COST BITES 20: COURT MAKES A THIRD PARTY COSTS ORDER ON THE BASIS OF MISCONDUCT OF LITIGATION: PARTIES GET THEIR JUST DESSERTS

In Ventures Food Ltd v Little Dessert Shop Limited [2022] EWHC 2437 (Ch) HHJ Richard Williams (sitting as a High Court judge) made a third party costs order on the basis of litigation misconduct by those who controlled a limited company.

“Having chosen to initiate the proceedings, the Third Parties then chose, without formally discontinuing, to disengage at a critical stage of the proceedings as the trial date fast approached. Such conduct was wholly contrary to the overriding objective and no doubt directly caused D needlessly to spend significant time and money in preparing for and attending both the PTR and the trial of a case that the Third Parties initiated but no longer had any intention of contesting.”

THE CASE

The claimant company had brought proceedings relating to the lease and occupation of a shop.  During the proceedings the claimant’s solicitors had been removed from the record on the basis that they had not received instructions.   A major issue in the case was whether certain emails were genuine and both parties had been given permission to rely on expert evidence. The defendant then made an application that the claimant’s permission to rely on expert evidence be set aside. The claimant’s expert had stated that he was without instructions and unable to proceed to prepare a joint report in accordance with court directions.

The court set aside the claimant’s permission to rely on expert evidence and gave the defendant permission to counterclaim for a declaration in relation to the lease. The claimant did not attend the Pre-Trial review, nor did it attend the trial where judgment was given for the defendant on the counterclaim.

THE APPLICATION FOR A NON-PARTY COSTS ORDER

The defendant made application for a non-party costs order against two people who were directors of the claimant company.  The judge did not accept that an order could be made on the basis that the respondents had fabricated documentary evidence.   However he made an award on the basis of litigation misconduct.

THE JUDGMENT ON THE ISSUE OF LITIGATION MISCONDUCT

Submissions on behalf of D

1. 1. The Third Parties failed to (i) instruct C’s expert to prepare a joint statement, (ii) attend the PTR, (iii) notify D that it wished to challenge D’s expert evidence at trial, (iv) attend trial. Rather than discontinuing the claim, the Third Parties instead allowed the claim to proceed to trial (with all the associated costs) and took steps to place C in a CVL.

1. 1. The Third Parties’ written evidence filed in response to this application (including selective and substantially redacted communications with their solicitor) does not provide any reasonable excuse for these failings. Further, the claim that TP2 gave clear instructions to Mr Summerfield prior to the Third Parties travelling to Pakistan to proceed with the joint statement and yet Mr Summerfield failed to instruct the expert to do so lacks credibility. Indeed, the email of 17 December 2021 from Mr Summerfield to TP2 [at p.24 of the exhibits to TP1’s witness statement] contradicts the assertion that Mr Summerfield had been told that the Third Parties were uncontactable in Pakistan as alleged and it is noticeable from the same email that there appears to have been a discussion between Mr Summerfield and C’s expert about what occurred during the expert meeting which preceded the expert subsequently not being given instructions to produce the joint statement. In any event, any such arguments and evidence as are now made by the Third Parties should properly have been presented before the Court at the time when the Court’s determinations were made.

Submissions on behalf of the Third Parties

1. 1. In their written evidence the Third Parties have explained that:

a. Prior to travelling to Pakistan they believed that clear instructions had been given to Mr Summerfield to progress the claim by arranging for the experts to meet and prepare a joint statement. It was only on returning to the UK that they became aware of the order removing STS as solicitors acting for C in the main action;

b. On returning to the UK on 24 January 2022, the Third Parties also discovered that their maternal uncle had been diagnosed with terminal cancer. When the uncle subsequently died on 11 February 2022 the Third Parties suffered with depression such that they were unable to run C’s business including the litigation. It was only by March 2022 that the Third Parties’ mental health had improved so that they felt able to deal with the litigation, but by then they had missed the PTR hearing at which it was ordered that C was unable to rely upon expert evidence; and

c. The Third Parties mistakenly believed that without legal representation they could not attend the trial.

1. 1. This Court cannot reject that evidence, including as to the stated beliefs of the Third Parties, without that evidence being tested by way of cross examination.

1. 1. Finally and come what may, the application against TP2 as brought rests solely on the throwaway assertion that he was a de facto or shadow director. Such laxity is unforgiveable. In Gemma Ltd v Davies [2008] BCC 812, it was reiterated that in order to show that a person was a de facto director (so as to fix them with liability under section 212 of the Insolvency Act 1986) the following guidance applied:

a. The applicant must plead and prove that the respondent undertook functions in relation to the company which could properly be discharged only by a director;

b. Holding out is not a necessary characteristic, though it may be important evidence to support the conclusion;

c. Holding out is not a sufficient characteristic. What matters is what the person did;

d. The person must have participated in directing the affairs of the company, and not in some subordinate role;

e. The person in question must be shown to have assumed the status and functions of a director and to have exercised real influence in the corporate governance; and

f. If it is unclear whether the acts are referable to an assumed directorship or some other capacity then the respondent is entitled to the benefit of the doubt.

By no stretch of the imagination can D’s case here be seen to meet these requirements.

Analysis and conclusion

1. 1. At the PTR hearing, I rescinded permission for C to rely upon expert evidence. The order expressly recorded my reason for doing so as being the failure to give instructions to C’s expert to prepare the joint statement. That finding was made based upon the evidence then before me, which included:

a. Emails from C’s expert (dated 10 and 11 January 2022) to D’s expert confirming that he was unable to progress the joint statement as he was without instructions and despite C being aware of the urgency of the matter; and

b. C’s solicitor’s application notice dated 10 January 2022 to come off the court record because inter alia he was without instructions and had been for over 4 weeks.

No application was made to set aside/appeal that order. The Third Parties cannot in my judgment now seek to go behind that finding by adducing evidence that could and should have been put before the court at the PTR hearing.

1. 1. The Third Parties assert that they did not attend the PTR hearing because neither was in a mental state to do so. However, the Third Parties have not provided any supporting medical evidence such that I cannot be satisfied that the Third Parties had good reason for not attending the PTR hearing.

1. 1. The Third Parties claim that they did not attend the trial because they mistakenly believed that without legal representation they had no standing to appear in court on behalf of C. No explanation is given for the basis of that surprising belief, but in any event that stated belief is wholly inconsistent with the fact that on 14 March 2022 the Third Parties felt able without legal representation to make an application to the Court on behalf of C seeking an order that proceedings be stayed for a period of 1 month for settlement negotiations.

1. 1. I do not accept the submission made on behalf of the Third Parties that I must simply accept without question or scrutiny what the Third Parties have stated in their written evidence served in response to this application simply because that evidence has not been tested by way of cross examination. Ultimately, and as confirmed in Deutsche Bank, “the procedure to be adopted for deciding whether a third party should bear all or part of the costs of the litigation should be summary in nature, in the sense that the judge would make an order based on the evidence given and the facts found at trial, together with his assessment of the behaviour of those involved in the proceedings.”

1. 1. In my assessment, having brought the claim in October 2020, the Third Parties had effectively abandoned the proceedings by 13 December 2022 (being 4 weeks prior to C’s solicitor’s application to come off the court record) and as evidenced by the fact that the Third Parties failed thereafter without good reason to (i) give instructions to the expert to prepare the joint statement in breach of the case management order, (ii) attend the PTR hearing and (iii) attend the trial. I am reinforced in that view by the fact that the transcript of the first meeting of C’s creditors on 13 April 2022 records the following exchanges:

Gareth Wilcox – “….what drove your decision to abandon the litigation, when you did?”

TP1 – “Basically, no income, we couldn’t afford it….”

Gareth Wilcox – “Okay, so in terms of the litigation, you abandoned the litigation because effectively the company trading as a dessert shop couldn’t fund the litigation anymore. Fine, had you taken any professional advice at that point and did it differ from any advice as regards the prospects of success that you had previously or was it just literally driven by a lack of funding?”

……

TP1 – “Obviously [STS] were always saying it was going to be a success and making us believe and at the end we couldn’t afford to pay his fees and then just told him that we wanted to finish it off and we didn’t want to take it any further.”

1. 1. In his written evidence served in response to this application, TP1 sought to distance himself from this part of the transcript by claiming that he could not recall making these comments, and to the extent that he did, they were not accurate. However, it is striking in my judgment that:

a. TP1 was the appointed convenor/chairperson for the meeting and therefore would likely have had to approve the transcript;

b. Earlier in his written evidence TP1 stated that –

“It is fair to say that, in about December 2021, [C] was in a worrying financial position. The business itself was struggling with little money coming in due to a downturn in profits post-COVID and, moreover, the litigation had cost approximately £130,000 in fees. In December 2021, [C] had a number of invoices outstanding with STS. We had raised queries regarding the time charged…”; and

c. In their application notice to come off the court record, STS confirmed that “fees and disbursements” were unpaid.

The weight of the evidence points clearly to the Third Parties abandoning the main action because C had run out of money to continue the litigation.

1. 1. CPR r.1.1 provides that the overriding objective is to deal with cases justly and at proportionate cost, which includes so far as is practicable (i) saving expense, (ii) ensuring the case is dealt with expeditiously and fairly, (iii) allotting an appropriate share of the court’s resources and ensuring compliance with court orders. CPR r.1.3 provides that the parties are required to help the court to further the overriding objective. The Third Parties by their own admissions controlled the litigation on behalf of C. Having chosen to initiate the proceedings, the Third Parties then chose, without formally discontinuing, to disengage at a critical stage of the proceedings as the trial date fast approached. Such conduct was wholly contrary to the overriding objective and no doubt directly caused D needlessly to spend significant time and money in preparing for and attending both the PTR and the trial of a case that the Third Parties initiated but no longer had any intention of contesting. Indeed, the court allocated 4 days in total to the trial, most of which time was not needed and ultimately lost as a result of the Third Parties’ decision not to participate.

1. 1. TP2 seeks to argue that he cannot and should not be made the subject of a non-party costs order, since he was not a director of C and conducted the litigation on behalf of C solely in his capacity as an employee. However, I accept the submission made on behalf of D that non-party costs orders are not limited to directors of insolvent companies. Indeed, in Goknur, Coulson LJ’s guidance was given expressly in the context of a controlling/funding director or shareholder of an insolvent company.

1. 1. In the judgment I gave at trial I found (at [9]) that the Third Parties “are brothers and co-owners of [C], with [TP1] being the sole director of [C].” I made that finding based upon the written evidence of the Third Parties served for the trial, which made repeated and extensive references to C being the corporate vehicle through which they operated their joint venture. I do not propose to quote each and every reference, but by way of examples:

a. In his first witness statement dated 10 September 2021, TP1 stated that “[7]….In about January 2017, Naveed and I really started to get thinking about whether we could run our own branch of a Little Dessert Shop as part of the family business………… [23] I didn’t want personal risk exposure for our Little Dessert Shop project, and nor did my brother. I mean, who on earth uses personal names for business purposes? That’s exactly the response we had received from our accountants and financial advisors at the time. So on 12^th December 2017, we incorporated [C] as our corporate vehicle for the project.”

b. In his first witness statement dated 10 September 2021, TP2 stated that “[4]…….[C] was the corporate vehicle through which my brother and I pursued a franchise to operate a shop at [the Premises]……… [23] Towards the end of 2017, my brother and I started thinking about how we would structure our new franchise business…… I thought it made sense to use a new company, for obvious reasons. I did not want personal (financial) exposure in the new business, and so a corporate vehicle was essential….. I thought it would be administratively easier to use a new corporate entity. My brother agreed.”

That finding has not been appealed.

1. 1. In my judgment, it is fair and just to make the Third Parties subject to non-party costs orders in relation to the costs incurred by D in the main action for the period from 13 December 2021 up to and including the trial and having regard to all the circumstances of the case including in particular:

a. The Third Parties controlled C;

b. In exercising that control, the Third Parties chose to initiate and pursue the main action against D;

c. As a result of their close connection to the main action, the Third Parties were given the opportunity, which they took, to frame the issues by way of statements of case, to disclose relevant documents, and to serve both lay and expert evidence;

d. The Third Parties, however, then chose in the run up to the trial to abandon the litigation without giving any proper notice of that decision to the Court or to D thereby causing both the Court and D needlessly to spend considerable time and resources on completing a litigation process initiated by the Third Parties including having to deal with the PTR and the trial;

e. At trial, and based upon the Third Parties’ own written evidence, I found that the Third Parties co-owned C. As a result of their close connection to the main action, the Third Parties are bound by that finding for the purposes of this application; and

f. Whilst particular caution should be exercised before making a director/owner of a company liable for costs in relation to the activities of the company, the Third Parties were guilty of serious litigation misconduct in the exercise of their control of the litigation, which was exceptional and well outside the ordinary run of cases, such that they should not be able to avoid personal liability for their actions/omissions by seeking to hide behind the corporate identity of C.

Overall conclusion

1. 1. The Third Parties shall jointly and severally pay D’s costs of the main action for the period from 13 December 2021 up to and including the trial.