited with approval by Sir Geoffrey Vos in Allied Fort v Ahmed: “I do not underestimate the importance of a finding adverse to the integrity to one of the parties. In itself, the risk of such a finding may provide a compelling reason for allowing a case to proceed to a full hearing, notwithstanding the apparent strength of the claim on paper, and the confident expectation, based on the papers, that the defendant lacks any real prospect of success. Experience teaches us that on occasion apparently overwhelming cases of fraud and dishonesty somehow inexplicably disintegrate.” (Of course, Sir Igor Judge was making a statement of principle. On the facts of the case in front of him, he found that the first instance judge was entitled to give summary judgment on an allegation of fraud. In contrast, in Allied Fort, Sir Geoffrey Vos considered that the judge had overstepped the bounds in doing so.)
iv) In King v Stiefel [2021] EWHC 1045 (Comm), Cockerill J considered the authorities relating to the evaluation of evidence in a summary judgment application and concluded:
“[21] The authorities therefore make clear that in the context of summary judgment the court is by no means barred from evaluating the evidence, and concluding that on the evidence there is no real (as opposed to fanciful) prospect of success. It will of course be cautious in doing so. It will bear in mind the clarity of the evidence available and the potential for other evidence to be available at trial which is likely to bear on the issues. It will avoid conducting a mini-trial. But there will be cases where the Court will be entitled to draw a line and say that – even bearing well in mind all of those points – it would be contrary to principle for a case to proceed to trial.
[22] So, when faced with a summary judgment application it is not enough to say, with Mr Micawber, that something may turn up.”
  1. Many of the authorities cited above predate the judgments of Leggatt J (as he then was) in Gestmin v Credit Suisse [2013] EWHC 3560 and Blue v Ashley [2017] EWHC 1928. He considered the necessary caution as to the weight to be placed on oral evidence in commercial litigation, in particular where there is relevant contemporary documentation. Though those cases were concerned largely with the question of the reliability rather than the honesty of witnesses, it might be thought that the principle more generally would direct the court to focus on the documentary evidence and the inherent plausibility of the parties’ cases rather than what witnesses have to say in the witness box. However, the care to be exercised in that regard was referred to by Floyd LJ in Kogan v Martin [2019] EWCA Civ 1645 when, citing the judgment of HHJ Gore QC in CXB v North West Anglia Foundation NHS Trust [2019] EWHC 2053 as to the caution to be exercised in applying the above passage from Gestmin particularly in the context of non-commercial disputes, he said ” a proper awareness of the fallibility of memory does not relieve judges of the task of making findings of fact based upon all of the evidence.” That emphasis on the need to focus on what witnesses may have to say applies with particular force in the context of allegations of dishonesty.

THE LAW RELATING TO RELIEF FROM SANCTIONS

The judge considered the law relating to relief from sanctions, in particular those – rare – cases where the court can consider the overall merits of the claim.  On the facts of this case the judge refused to grant relief from sanctions.  The underlying merits of the defendants’ defence was a factor, as was the lack of a good explanation for previous statements made in litigation and the absence of a full explanation for the default.

RELIEF FROM SANCTION – THE LAW
    1. The power to give relief from sanction arises from the court’s general case management powers in CPR Part 3. CPR 3.8(1) states:
“Where a party has failed to comply with a rule, practice direction or court order, any sanction for failure to comply imposed by the rule, practice direction or court order has effect unless the party in default applies for and obtains relief from the sanction.”
CPR 3.9(1) further provides:
“On an application for relief from any sanction imposed for a failure to comply with any rule, practice direction or Court order, the Court will consider 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.”
    1. The proper approach to applications for relief from sanction is to apply the three-stage test set out by the Court of Appeal in Denton v TH White [2014] EWCA Civ 906:
i) The Court should first identify and assess the seriousness of the breach giving rise to the sanction. If the breach is neither serious nor significant, the Court is unlikely to spend much time on the second and third stages.
ii) The court should then consider why the default occurred.
iii) The court should finally consider all of the circumstances of the case so as to enable it to deal justly with the application.
    1. It is relevant to note, when considering the just disposal of the application that dealing justly with an application includes, pursuant to the overriding objective, the following, pursuant to CPR1.1(2):
i) ensuring that the parties are on an equal footing and can participate fully in proceedings, and that parties and witnesses can give their best evidence;
ii) saving expense;
iii) dealing with the case in ways which are proportionate to the amount of money involved, to the importance of the case, to the complexity of the issues and to the financial position of each party;
iv) ensuring that it is dealt with expeditiously and fairly;
v) allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases; and
vi) enforcing compliance with rules, practice directions and orders.
    1. In oral submissions, Mr Perrin drew my attention to the reference in paragraph 3.9.1 of the White Book to Momsom v Azeez [2009] EWCA Civ 202. In that case, as here, the court was concerned with non-compliance with an “unless” order, in that case imposing a sanction if the defaulting party failed to comply with a disclosure application. The appellant argued that it was incumbent upon the court by reason of article 6 of the European Convention of Human Rights to consider whether the debarring order was proportionate, conceding that the refusal to grant relief under CPR3.9 would not contravene Article 6 if it was proportionate and for a legitimate purpose. The Court of Appeal, noting that compliance with the order was necessary for a fair trial to occur, held that it was compliant, noting “Any other conclusion would mean that litigants could with impunity avoid compliance with court orders made for the purpose of the holding of a fair trial.”
  1. It is not normal in applications for relief from sanction to consider the merits of the underlying claim, save in the particular circumstances addressed in Al Saud v Apex Global Management cited above. The reason for this is clear from paragraph 3.9.20 of the White Book – the court declines to embark on an investigation of the merits when dealing with relief from sanction because of the inappropriate waste in costs and time that this would involve. However, in this case, the merits are being dealt with in any event, because of the application for summary judgment. Where the court is able to reach firm conclusions on the merits of the claim, those it seems to me would be matters to be taken into account in the third stage of the Denton test.
    1. It is a striking feature of the application for relief from sanctions that the Defendants have not explained how it was that the First Defendant asserted that the Defendants remained in possession of £18,000 in his first witness statement. The submission on his behalf that the figure was based upon a calculation of the original sum received less the figures paid out is by no means implausible. The result of that calculation is almost exactly the sum proffered by the First Defendant to the Claimants (albeit after the Unless Order was made) and it is perfectly possible to see how someone, aware of the original sum received and the amounts paid out, might assume (without further knowledge) that this sum must be available.
    1. It is distinctly unfortunate that the First Defendant himself has not explained this in evidence. A party who is seeking relief from sanction can be expected to come before the court with a full explanation of how the need for the application comes about. It is not for the parties’ advocate to have to postulate matters that are not verified in evidence on a central issue, where the party is seeking the court’s indulgence.
    1. But the problem goes further here. As the Claimants point out, the more fundamental question is, how it came about that the First Defendant said that the money was in his (or the Second Defendant’s) “possession”. On his behalf, Mr Perrin, in valiant submissions, sought to argue that he might have thought that the money was in his possession because it had reduced the company’s overdraft. This was not what the First Defendant said in the witness statement and had he meant this, I would have expected him to say it. The witness statement was a clear attempt to show that his dealings with the money, were purely at the instruction of Mr Shah and had only resulted in benefit to third parties, save for the £18,000 which could be returned. In fact, he could not return the money, at least not without making arrangements with the bank for a further overdraft.
    1. I am left with no adequate explanation for the non-compliance with the Unless Order. If the First Defendant’s witness statement of 22 October 2021 is to be believed, he had around £18,000 in his possession (or in the possession of the Second Defendant) which could have been repaid to the Claimants. It was offered to the Claimants. The natural inference is that in fact the Defendants did have this money. However, it is not disclosed in any of the bank statements before me. On the other hand, the bank statements appear to indicate a position where the money simply went to reduce an overdraft, in which case the statement that the Defendants still had the money in their possession was wrong and misleading.
    1. This issue is all the more significant, given what the First Defendant had said Judge Halliwell on 15 October 2021. Given my finding that the First Defendant lied to Judge Halliwell on what is a closely related issue, I am forced to conclude yet again that the First Defendant has lied to the court, this time in a witness statement.
    1. The mere fact that the Unless Order in respect of which relief from sanction was made was in fact the consequence of the court being misled by untrue information does not prevent the Defendants getting relief from sanction. In fact, ironically, it is probably the case that the Unless Order would not have been made had I known the true position. However, when one comes to consider all of the relevant circumstances of the case for the third stage of the Denton test, the provision of misleading information is a significant factor.
    1. The breach of the Unless Order has not imperilled a hearing date. As Mr Perrin rightly says, such imperilment is often a significant reason not to give relief from sanction because of the emphasis in CPR3.9 on the efficient conduct of litigation. But the manner in which this litigation has been conducted by the Defendants has been anything other than efficient, even if no hearing date has been imperilled.
i) This is the sixth interlocutory hearing in the case. Whilst the need to adjourn the previous hearing cannot in any way be laid at the door of the Claimants, the other five have been complicated by the Defendants pursuing an untruthful case and the First Defendant misleading the court, causing considerable time to be spent in considering a case which, in respect of the Second Defendant, is indefensible.
ii) This is not the first occasion where the Defendants have required relief from sanction or at least been in breach of a court order. I have identified above that they failed to file the first statement or the acknowledgment of service in time and required relief from sanction relating to the late service of the First Defendant’s fourth witness statement. None of these were serious breaches that, of themselves, or even together merited any sanction beyond the costs order in respect of the late witness statement, but they are relevant to the exercise of the judgment on the third stage of the Denton test.
iii) If I were to grant relief from sanction, there is a very real risk that the First Defendant would continue to mislead the court. He has done so on two occasions now, without seemingly any insight into the harm that this does not only to the litigation process generally but to his own case.
iv) In respect of the First Defendant, whilst I do not consider that the Claimants are entitled to judgment for the pleading issues raised above, in fact I have not been able to identify any defence that he may have to a claim in unlawful assistance. His assistance, though unpleaded, is indisputable. Given my findings on the issue of dishonesty, I see no prospect of him showing that any acts were those of the limited company alone and not him. It follows that to give relief from sanction would simply to delay the inevitability of a further summary judgment application which with an amended pleading would inevitably succeed. That would not be consistent with the overriding objective.
v) In respect of the Second Defendant, if I granted relief from sanction, the Claimants would, in light of my analysis above, immediately be entitled to summary judgment (subject to the “some other compelling reason” exception which I deal with below in any event) and therefore nothing would be achieved by the grant of relief.
    1. I have considered with care the Defendants’ argument that the First Defendant faces professional ruin if “a finding of fraud is entered against him.” That is both a circumstance of the case that I should have regard to on a relief from sanction application and potentially a compelling reason to allow the case to go to trial. I deal with the two issues together since the answer to both should be the same.
    1. Technically of course I have made no such finding, though the distinction between a finding that the First Defendant was dishonest and that he has no real prospect of success in showing that he was not dishonest might be so narrow as to be in truth indistinguishable. But the finding I make is that neither he nor the Second Defendant has a real prospect of successfully defending the claim that, once the money was paid into the Second Defendant’s bank account, he knew that it was money that the Second Defendant was not entitled to, yet he nonetheless caused it to pay the money out. That is probably rightly characterised as a type of fraud, but it is not necessarily a type of fraud that would lead to the ruin of a professional person. In any event, for reasons identified below, notwithstanding my findings on the evidence, the judgment that I shall order flows in fact from the non-compliance with a court order rather than being a judgment against the Defendants on an allegation of fraud.
    1. In any event, it is not for me to determine what the consequences of any such findings are beyond the strict bounds of this case, which would be a finding that the Claimants are entitled to the relief that they seek. Any judge dealing with a case such as this thinks long and hard before delivering a judgment that may lead to a person’s bankruptcy or to career damage. That is no more the case where the party is a doctor than where he or she is a hospital porter.
    1. Having anxiously scrutinised the material before the court, I have reached the conclusion that there are no good grounds for relief from sanction. I do so with a heavy heart as to the consequences it may have for the First Defendant but with confidence that on the evidence before me it is the appropriate conclusion. I were to grant relief from sanction or to decline to enter summary judgment on my firm conclusions on the matter before me, I would simply be imposing further expense on the parties before the inevitable conclusion to the litigation was reached.
CONCLUSION
  1. It follows from my reasoning above that I do not grant relief from sanction. For that reason, the Claimants remain entitled to judgment pursuant to my order of 22 October 2021. Whilst I would have entered summary judgment for the Second Defendant but for the Unless Order, it is not necessary to do so.