Relational LLC v Hodges

Mr Hodges is (or, at any rate, used to be) a wealthy individual; he decided to set up business in Florida and moved there with his family in 2004 and incorporated a company known as Laminate. He leased equipment from the claimant Relational, a company incorporated in Delaware with its main place of business in Illinois. It is a financially substantial company.

Laminate’s obligations to Relational were guaranteed by Mr Hodges and, when Laminate’s business failed, Relational sought to rely on that guarantee. It sued Mr Hodges in Illinois since the guarantee had an Illinois jurisdiction and (a separate) Illinois choice of law clause. There was also an agreed method of service clause permitting service of process by courier at 289 Arrida Parkway Miami, Mr Hodges’ primary residential address.

Mr Hodges apparently fled Miami and returned to England in December 2006 without informing either Relational or Laminate’s trustee in bankruptcy who had been appointed pursuant to Chapter 11 bankruptcy proceedings in about January 2007.

When Relational tried to serve the Illinois proceedings at the agreed address, its representatives found an empty house. But in due course on 10^th May 2007 a process server found Mr Hodges in Birmingham and purportedly served him there. That service is disputed by Mr Hodges.

Mr Hodges did not acknowledge service in Illinois or otherwise appear there so a default judgment was entered on 17^th August 2007. On 30^th October 2008, however, Mr Hodges applied to the Illinois court to vacate the default judgment on the ground that he had not been served in Birmingham because he had been in a nearby public house at the time when the process server said he had served the proceedings. There was then a contested hearing on 2^nd February 2009 at which Mr Hodges appeared and gave evidence to Judge Coar. On 27^th November 2009 Judge Coar found that Mr Hodges had been personally served despite his evidence to the contrary. Mr Hodges appealed that decision but on 8^th December 2010 the US Court of Appeal for the 7^th Circuit dismissed his appeal saying

“Hodges simply failed to persuade the court that he was telling the truth”

Relational now seeks to enforce the Illinois judgment in England. It originally made a statutory demand in April 2008 based on the guarantee and the default judgment but Mr Hodges applied to set that aside and was partially successful, Relational did not pursue the matter. It began the current proceedings for recognition and enforcement of the US judgment in the Commercial Court in September 2010. Mr Hodges defends these proceedings on 4 grounds

Once the defence had been served there was a case management conference at which Mr Hodges applied for security for costs of the action in the sum of £100,000 down to exchange of experts’ reports. Relational has offered £25,000 but no more. The application was made pursuant to CPR 25.13 which provides as follows with regard to the conditions that must be satisfied before security for costs can be ordered:-

“(2)

The conditions are –

(a)

the claimant is –

(i)

resident out of the jurisdiction; but

(ii)

not resident in a Brussels Contracting State, a State bound by the Lugano Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982.”

It is agreed that Relational is resident out of the jurisdiction and is not resident in a Brussels Contracting State, a State bound by the Lugano Convention or a Regulation State as defined in s 1(3) of the Civil Jurisdiction and Judgments Act 1982.

Since Nasser v United Bank of Kuwait [2002] 1 WLR 1868, the English courts have usually declined to make an order for security over and above an estimate of the extra costs which will be incurred by reason of having to enforce any judgment for costs abroad against a foreign claimant. It is said by Relational that those costs cannot be more than the £25,000 which Relational has offered.

Relational accepts, however, that if Mr Hodges wins the action in England and seeks to enforce any costs order in the United States, it will ask the court to set off against such costs the amount of the judgment they have obtained in the United States and that the court will be likely to grant an order for such set off. It is more than likely that the amount of Relational’s judgment will overtop the amount of costs and that Mr Hodges will, therefore, come away empty handed from the US Court in which he seeks enforcement of any costs order.

Mr Hodges says that he will thus be prevented from recovering his costs (although he has been successful) and there will therefore be a substantial obstacle to the enforcement of his English judgment for costs such that it would be just to make an order for security of the full amount of his costs in respect of the English proceedings. He uses the phrase “substantial obstacle” because, since Nasser’s case that has been the justification for exercising the discretion to order security for costs in a way that does not discriminate between EU residents and non-EU residents, which Article 14 of the European Convention of Human Rights forbids the English court to do. This is usefully set out in paragraphs 61-63 of Mance LJ’s judgment in that case:-

“61.

Returning to rules 25.15(1) and 25.13(1) and (2)(a) and (b), if the discretion to order security is to be exercised, it should therefore be on objectively justified grounds relating to obstacles to or the burden of enforcement in the context of the particular foreign claimant or country concerned. The former principle was that, once the power to order security arose because of foreign residence, impecuniosity became one along with other material factors: see the Thune case [1990] 1 WLR 562 cited above. This principle cannot in my judgment survive, in an era which no longer permits discrimination in access to justice on grounds of national origin. Impecuniosity of an individual claimant resident within the jurisdiction or in a Brussels or Lugano state is not a basis for seeking security. Insolvent or impecunious companies present a different situation, since the power under CPR Part 25.13(2)(c) applies to companies wherever incorporated and resident, and is not discriminatory.

62.

The justification for the discretion under rule 25.13(2)(a) and (b) and 25.15(1) in relation to individuals and companies ordinarily resident abroad is that in some - it may well be many - cases there are likely to be substantial obstacles to or a substantial extra burden (e.g. of costs or delay) in enforcing an English judgment, significantly greater than there would be as regards a party resident in England or in a Brussels or Lugano state. In so far as impecuniosity may have a continuing relevance, it is not on the ground that the claimant lacks apparent means to satisfy any judgment, but on the ground (where this applies) that the effect of the impecuniosity would be either (i) to preclude or hinder or add to the burden of enforcement abroad against such assets as do exist abroad, or (ii) as a practical matter, to make it more likely that the claimant would take advantage of any available opportunity to avoid or hinder such enforcement abroad.

63.

It also follows, I consider, that there can be no inflexible assumption that there will in every case be substantial obstacles to enforcement against a foreign resident claimant in his or her (or in the case of a company its) country of foreign residence or wherever his, her or its assets may be. If the discretion under rule 25.13(2)(a) or (b) or 25.15(1) is to be exercised, there must be a proper basis for considering that such obstacles may exist, or that enforcement may be encumbered by some extra burden (such as costs or the burden of an irrecoverable contingency fee or simply delay).”

Gloster J rejected Mr Hodges argument (1) because she said that he would get substantial value as a result of the set-off because the amount of the US judgment would be reduced to the extent of his recoverable costs; the set-off was not, therefore, an obstacle to his enforcing as judgment for costs; and (2) because an EU claimant would be in the same position as Relational; to make an order against Relational when an order could not be made against an EU litigant would be discriminatory and thus contrary to Article 14 of the European Convention, which prevents discrimination on the grounds of, inter alia, nationality. Mr Hodges now appeals.

On his behalf Mr Millett QC submitted:-

In Owens Bank Ltd v Bracco [1994] QB 509, the claimant Bank was attempting to enforce a judgment obtained in St. Vincent in respect of a loan made to an Italian company whose president (Mr Bracco) had signed the loan agreement. The Bank first began proceedings in Italy to enforce the judgment but the defendants claimed that the St. Vincent judgment had been obtained by fraud. The Bank then sought registration of the St. Vincent judgment in England pursuant to section 9 of the Administration of Justice Act 1920. The defendants then applied for orders that the English court should decline jurisdiction pursuant to Articles 21-23 of the Brussels Convention on the ground that the Italian court was the court first seised. The Court of Appeal rejected that application but the House of Lords referred two questions to the European Court of Justice:

The court thus decided that the issue whether a judgment was obtained by fraud could not be severed from the question whether such judgment was to be recognised or enforced. Mr Millett submitted that, likewise, a decision that, if a defendant successfully defends an action to enforce a foreign judgment, he is to be entitled to his costs cannot be severed from the question whether the judgment is to be recognised or enforced.

There is obviously considerable force in that argument but I do not find it necessary to reach a concluded view upon it because, even if the argument is right, it does not seem to me to follow that the principles of Nasser v United Bank of Kuwait are inapplicable. That case did not depend on the fact (if it was a fact) that the action fell within the Brussels Convention (or, now, the Lugano Convention or the Regulation); what it depended on was the anti-discrimination provisions of the European Convention of Human Rights. Access to the court is not to be restricted on grounds of the residence of a particular claimant because that would be likely to be discriminating conduct prohibited by the European Convention. However much the relevant proceedings may themselves be outside the scope of the Brussels Convention, that is an irrelevant fact.

The judge did not consider this argument since it is a new argument in this court. She did not, therefore, say how she would have approached the question of security for costs if she had accepted it. Since we have rejected it, we too do not have to consider whether, if right, it would have been appropriate to order security in any greater sum than has been offered by Relational, although I shall say something about it in the postscript to this judgment.

In the context of this case, I would not regard the availability of set off in any Illinois court, which is invited to enforce any future order of the English court in relation to costs, as an obstacle to enforcement. As the judge pointed out in para 6 of her judgment, an EU litigant with an Illinois judgment in his favour would not have to put up security. If a US litigant with such a judgment has to put up security, that would be the very discrimination which Article 14 of the European Convention requires the court to avoid.

Mr Millett made two points in response; first that the English court should be astute to ensure that its orders for costs should be enforced otherwise the sanctity of its judgment would be undermined. But this savours too much of a “my country right or wrong” approach. There is no reason why an English judgment should be regarded as more sacrosanct than an Illinois judgment. Rules of conflicts of laws with regard to the enforcement or recognition of judgments may vary from country to country but that is no reason to set aside the basic non-discriminatory approach of Nasser.

Secondly Mr Millett said that, as regards enforcement of judgments or costs orders, the relevant and practical question is “where are the assets against which a court order can be enforced?” That is different from the question “where does the claimant reside?” which is the focus of CPR 25.13(2)(a). But that is not, to my mind, a relevant difference if reliance on the difference is meant to suggest that the location of assets entitles a court to go behind the requirement that one should not discriminate between litigants on the ground of nationality. Most people reside in the country of which they are nationals, but assets can be held anywhere. If, of course, assets are held in a country where it is notoriously difficult to enforce a judgment, that may be a ground for ordering security. But in this case the assets of the claimant are likely to be mainly in the United States which (as it happens) is Relational’s country of residence and where English judgments can be enforced. That may be somewhat expensive but no one suggests that the offered £25,000 is not sufficient to cover that expense.

Mr Millett submitted that, if the likely set-off did not constitute an obstacle to enforcement of the costs order, it constituted an obstacle to the execution of the costs order and that matters of execution were for each individual state and played no part in the Lugano Convention or the European Regulation.

I cannot see that either part of this argument is correct. It may be a question whether set off is part of a state’s substantive law or its procedural law. But it must be one or other and is not a matter that goes solely to execution. Even if it did go only to execution and it is correct that (as Hamblen J has apparently held in Dumrul v Standard Chartered Bank [2010] EWHC 2625 (Comm)) execution forms no part of the Lugano Convention or the European Regulation, I cannot see how that can help Mr Hodges any more than the consideration that enforcement of foreign (non-EU) judgments is outside the Convention/Regulation. As already observed, that has nothing to do with the non-discriminatory requirements of the Convention on Human Rights.

The judge finally said that Relational, if bound to put up security merely because it was suing on a US judgment rather than on the underlying cause of action, would be in a worse position by relying on the contractual agreement than the judgment. I agree with that but that is not an essential part of the reasoning for her decision and I need say no more about it.

I would, therefore, dismiss this appeal.

If Mr Millett had succeeded on his arguments either before the judge or before us, there would then have been an unfettered discretion to be exercised by the court. I have to say that, although we were not addressed about this, I would, if it had come down to the exercise of a general discretion be doubtful whether it would normally be appropriate to order security for costs when a claimant is suing upon a judgment obtained in a country which in general terms has a similar process for enforcement of judgments as we in this country do. That would certainly be the case if the foreign judgment was a judgment on the merits since the defendant would have to displace the judgment and would, therefore, effectively be a claimant who has the burden of proof. Even in a case such as this, where there has been no determination on the merits but there has been an agreement to submit to the foreign court, it is for the defendant to displace the judgment and he is thus effectively a claimant. In these circumstances, security for costs would not, in my judgment, normally be appropriate.

There is a decision of this court in the somewhat analogous field of arbitration and enforcement of awards that, to the extent that there is jurisdiction to order security for costs of an action to enforce the award, it is inappropriate to do so see Gater Assets v Nak Naftogaz [2008] Bus L.R. 388. It is true that the statutory scheme in relation to the enforcement of awards is tighter and more onerous on defendants to arbitration enforcement claims but the general tenor of the judgments of Rix and Moses LJJ should make any judge cautious about ordering security for costs in favour of a defendant to a claim to enforce a foreign judgment.

I agree.

I also agree.