IN THE HIGH COURT OF JUSTICE
ON APPEAL FROM
HIS HONOUR JUDGE LANGAN QC
QUEENS BENCH DIVISION, LEEDS DISTRICT REGISTRY
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
LORD JUSTICE SEDLEY
LORD JUSTICE RIMER
and
LADY JUSTICE BLACK
Between :
AUTOWELD SYSTEMS LTD | Appellant |
- and - | |
KITO ENTERPRISES LLC | Respondent |
Mr William Buck (instructed by Close Thornton Solicitors) for the Appellant
Mr Kenneth Craig (instructed by Baskin Ross & Co Solicitors) for the Respondent
Hearing dates : 1st November 2010
Judgment
Lady Justice Black :
This is an appeal from an order made by HHJ Langan QC on 19 March 2010 requiring the appellant, Autoweld Systems Ltd, to provide security for costs in relation to a claim which they have made against the respondent, Kito Enterprises LLC.
. For simplicity, I will adopt the terminology of the first instance proceedings and call Autoweld Systems Ltd “the claimant” and Kito Enterprises LLC “the defendant”.
The claimant is a company registered in this country which provides specialist automatic welding machines and associated services. The defendant is a company registered outside the jurisdiction which provides general construction services to the oil and gas industry.
The defendant had been engaged by the Iranian Offshore Engineering and Construction Company (IOEC) to lay an extensive gas pipeline in the Persian Gulf. In November 2007, the claimant agreed to lease automatic welding machines to the defendant and to provide associated services and personnel for the purposes of the pipeline project. The contract between the claimant and the defendant required the claimant to perform a total of 16,400 welds for the defendant.
On 6 September 2008, after the claimant had done a little under half of the welds, the defendant terminated the contract. The claimant alleges that this termination was in breach of contract. The defendant alleges that the claimant had repudiated the contract and it was merely accepting that repudiation.
The dispute centres on the pace at which the claimant was carrying out the welds.
The claimant’s case is that it was fulfilling its obligations under the contract and was wrongly prevented from continuing to do so by the defendant. It seeks payment from the defendant under two headings:
A sum said to be due under the contract for work already completed
This sum is partly in sterling (£116,806) and partly in US dollars (US$ 324,275). I will refer to it as “the invoiced sum” because invoices have been sent to the defendant in relation to it. Counsel for the claimant, Mr Buck, has calculated that the total sum is approximately £317,375 at the present rate of exchange.
A sum for loss and damage by way of lost profits under the contract
US$ 551,675 are claimed under this head.
The defendant’s case is that it was an express (or alternatively implied) term of the contract that the claimant would be able to produce an average of at least 150 welds per day and that, if it failed to produce that, the defendant would be entitled to take appropriate action in order to complete the work and mitigate the delays. It says that the claimant produced materially fewer than 150 welds per day, thereby repudiating the contract. Alternatively, it claims that the information as to the average number of welds per day was a representation by the claimant on which it relied in entering into the contract. The failure of the claimant to produce welds at the promised rate therefore entitled it to terminate the contract and it owes nothing to the claimant.
The defendant has filed not only a defence denying that it is in breach of contract but also a counterclaim. It claims to set off such sums as may be awarded under the counterclaim against the claim.
The counterclaim falls into a number of categories.
Three sums, totalling US$ 12,679,200, are claimed as losses arising from the claimant’s breach of contract:
US$ 7,062,000 being the cost of the extra days required to complete the welding
US$ 3,250,000 being the defendant’s own liability to IOEC for liquidated damages in relation to the delay in completing the pipeline
US$ 2,097,200 being money paid by the defendant for materials to the alternative contractor which it engaged to complete the welding work.
The defendant made an advance payment to the claimant for the purchase of material for use in the contract and seeks an account of monies/materials which were not used by the claimant in the work carried out, claiming that the monies concerned amount to US$ 1,570,967.
The defendant seeks delivery up of the project qualification records which are required to satisfy IOEC that the welds have been produced to a proper standard or an indemnity for any losses it might suffer as a result of the claimant’s failure to deliver them up.
The defendant’s pleaded response to the claimant’s claim for the invoiced sum is carefully drafted, reading:
“31. …….it is admitted and averred that the Claimant has raised a series of invoices and that the Defendant has made a series of payments to the Claimant, but by reason of the matters set out herein, it is denied that the sum claimed or any sum is now due and owing to the Claimant.”
Mr Buck asserted that the validity of the outstanding invoices was therefore not challenged. When asked during the appeal hearing whether that was accurate, and in particular whether the defendant admitted that the invoiced sums were due, counsel for the defendant, Mr Craig, would not go that far. He said that it was accepted that the invoices had been submitted and that the welds in question had been done but that it was argued that the defendants were not obliged to pay for them because they had not been done quickly enough.
On 2 March 2010, the defendant applied under CPR Rule 25.12 for an order that the claimant provide £282,212 plus VAT by way of security for its costs.
CPR Rule 25.13 sets out the conditions that must be satisfied before security is ordered. In so far as it is relevant in this case, it reads:
“25.13 Conditions to be satisfied
“(1) The court may make an order for security for costs under rule 25.12 if-
(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and
(b) (i) one or more of the conditions in paragraph (2) applies, or
(ii) an enactment permits the court to require security for costs.
(2) The conditions are-
[(a) and (b) omitted]
(c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so;
[(d) to (g) omitted]”
Judge Langan QC found condition (c) satisfied and exercised his discretion to make an order in the defendant’s favour for security for costs in the sum of £180,000. In the event that security was not provided, the claim was to stand dismissed.
The claimant maintains that it is in a position to provide the security ordered but that the judge was wrong to require it. It appeals on three grounds which Mr Buck summarises thus:
Ground 1: There was no reasonable basis to determine that the claimant would be unable to pay the defendant’s costs if ordered to do so.
Ground 2: In considering all the circumstances of the case, it was not just to make an order that security be provided
Ground 3: In determining the quantum of any security there was no reasonable basis for ordering that a sum of £180,000 be provided.
Ground 1: inability to pay the defendant’s costs
Before the judge, the claimant’s case was that it had a healthy balance sheet, a good track record in discharging its obligations, and over £400,000 in a bank account, and there was therefore no reason to believe that it will be unable to pay the defendant’s costs if ordered to do so. On appeal, counsel advanced a totally new additional argument which was that the defendant should be treated as already having ample security for costs because it owes the claimant the invoiced sum, which is comfortably in excess of the £282,000 which it was seeking as security.
The new argument
The notion that the invoiced sum should be viewed as a form of security for costs has a superficial attraction. Whilst not, of course, the same as a sum of money sitting in court ready to cover the defendant’s costs if necessary, if the claimant is right in saying that the invoiced sum is owed to it, it follows that at present that sum is notionally held by the defendant to its credit.
However, in order to evaluate the argument properly, it is necessary to consider rather carefully both the terms of Rule 25(13)(c) and the interrelation between the claim and the counterclaim.
Rule 25(13) is a forward looking provision. It requires the court to be satisfied that there is reason to believe that the claimant will be unable to pay the costs if ordered to do so. The ultimate focus of the rule is therefore upon the end of the proceedings.
The most obvious situation in which an order for costs may be made against the claimant at the end of the proceedings would be where the claimant had failed to establish a breach of contract on the part of the defendant. On the facts of this case, the corollary of that would be that the claimant was itself in breach of contract because the defendant would not be entitled to bring the contract to an end otherwise. It is difficult to see how, in such circumstances, the defendant could fail to recover damages against the claimant of an amount at least equal to (and probably significantly exceeding) the invoiced sum.
How, in these circumstances, would the invoiced sum be treated?
I will assume that, as seems likely, the invoiced sum would be found to be payable notwithstanding the breach of contract by the claimant. Nothing that has been pleaded or said on behalf of the defendant suggests to me that it will ultimately be able to advance a realistic case in support of a different result.
The defendant submits that the counterclaim would operate as an equitable set off and would defeat the claimant’s claim for the invoiced sum. The claimant would not be entitled to judgment for the invoiced sum; instead the defendant would recover judgment for a figure calculated by deducting the invoiced sum from whatever figure would otherwise be payable to it by the claimant.
The modern law of equitable set-off has been said to date from Hanak v Green [1958] 2 QB 9. The authorities, both before and after that case, have recently been reviewed in this court in Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667, at paragraph 43 of which Rix LJ distils the conclusions that he draws from the jurisprudence. For equitable set-off to be permissible, there is a “formal requirement” of close connection between the dealings and transactions which give rise to the claim and the cross-claim and there is also a “functional requirement“ that it would be unjust to enforce the claim without taking into account the cross-claim. Nuances in the formulation of the test should not be allowed to become a distraction but, having reviewed the various versions in the authorities, Rix LJ considered Lord Denning’s test from Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 (“The Nanfri”) to be the best restatement of the test, and the one most frequently referred to and applied. Lord Denning’s test required “cross-claims…so closely connected with [the Plaintiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim“.
The claimant does not advance any reasons why the claim for the invoiced sum and the defendant’s counterclaim should be seen as not sufficiently closely connected to give rise to an equitable set off which would result in the claim for the invoiced sum being defeated by the counterclaim. What Mr Buck does do, in his submissions on the subject, is to seek to turn the tables on the defendant by relying on the concept of equitable set off himself as a support for his argument that the unpaid invoiced sum can serve as security for costs.
He invites attention to CPR Part 40.13 where he says that the principle of equitable set off is now encapsulated and to instances of the operation of a principle of set off in other areas of the law - the rule in Cherry v Boultbee (1839) 41 E.R. 171 in probate, for example, and section 323 of the Insolvency Act 1986 with regard to mutual credit and set-off.
He submits,
“There is a clear theme running through the….examples of set off. The court prefers to start its considerations once the correct balance is determined between the parties. In the current appeal, allowing the money owed on the invoices to be sufficient security by itself, with no further order of security of costs in favour of the respondent, would put the parties on an equitable footing before trial. This is the de facto position within the proceedings and is one of the reasons why the order granting the respondent security for its costs should not have been made.”
This rather diffuse analysis is not, I am afraid, one which I find of any real assistance. I prefer to take as my starting point the wording of CPR Rule 25(13)(c). To apply the rule, one must cast oneself forward to the moment when the claimant may, in reality, have to pay the defendant’s costs. The scene must be as follows: the claim for the invoiced sum has been defeated by the counterclaim and judgment has been given for the defendant for a sum which takes that sum into account. Suppose also that the claimant has not got the funds to meet the defendant’s costs as well as the sum due under the judgment, or perhaps to discharge either debt. Where is the secured fund from which the defendant is to meet his costs? If one were to say to him,“Take them out of the invoiced sum” , he would say “But the substantive judgment in my favour was reduced by that sum so if I do that, I will be forfeiting part of what is due to me in respect of my actual claim or, putting it another way, paying my own costs.” Looked at like this, the invoiced sum is irrelevant to the issue of security for costs.
What would the situation be if security for costs in the traditional form were to be required? At the end of the case, the successful defendant could have recourse to that sum to discharge its costs and would have no need to put the notional invoiced sum towards them. In those circumstances, I suppose that it might be argued that the invoiced sum serves as first payment towards the sum due under the judgment – it is knocked off in calculating the judgment debt because the defendant already has it. Where the claimant is likely to be able to meet the entirety of the judgment debt without difficulty in any event, that would be unremarkable. But it appeared in submissions in this case that the defendant acknowledges that if it were to succeed in proving its case for the whole, or a significant part of, the sums claimed in the counterclaim, it would be extremely unlikely that the claimant would be able to satisfy the judgment against it. In that event, by obtaining security for costs in addition to retaining the benefit of the unpaid invoiced sum, the defendant would in fact have succeeded in getting security for a proportion of its claim, not only for its costs.
I am not persuaded that there is any force in this argument. First, it is an inevitable feature of a set off that it provides a degree of security for the claim of the successful party and it is important to recognize that that happens whether or not there is an order for security for costs. Second, it is too simplistic in the circumstances of this case to look only at the invoiced sum notionally in the hands of the defendant. The defendant’s case is that it made advance payments in the sum of US$ 1,570,967 to the claimant for the purchase of materials to carry out the welds required by the contract. It claims that, a significant proportion of the welds not having been completed, the claimant should account for whatever remains unspent of the sum and/or for the materials purchased with it but unused. Should weight be put on the invoiced sum notionally in the defendant’s hands without taking into account the defendant’s assets notionally in the claimant’s hands? Until the claimant serves its reply and defence to counterclaim, its position in relation to the advance payment is not, of course, known, but equally the defendant does not admit that the invoiced sum is due to the claimant.
In my judgment, the defendant is right and it would not be appropriate, in all the circumstances, to view the invoiced sum as offering the defendant any security for costs.
The other arguments on Ground 1
Judge Langan’s examination of the claimant’s balance sheet led him to the conclusion that there was reason to believe that the claimant would not be able to pay the defendant‘s costs if ordered to do so. The abbreviated balance sheet for 31 March 2009 showed a figure for net assets of £23,827 but management accounts were also available and showed that that figure took into account the invoiced sums which are in issue in the proceedings which the judge considered put a very serious question mark over the net asset figure. He took into account the “over £400,000” (said in fact to be £440,000) presently in the claimant’s bank account but rightly directed himself that his concern was the position at the conclusion of the proceedings and that it by no means followed from the availability of a cash sum now that the same or similar would be available to meet an adverse costs order.
The claimant submits that Judge Langan’s conclusion was unfounded given the sum of cash in the bank, the company‘s successful trading record over a number of years as evidenced by the accounts, its healthy orders and increased turnover, and the fact that it had not had any significant judgments against it in the past. It argues that the judge was wrong, in particular, in his treatment of the invoiced sum. It was a legitimate debt to the company and it was proper accounting practice to include it in the accounts as such. Furthermore, Mr Buck complains that no evidence had been tendered by the defendant to support the argument that there was a risk of assets being dissipated by the company and that that was a suggestion based on pure and unsubstantiated speculation.
It has not been established, in my view, that the judge erred in the way in which he arrived at his conclusion. He was obliged to look forward to what the situation would be if an order for costs was made against the claimant. For the reasons I have already given, the principal scenario in which such an order would be made would be where the court had found that it was the claimant which was in breach of contract and in these circumstances, it is likely that the defendant would have established a counterclaim easily sufficient to eradicate the invoiced sum. The judge was therefore right to look behind the accounts, no matter how correctly they had been prepared, at the reality which was that the claimant company would not have the benefit of the £300,000 odd that related to the invoices. Its assets would also have been depleted by its own costs of the litigation. The defendant anticipated his total costs to be likely to be about £282,000 so this gives some idea of the burden that that would constitute. There was accordingly plenty of material to justify the judge’s conclusion without the defendant offering more by way of evidence.
Ground 2: not just to make an order
Judge Langan arrived at his decision by taking into account a series of what he described as “effectively negative factors” which were as follows:
the defendant should not be regarded as the true claimant
it was not apparent that any weakness that there may be in the claimant’s financial position had been caused by the defendant’s alleged breach of contract
it was not a case in which there was any suggestion that an order for costs would have the effect of stifling the claim and, for the immediate future at least, there was money in the bank to meet an order for security and to fund the claimant’s litigation costs.
In addition, the judge remarked that if the claimant was itself apprehensive about the defendant’s ability to meet an adverse order for costs, it could seek an order for security in relation to the counterclaim. No doubt the fact that, as Mr Buck acknowledged in front of us, at best only limited security would be available on the facts of this case was a material factor in it not having done so.
The judge also accepted the argument on behalf of the defendant that it was in a “lose/lose situation” if no order for security were to be made. If the defendant were to succeed in defending the claim, as the judge put it
“they are at very serious risk, both of not recovering any damages which they may be awarded on the counter claim, and of not recovering their own costs in the litigation”.
In deciding whether, in all the circumstances of the case, it was just to make an order for security for costs, the judge was exercising a discretion, and the claimant acknowledges the difficulties in persuading this court to interfere with such a decision but Mr Buck submits, nevertheless, that the judge went wrong. He was wrong in his view that the defendant is not the true claimant. He also failed to have regard to the effect of an order for security if security were not provided. Mr Buck submits that, given that the same facts and issues arose in relation to both the claim and the counterclaim, the result would be that the claimant would be unable to advance its own claim, including in relation to the invoiced sum, but would still have to defend the defendant’s substantial counterclaim covering exactly the same ground.
The claimant’s objection to the order for security for costs is one of principle, its position having been throughout that it can in fact provide security for costs. However, Mr Buck submits that a court should approach the exercise of its discretion by considering what the position would be in the event that security were ordered but not provided. I can see the force in that submission, at least to the extent that I am satisfied that the court should include a consideration of what that position would be amongst the factors that it takes into account, although I think it unlikely to be determinative on its own.
We were taken to a number of authorities which provide some guidance on how the court’s discretion with regard to security for costs should be exercised.
The earliest of these is Samuel J Cohl v Eastern Mediterranean Maritime Ltd (The “Silver Fir”) [1980] 1 Lloyd’s Law Reports 371. In that case, the claimant ship owners let their vessel Silver Fir by a charter party to the respondents. The claimants claimed damages for what they said was a repudiatory breach of the charter by the charterers. The charterers denied they were in breach of the charter, alleged that the claimants were in breach themselves, and counterclaimed for loss and damage, in particular alleging that their consignees had claimed against them for non-delivery of a cargo which they were unable to load by virtue of the claimants’ breaches. The proceedings were referred for arbitration. Both parties applied for security for costs. Parker J ordered security for costs to be given by the claimants in relation to the claim but refused an order for the defendant to give security for costs for the counterclaim. The defendant appealed, seeking an order that the plaintiffs give security
The Court of Appeal held that there was discretion to award security for costs even in cases which arose from the same subject matter though “if the counterclaim is a defence and nothing more then normally the discretion should not be exercised in favour of ordering security”. The fact that the same issues are likely to arise on both the claim and the counterclaim was said to be an important factor but not so decisive as to exclude the exercise of discretion. A feature that the Court of Appeal obviously found significant was that the parties were, as Lawton LJ put it, both “spoiling for a fight against the other” and it was mere chance that one party had started the arbitration before the other could get in a claim. They considered that both parties should be treated alike so ordered the defendant to provide security for costs as well. It is of note that this was an arbitration between two foreign corporations and the Court of Appeal were fortified in their conclusion by the way in which matters were dealt with in commercial arbitrations elsewhere in Europe.
Petromin S.A. v Secnav Marine Ltd [1995] 1 Lloyd’s Law Reports 603 was a decision of Colman J in relation to another arbitration and followed the same approach as The Silver Fir. A charter came to a premature end with each party saying the other was in breach. The plaintiffs claimed a declaration that they had lawfully terminated the charter and damages for the defendants’ breach; the defendants counterclaimed for damages for the plaintiffs’ breach. The plaintiffs sought security for costs from the defendants. The judge remarked that both parties were making substantive claims based on the same facts and that either could properly have been the claimant. The counterclaim was not merely a defence but a large claim for damages in its own right and the plaintiffs’ defence to it was not demonstrably weak or hopeless. The plaintiffs were accepting that there should be mutual security, even though the defendants had not applied for it. The judge considered that the just and equitable approach was for both of them to put up security. He rejected the defendants’ argument that the amount of security should be measured by the extent to which the plaintiffs’ potential costs had been increased by having to meet the counterclaim as opposed merely to pursuing their own claim.
Mr Buck relies on this case to establish a principle that the parties to the litigation are to be treated equally where there is both claim and counterclaim. Although the result in both Petromin and The Silver Fir was that both parties were to provide security for costs, that does not establish that there is a general principle that that must be so or that where only one side applies for security, the other cannot be ordered to provide it. Dillon LJ in Hutchinson Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 308 at page 313 expressly said, commenting on The Silver Fir, that
“it does not follow that there is any general principle that security for costs should only be awarded if it is awarded to both sides, otherwise it should not be awarded to either. The question is one of the general discretion of the court in looking at all the matters which are before it.”
The Silver Fir and Petromin have features in common which distinguish them from the present case. Both involved arbitrations and, as the court commented in The Silver Fir, the European context was one in which both parties were required to provide some security for costs. In The Silver Fir both parties were applying for security for costs and the respondents had already been granted security by the time the Court of Appeal considered the matter and in Petromin the plaintiffs were accepting that there should be mutual security.
Hutchinson Telephone (UK) Ltd v Ultimate Response Ltd and another Court of Appeal case, B J Crabtree (Insulations) Ltd v G T Communication Systems Ltd 59 BLR 46 (decided 1990), were of more general assistance.
B J Crabtree (Insulations) Ltd v G T Communication Systems Ltd 59 BLR 46 (decided 1990) was an unsuccessful application by a defendant for security for costs. The plaintiffs were claiming £78,000 for work done at the defendants’ premises; the defendants alleged that the work had not been carried out properly and counterclaimed for £105,000 in respect of damage which they said had been caused by the plaintiffs. Once again it was very largely a matter of chance that the plaintiffs were the plaintiffs and the defendants were counterclaiming defendants because, as counsel for the defendants fairly told the court, when the plaintiffs issued their writ, the defendants had themselves been considering making a claim against the plaintiffs but had not yet decided whether they should pursue it or not.
Bingham LJ emphasised (at page 49) the discretionary nature of the exercise and that there is no rule of thumb as to the grant or refusal of an order for security. He considered, in the light of the coincidence of the ground covered by both the claim and the counterclaim, what would happen if security were to be ordered but not given, and said (at page 52) in a passage upon which the claimant in this case relies:
“It is, however, necessary as I think, to consider what the effect of an order for security in this case would be if security were not given. It would have the effect, as the defendants acknowledge, of preventing the plaintiffs pursuing their claim. It would, however, leave the defendants free to pursue their counterclaim. The plaintiffs could then defend themselves against the counterclaim although their own claim was stayed. It seems quite clear and, indeed was not I think in controversy - that in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiffs were to pursue their claim, but on that basis they would defend the claim and advance their own in a somewhat hobbled manner, and would be conducting the litigation (to change the metaphor) with one hand tied behind their back. I have to say that that does not appeal to me on the facts of this case as a just or attractive way to oblige a party to conduct its litigation.
Mr Phillips for the defendants submits there would really be no problem because, if the defendants failed in their counterclaim and the plaintiff‘s case contrary to the counterclaim effectively succeeded, then the stay could be lifted and the plaintiffs could be given judgment. But on that assumption one is bound to ask what would be the point of making the order at all except to give the defendants a tactical advantage in the litigation.
One comes back, I think, at the end of the day to the reflection that this is a rule intended to give a measure of protection to a defendant who is put to the cost of defending himself against a claim made by an impecunious corporate plaintiff. It may in some cases be fair and just to make such an order even though the defendant is himself counterclaiming, but I am persuaded that it would be wrong to do so here because the costs that these defendants are incurring to defend themselves may equally, and perhaps preferably, be regarded as costs necessary to prosecute their counterclaim. Of course, as Mr Phillips points out, they may decide later not to prosecute their counterclaim, but that would be a different situation from that which now presents itself before the court and upon the basis of which we have to rule. The fact that the plaintiffs are plaintiffs and the defendants are counterclaiming defendants instead of the other way round appears on the facts here to be very largely a matter of chance.”
There were other factors that were relevant to the exercise of the discretion, such as the burden that paying a large sum of money into court would place on the plaintiff which was a small trading company, but Bingham LJ identified as the factor that seemed to him most important in the case that “these two claims - the claim by the plaintiffs and the cross-claim by the defendants - raise essentially the same issues and are going to be litigated anyway so far as one can tell”. Parker LJ, who was in agreement with him, said:
“Here the situation is that, if the money is not paid into court [by way of security for costs] and the plaintiff’s claim is therefore stayed, the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim. In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed was a good and sound claim. The result would then be that the stay would be lifted and there would then be judgment for the plaintiff on the claim (notwithstanding the fact that he had not paid the money into court) with appropriate orders for costs. This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff. That seems to me to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.”
In Hutchinson Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 308. The plaintiff was claiming damages for breach of written agreement together with other relief including rectification of the agreement and an injunction. The defendant denied that it was in breach of the agreement, alleging that it was the plaintiff which was in breach, alleging malicious falsehood, and counterclaiming for damages under a number of heads, the total counterclaim exceeding the claim in amount by a substantial margin.
It is important to recognise that the application was not, as in the present case, an application by a defendant for security for costs from a claimant, but an application by the plaintiff against the defendant for security in respect of the costs of defending a counterclaim. As Bingham LJ observed, the general rule is that security may not be ordered against a defendant so it was inevitable that there would be a particular concentration on whether the counterclaim could be viewed as a claim in its own right and whether the defendant’s position was sufficiently analogous to that of a claimant to justify an order requiring it to provide security for costs.
Both parties took us to the guidance given by Bingham LJ. He said, at p 317:
“At that point [having established jurisdiction to make an order for security for costs], one moves on to the largely discretionary area. The trend of authority makes it plain that, even though a counterclaiming defendant may technically be ordered to give security for the costs of a plaintiff against whom he counterclaims, such an order should not ordinarily be made if all the defendant is doing, in substance, is to defend himself. Such an approach is consistent with the general rule that security may not be ordered against a defendant. So the question may arise, as a question of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?
It appears to me that Field J put his finger on the appropriate question when he pithily observed in Mapleson v Masini (1879) 5 QBD 144 at 147:
‘The substantial position of the parties must always be looked at.’
For my part, I think that no simple rule of thumb exists to determine the answer to the question. An order for security against a counterclaiming defendant is not precluded because the counterclaim arises out of the same transaction as the claim. Otherwise, no order could have been made in The Silver Fir. It is again not conclusive that the counterclaim overtops the claim, although I venture to think that the relative quantum of the counterclaim and the claim is not in all circumstances irrelevant. It is clearly a relevant consideration that, if the plaintiffs had not issued proceedings, the defendants would have done, as in The Silver Fir, because in such a case it may be almost a matter of chance whether a party happens to be the plaintiff or the defendant; and if the proper inference is that the defendants would have sued anyway, that fortifies the inference that the counterclaim has an independent vitality of its own and is not a mere matter of defence.”
At page 318, analysing the situation in the case before him, he said:
“It is, in my judgment, significant that the defendants here, in addition to pleading a very full defence, have pleaded an extensive counterclaim in which the damages claimed appear to exceed by a very substantial margin the damages claimed by the plaintiffs, in which additional substantial claims for malicious falsehood are made and in which the ambit of the action is very substantially enlarged. Like the deputy master, I have formed the view that the defendants here have clearly crossed the boundary which divides an aggressive defence from an independent counterclaim. That, of course, still leaves the discretionary question as to what is the fair order to make. To my mind, it is significant that the counterclaim raises far-reaching issues necessarily expensive and time consuming to explore. If the defendants’ counterclaim fails, it is very doubtful if the defendants can pay the plaintiffs’ costs of exploring those new issues, and it seems to me just and equitable that the plaintiffs should be secured against those costs in the event that they are successful in defeating the counterclaim.”
Mr Buck submits that it is material here that the counterclaim arises out of the same transaction as the claim and that the defendant advances a counterclaim which is for much more money than is involved in the claim and also seeks different relief in the form of delivery of certain documents. In his submission, it goes beyond self defence and involves a cross-claim with “an independent vitality of its own” which has “crossed the boundary which divides an aggressive defence from an independent counterclaim” and which dictates that the defendant should be seen as the true claimant.
Mr Buck seeks to paint a picture of Autoweld having begun the proceedings in order to recover, by the only route open to it, “a substantial admitted debt”, namely the invoiced sum, only to be stymied by the defendant seeking to avoid paying by making its comparatively enormous counterclaim. His submission proceeds on the basis that the defendant does not dispute the invoices whereas the claimant disputes the counterclaim which makes the defendant the true claimant. He identifies as the real dispute the defendant’s assertion that the claimant is in breach of contract causing the defendant a loss far in excess of the claimant’s claim. The principal issue in the trial will be, he says, whether the defendant was entitled to terminate the contract early. He argues that the order for security for costs produces an absurd situation in which, if it does not provide security, the claimant will be barred from pursuing its own claim, including the admitted invoices, whilst the defendant is allowed to continue with its claim. Both sides’ claims depend on whether there was a breach of the contract by the claimant yet only the defendant would be entitled to pursue any remedies at the end of the trial and the claimant would not even be able to recover the invoiced sum or to rely on it as a set off against any sums found due to the defendant. The claimant would also be debarred from relying on certain matters that it would otherwise advance as a defence to the counterclaim, for example that it is entitled to withhold the documents claimed by the defendant until the defendant pays the invoiced sum.
In evaluating these submissions, it must first be observed that, as I said towards the beginning of this judgment, the invoiced sum is not admitted. Furthermore, the claimant’s argument does not acknowledge that the claimant was not only claiming the invoiced sum but also a significant sum by way of damages for breach of contract in wrongly requiring the claimant to cease work before it had fulfilled its obligations. Granted, the sum claimed by the claimant falls very far short of that claimed by the defendant but the respective size of the claims, whilst relevant, is certainly not determinative.
Indeed, it is clear from the authorities that, in view of the court’s overriding discretion, no one factor automatically determines the outcome of a particular case. The fact that the claim and counterclaim give rise to the same issues is important but not determinative - Parker J’s first instance decision in The Silver Fir was overturned by the Court of Appeal because he proceeded on the basis that it was, and the Court of Appeal intervened in Hutchinson Telephone for the same reason.
A very material factor in this case was the financial situation of the claimant. The judge accepted, and was entitled to accept on the material before him, that if the defendant successfully defended the claim they would be at very serious risk of not recovering any damages on their counterclaim. The defendant had not begun the litigation nor was there anything in this case (in contrast to the The Silver Fir, Petromin, and B J Crabtree) to lead one to suppose that they were about to do so when the claimants brought their claim. The risk identified in the defendant’s own submission to Judge Langan QC and accepted by the judge was a very good reason why they would not have taken that step. Faced with the reality of a claim, they responded to the proceedings by pleading the entirety of the claims which they considered open to them but that does not, in my judgment, amount on these facts to advancing a counterclaim with an independent vitality of its own. It must be borne in mind that the design of the rules is to protect a defendant (or a claimant placed in a similar position by a counterclaim) who is forced into litigation at the election of someone else against adverse costs consequences of that litigation.
Whilst the claimant is correct, therefore, to draw attention to the extent to which it would be limited in the continuing litigation if debarred from pursuing its claim, and whilst that is clearly a material factor, in this particular case it must be put into the scales against it that there may well be no continuing litigation if the claim were to be dismissed in default of security for costs being provided. In these circumstances, my view, subject to one reservation, is that the judge was entitled to make the order for security for costs that he did and that it was a proper exercise of his discretion.
My reservation concerns the claim for the invoiced sum. The bulk of the claims made by each side are mirror images of each other, all arising from a breach of contract with the only issue being which side is in breach. The claim for the invoiced sum is a claim arising (on the claimant’s case) from the fulfilment of an element of the contract before it was ended prematurely and it is therefore not in the same category. The defendant’s response to it differs from its response to the rest of the claim in that although it is not prepared to admit that it owes the invoiced sums, nothing of substance is pleaded with regard to it and it is difficult to see precisely what defence there is apart from set off. It could be argued that it is unjust in these circumstances to debar the claimant from pursuing this claim. I considered, therefore, whether it would be appropriate to amend the judge’s order so as to exclude the claim for the invoiced sum from the dismissal that will occur in the event that no security is provided. Ultimately, not without hesitation, I have concluded that it would not be right to do this. Deference must be paid to the discretionary nature of the judge’s decision and I do not think it could be said that his order was one which was not open to him. The defendant is no more a volunteer in relation to this part of the claim than any other and he has available to him his set off which applies in relation to this sum just as much as to the other heads of claim advanced by the claimant.
Ground 3: £180,000 too much by way of security
The claimant submits that the judge was wrong to require £180,000 by way of security for costs and should have limited the order by excluding anything in relation to the costs of the claim for the invoiced sum and in relation to the costs of bringing the counterclaim.
The defendant applied for an order in the sum of £282,212 which was based on the total costs including those of the trial. The judge concluded that it would be “wrong at this stage to order security for an amount which takes the parties through a lengthy envisaged trial” and therefore made provision which in his view stopped “some way short of that”. Mr Buck complains that the judge did not apportion the costs between the various claims so as to isolate the costs of the claim for the invoiced sum and the costs of bringing the counterclaim when he determined the correct figure as £180,000 and therefore effectively required the claimant to, as he puts it, “provide security to defend itself within the proceedings” against the counterclaim.
In my view, this ground can be dealt with shortly. Fixing the appropriate figure for security for costs is not an exact science and will, of necessity, be approached robustly. The greatest generator of costs in these proceedings was likely to be the investigation of which of the two parties was in breach of contract. The cost of establishing what ancillary remedies flowed from the court’s finding in this respect would be relatively limited. As for the invoiced sum, whatever the claimant’s view of its merits, it is not admitted and there is a significant potential set off which may operate as a defence in relation to it. Although not arrived at by a precise investigation of the detail of the estimated costs, the judge’s order was plainly within the ambit of his discretion.
Conclusion
For the reasons I have given above, I would dismiss the appeal.
Lord Justice Rimer
I agree.
Lord Justice Sedley
I also agree.