Spy Academy Ltd. v Sakar International Inc

This is an appeal by the claimant in these proceedings, Spy Academy Ltd, with the permission of Rix LJ from an order for security for costs made on 15 September 2008 by HHJ Simon Brown QC in the Birmingham Mercantile Court.

Security of £20,000 was ordered, to be paid within 14 days, failing which there was to be judgment for the defendant, with costs, without further order. On the claimant’s failure to provide the security, on 7 October 2008 the judge summarily assessed the total costs payable to the defendant in the sum of £15,048.

The proceedings arise out of a licensing agreement made in June 2006 under which the claimant licensed to the defendant, a large United States electronics and optical product manufacturer, the right to use its Spy Academy brand to re-brand a range of the defendant’s products, then marketed under the brand name Matrix Zone. The parties hoped that re-branding with the Spy Academy stories, images and other enticements for the youth market into which these products were sold would increase sales and bring substantial spin-off benefits to the claimant from the exposure of its Spy Academy brand to a mass market. The licence was to run for ten-and-a-half years in the United States and three years in Canada, Mexico and Latin America. It is unnecessary to analyse the agreement in detail but clause 3.6 required the defendant to:

“use its reasonable endeavours artistically, creatively and entrepreneurially to maximise the value of the products it creates or sales under this Agreement.”

Clause 12.2.5 provided that

“the Licensee…will test one of its current “Matrix Zone” products using the new The Spy Academy brand, name, images and logo and (subject to sales not falling below current “Matrix Zone” levels for the same product) will re-brand its entire on-going and future “Matrix Zone” range as The Spy Academy within 9 months from the start of the test. The test will commence within four months of the start of this agreement. If the re-branding of the entire “Matrix Zone” range does not occur within nine months from the start of this agreement, the contract will be deemed cancelled and all rights will revert back to the original rights’ holder in such situation, the Licensor will notify the Licensee in writing giving 30 days notice.”

It is the claimant’s case that the defendant failed to honour its obligations under the agreement and, without any warning, announced that it had discontinued the re-branded range of products. This led the parties to agree, in September 2007, that the licence would be terminated but expressly on terms that this did not affect the parties’ accrued rights and liabilities at the date of the termination. The claimant contends that the defendant’s prior breaches of the agreement have caused it considerable loss, although its claim is limited to just under £50,000. The defendant contends that sales of the test product referred to in clause 12.2.5 did not reach previous levels and so its obligation to re-brand its entire Matrix Zone range never arose. This contention is hotly contested by the claimant, who has produced e-mails which suggest -- and I say no more than that -- that he might be right. The defendant further contends that, as the re-branding of the entire range did not in fact occur within nine months, the contract was deemed cancelled irrespective of whether sales of the test product were successful or not. But, as Rix LJ observed when granting permission, it is reasonably arguable from the terms of the contract that the termination of the contract through cancellation is there for the protection of the licensor and the original rights holder and not for the protection of the licensee, the defendant, which has, ex hypothesi, failed to carry out its obligations to re-brand within nine months.

So that, in a nutshell, is the dispute between the parties. It is not one about which one can say at this stage that one or other of the parties is bound to win. But I agree with Rix LJ that the claim is a perfectly bona fide claim with a perfectly reasonable prospect of success. Mr Quirk, who appears for the defendant today, did not take issue with this assessment.

This leads me to the procedural history which preceded the hearing before the judge. The present claimant is an English company, the creature of Mr Haydn Price, its managing director and shareholder. It was formed as a special purpose vehicle to license The Spy Academy intellectual property rights to the defendant. It had and has no assets apart from its claim against the defendant, and Mr Price has accepted that it is impecunious. Mr Price owns at least two other companies, Spy Academy Holdings Limited (“Holdings”) and Pablo Star Limited. Holdings, he says, has no assets and is about to be struck off the Register. Pablo Star is also in a parlous state, although it is involved in protracted litigation, which Mr Price says has good prospects of success. Mr Price is acting in person for the claimant in Pablo Star and this litigation. He started this claim in the name of Holdings on 15 October 2007. The defendant applied to strike the claim out because the wrong claimant had been named, and the Particulars of Claim disclosed no cause of action. At a hearing on 11 March 2008, HHJ Brown substituted the present claimant for Holdings under the slip rule and ordered the claimant to file Amended Particulars of Claim to clarify the case he was making, which he did.

The defendant applied again to strike the claim out on the basis that it was vexatious and an abuse of process. That application was not proceeded with when the defendant restored the claimant company to the Register of Companies, from which it had been struck off. But on 24 June 2008 the defendant applied for the first time for security for costs. What happened next is unfortunate. At a hearing which neither party attended, HHJ Alton QC ordered that the application for security should be heard on 15 September 2008, that, if the claimant wished to rely on evidence in opposition to the application, it should be filed and served by 4pm on 29 August 2008 and that neither party should be entitled to rely on evidence which had not been filed and served in accordance with her order. Before this order was served, Mr Price told the court that the claimant’s address for service was “Haydn Price” at a Birmingham address. That address was an accommodation address. The court sent HHJ Alton’s order to this address, but the letter was addressed to the claimant company, a name which the address provider did not recognise, with the result that the letter was not sent on to or seen by Mr Price. Some time after 29 August he was alerted to what had happened and promptly prepared, filed and served on the court and the defendant a long statement dated 7 September.

When the matter came before the judge on 15 September, the defendant, represented by a local solicitor, objected to the admission of this statement, which it is apparent the judge had not seen or read. Mr Price attempted to explain what had happened but the judge does not appear to have understood. In refusing to admit the statement, he simply said that Judge Alton’s order had been served on the right address. So it had, but it had not been addressed to the right person, which is why Mr Price did not receive it. At all events the hearing proceeded before the judge for a relatively short time, in which Mr Price attempted to deal orally with the merits of the claim and why he said that an order for security should not be made. The judge then gave a short judgment in which he said that the claim did not look of much merit and that the defendant might well have a valid defence to it. He concluded simply by saying:

“I am satisfied that the justice of this particular instance is that a company which is facing another limited company without any demonstrable assets is entitled to security for the costs of defending these fairly convoluted proceedings. It would be very unjust on the defendant if it fought the case over three or four days and then found that it could not recover any of the costs of having to do so.”

It is apparent from that passage and from the whole of this very short extempore judgment that the judge did not refer specifically to any of the reasons which Mr Price advanced, albeit briefly, as to why the order should not have been made.

Mr Quirk submits that the judge’s judgment cannot be criticised for his assessment of the merits, so much of the evidence in Mr Price’s statement which went to the merits made no difference and had no effect on the result of the hearing.

I am not able to accept this submission because accepting, as I do, Rix LJ’s assessment of the merits, it does seem to me that to say of the claim that it does not look of much merit and that there may well be a valid defence to it does not suggest that the judge was looking at the merits neutrally in the way which Mr Quirk has today conceded he should have done. Mr Quirk also argues that, albeit shortly, Mr Price had been able to make the points which were contained in his statement orally. All in all, he says that the judge’s decision not to admit the statement cannot be characterised as a serious procedural error and did not make it unjust. The decision not to admit the statement was within the wide ambit of the judge’s discretion.

I am afraid I cannot accept those submissions. With the benefit of hindsight I accept, I think the judge should have admitted Mr Price’s statement. Through no fault of his own Mr Price had not received Judge Alton’s order and, if the judge had understood this fully, which I doubt he did, I think he would have admitted the statement. Furthermore, Mr Price was a litigant in person and his statement developed much more cogently his reasons for opposing the application for security than he was able to advance orally. The impact which those oral submissions made on the judge can, I think, be measured by the fact that he does not refer to them in the short judgment which he gave. I am sure that if he had seen and read the statement prepared by Mr Price he would have referred to his objections to the making of the order which Mr Price had developed at some length.

For those reasons, I think the judge’s decision was flawed; that his refusal to admit the statement did amount to a serious procedural error and rendered his decision unjust. The consequence is that it now becomes necessary for us to decide, on the information we have, whether or not an order for security for costs should be made in this case. In other words, it is for us to exercise the discretion afresh. Obviously the precondition for making such an order (reason to believe that the claimant would be unable to pay the defendant’s costs if ordered to do so) is satisfied. The issue is whether, “having regard to all the circumstances in the case”, it is just to make the order.

So far as is relevant to this case, the authorities establish that the factors to be taken into account when exercising this discretion include whether the claim is bona fide and not a sham, whether the claimant has a reasonably good prospect of success, whether the application for security was being used oppressively so as to stifle a genuine claim, whether the claimant’s want of means has been brought about by any conduct by the defendant and whether the application for security is made at a late stage in the proceedings. It must also, obviously, take into account the prejudice to a defendant who, if successful, will be faced with the prospect of recovering nothing unless security for costs has previously been ordered.

I have already dealt with the merits of the claim in this case. It seems to me, in the circumstances, that the claimant can say here that its want of means has been brought about by the conduct of the defendant, since it is a company formed for the sole purpose of this transaction, which failed to generate revenue because of the defendant’s breaches of contract. The claimant can also rely on the fact that the application for security was not made at the outset. There may have been good reasons for not doing so earlier, but the fact is that the proceedings had been on foot for nine months before the application was made.

But the argument before us has mainly focused on the issue as to whether the application is being used oppressively to stifle a genuine claim. Here the defendant relies upon what Gibson LJ said in the case of Keary Developments v Tarmac Construction [1995] 1 AER 534 at page 540 in which the court said:

“Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that a claim would be stifled…

…the court should consider not only whether the plaintiff company can provide security either from its own resources to continue the litigation, but also whether it can raise the money needed from its directors, shareholders or other backers or interested investors. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation…”

Mr Quirk submits that the claimant has not discharged and cannot discharge the onus of establishing that it is unable to raise funds from other sources and that therefore it cannot rely upon this factor. The claimant’s statement of 7 September 2008 dealt with this quite shortly. But in his skeleton argument for the purposes of today’s hearing which, as we are considering the matter afresh, we can take into account, he deals with the matter more fully, he accepts that as the claimant’s managing director his own circumstances are relevant. Explaining that he owns the companies to which I have referred, he says:

“I further can confirm to the court on behalf of [the claimant] that there is no prospect of funds being available and forthcoming from any outside source to fund such security and that as the sole shareholder for all the relevant companies I am personally in no position to provide the level of security [the defendant] seeks having only recently finished an IVA and having no realisable assets at present. I do not own a house and or other tangible assets. The money [the claimant] used to pay the £1550 costs order to [the respondent] was borrowed from a friend for 6 months and that friend now needs her money back to pay unforeseen bills.”

There is an e-mail that confirms this.

“My previous investors do not want to know, my bankers have demanded their money back and Pablo Star is also fighting off a winding up petition. I was also evicted from my home of many years. I would like to point out that these wider financial problems have solely been caused by the large amount of money Pablo Star is owed…”

He also relies on the fact that, in the Pablo Star litigation to which I have referred, this court as recently as 28 May (two months ago) Rix LJ said:

“I turn to the question of stay on the payment of costs and the question of security for costs. It is common ground that Pablo Star is not worth powder or shot. It is not entirely common ground that other companies with which Mr Haydn Price is involved may be in exactly the same position but the fact of the matter is that no-one can find any money anywhere. Whether Mr Price himself can raise any money is perhaps not well attested in the evidence, although, late in the day, Mr Price has addressed that matter with the help of some documentary support, but he has only put it forward today in court. It does seem, however, that Mr Price and his companies have fallen on ill days in the last few years. His companies are worthless; they are close to being wound up or struck from the register; he has lost his home; he has no money in his account; he has tried to borrow from friends as he has shown in some material that he has put before the court and has failed.

Mr Price has produced some documents with the skeleton argument and Mr Quirk has analysed those documents with skill, making the point that many of them do not show what the state of affairs is at the present time and go back as long ago as 2007. But, as Mr Price points out, it is always difficult for a party in his position to prove a negative. Having listened carefully to Mr Quirk’s arguments on this aspect of the case, I am not persuaded that there is any realistic chance of the claimant being able to raise money to provide security personally. I appreciate that the cases show that the onus is on him to show that he cannot, but, looking at the totality of the material which is now before us, I think he has satisfied that onus. It follows that any worthwhile order in favour of the defendant would have the effect of stifling the claimant’s claim. This factor is not determinative of the matter but obviously points strongly against making an order for security.

All in all, balancing the factors to which I have referred and exercising the discretion afresh, I do not think it would be just to make an order for security in this case. It follows that I would allow the claimant’s appeal against the judge’s order for security and set aside the judgment given in default of compliance with that order and the consequential orders for costs which the judge made.

I have so far not referred to the fact that, at the time when the judge made his order, the claimant had an outstanding Part 18 application for further information. That application, it appears (although not clearly) was dismissed by the judge without considering its merits in the wake of his dealing with security for costs. At all events Rix LJ gave permission to appeal the dismissal of that application. As a consequence of allowing the appeal against the order for security, I would also allow the appeal against the dismissal of the Part 18 application and remit that application to be heard on its merits in the Birmingham Mercantile Court.

I agree. Like Sir Simon Tuckey I think the judge made a procedural mistake which had substantive consequences for the claimant, making it necessary for this court to reappraise for itself the application for security for costs. Doing this, I agree that, again, for the reasons my Lord has given, this is not a case in which security should be ordered.

I would add my own appreciation of the balanced and well-focused arguments that have been advanced by Mr Quirk on behalf of the respondent/defendant in seeking to sustain the judge’s order.