TMO Renewables Limited (in liquidation) v Timothy Stephen Kenneth Yeo & Ors

This is an appeal on costs.

At the conclusion of a lengthy trial, Mrs Justice Joanna Smith found that the defendants had acted in breach of fiduciary duties owed to the claimant company and that they had done so in bad faith. Those who are interested can read the whole sorry story in her careful and comprehensive judgment on the merits ([2021] EWHC 2033 (Ch)). In a nutshell, she found that the defendants had gerrymandered a vote at an extraordinary general meeting of the claimant with a view to defeating resolutions presented by a major shareholder aimed at changing control of the claimant’s board of directors. The gerrymandering consisted principally of the issue of 75 million ordinary shares to a new investor on terms which (1) permitted payment to be deferred for up to two years notwithstanding that the claimant was in financial straits and (2) enabled that new investor to vote against the resolution, thereby ensuring its defeat.

But the judge also found that the defendants’ breaches caused the claimant no loss, principally because it was insolvent and would have gone into administration anyway. So she dismissed the claim against all of the defendants. She ordered that the claimant should pay 30% of the defendants’ costs of the claim, to be assessed on the standard basis.

The claimant sought permission to appeal against the dismissal of its claim, but that application was refused by Lord Justice Lewison. An appeal against the judge’s costs order by the 3^rd and 5^th defendants has been compromised. What is left is an appeal on costs by the 4^th defendant, Mr Michael McBraida. Mr Richard Morgan KC, who appears for Mr McBraida, submits that as the successful party Mr McBraida should have been awarded all of his costs, and that because he did better than an offer to settle which he made at the outset, those costs should be assessed on the indemnity basis.

The height of the hurdle which an appellant faces in challenging a trial judge’s assessment of the appropriate order to make on costs is too well known to require extensive citation. One description of this was given by Lord Justice Davis in F & C Alternative Investments (Holdings) Ltd v Barthelemy (No. 3) [2012] EWCA Civ 843, [2013] 1 WLR 548 at [42]:

For reasons which I will endeavour to explain briefly, the appellant’s submissions in this case do not come close to clearing this hurdle.

The judge reserved her decision on costs and produced a judgment extending to 70 paragraphs. She set out the law in terms which Mr Morgan did not challenge:

Mr Justice Briggs’ reference in Bank of Tokyo to “the imposition of an additional penalty” should not be understood as suggesting that the purpose of an order for costs is punishment. Rather, it is a convenient shorthand, recognising that it may be appropriate to mark the court’s disapproval of the conduct of a dishonest case and acknowledging that putting forward a dishonest case will often lead to an increase in costs for one or both parties. As well as producing a just order in an individual case, such an approach serves the interests of justice generally by deterring dishonest conduct.

The judge then sought to apply these principles.

First, she addressed the question whether it was appropriate to make an issue-based order. She recognised that the defendants, including Mr McBraida, were the successful parties for the purpose of CPR 44.2(2)(a) and worked systematically through the various factors set out in CPR 44.2(4) and (5). She said that she had to have regard to the scope and extent of the defendants’ dishonest conduct, and that although there had been some differences between the approach and evidence of each of the defendants at trial, “I have found that they each deliberately pursued a case on liability that they knew to be false and, as Mr Sutcliffe pointed out, this appeared to be a collective endeavour in the sense that they had ‘learned their lines’ in advance of trial”. She described their conduct as “an egregious form of corporate wrongdoing”. She recognised that the claimant did not succeed in establishing every aspect of its case on liability, but nevertheless the conduct which it did establish was serious and was denied by all defendants up to and throughout the trial “notwithstanding the strong evidence of wrongdoing contained in the contemporaneous documents”. She said that this “was obviously not a reasonable approach for the Defendants to take in their defence of the claim”. Accordingly “it would not be fair or just for the Defendants to recover the costs they spent in advancing their dishonest case on liability”.

The judge then made a broad assessment of the percentage of costs attributable to this liability case, which she assessed as 40% of the overall costs. She said that, without anything more, this would lead to the conclusion that the defendants should be deprived of 40% of their costs of the action.

But she identified three further questions which arose in the light of the parties’ submissions.

The first was whether the defendants’ conduct should not merely deprive them of a percentage of their costs, but would justify an order for costs in favour of the claimant. The judge deferred her conclusion on this question until she had dealt with the other two questions.

The second question was whether the fact that the claimant won on some other issues at trial (beyond the issues of liability) affected the analysis. As to this, the judge concluded that it did not: in almost every case the winning party would lose in relation to some issues.

The third question concerned the claimant’s own conduct. This included its failure to engage with correspondence in which the defendants’ solicitors pointed out the flaws in its case on causation and loss, defects in its expert evidence and in the disclosure which it had given, and in particular the claimant’s failure to accept admissible offers to settle.

There had been two such offers. The first was an offer by Mr McBraida alone to pay £100,000 in full and final settlement. This offer was made on receipt of draft Particulars of Claim, before proceedings were issued. It was accompanied by a detailed explanation of the flaws in the claimant’s case on causation and loss. However, it included a requirement that the claimant indemnify Mr McBraida, up to a maximum of £100,000, in the event of contribution proceedings being brought against him by any of the other defendants. The claimant rejected the offer. The second offer, to settle for £515,000 inclusive of interest and costs, was made jointly by all the defendants on 27^th January 2020. The claimant rejected the offer, but did propose mediation and said that it was open to discussing the provision of additional information about its claim. The defendants, however, including Mr McBraida, took the view that a mediation would be “an expensive waste of time” due to the claimant’s conduct (see the final paragraph of Fladgate’s letter dated 18^th February 2020).

The judge considered all of these criticisms of the claimant’s conduct in detail over 27 paragraphs of her judgment. She accepted that there was force in them and that aspects of this conduct were unacceptable. She accepted that, even though the offers to settle were not made under CPR 36 and therefore would not carry the costs consequences which would have applied if they had been, nevertheless some weight should be given to them in assessing the overall order to be made on costs; they represented at the very least an attempt to open up a dialogue on the merits of the case, including the real value of the claim.

The judge then returned to the question whether an order for costs should be made in favour of the claimant. She reiterated “that the Defendants’ conduct was serious in that they advanced a dishonest and misleading case on liability”, without which the costs of the action would inevitably have been very significantly reduced, and declined to draw any distinction between Mr McBraida and the other defendants in this regard. Nevertheless, she concluded that it would not be in the interest of justice to order the defendants to pay that element of the claimant’s costs which was referable to liability:

I have emphasised the judge’s reference to the admissible offers, and will do so again when I quote the judge’s ultimate conclusion, because Mr Morgan submitted that she gave little or no weight to those offers.

Accordingly, the judge’s discretion fell to be exercised on the basis that the defendants were the successful parties, but that they had advanced a dishonest case; and that there were (as she put it) “genuine and serious grounds for concern over some aspects of TMO’s conduct of the proceedings”.

The judge set out her conclusion as follows:

As many as seven grounds of appeal are advanced, which I can summarise as follows:

Mr Morgan submitted that the order which the judge should have made was to award Mr McBraida 100% of his costs on the indemnity basis.

There is considerable overlap between these grounds of appeal. I accept the submission of Mr Andrew Sutcliffe KC for the claimant that they can conveniently be grouped as follows. As will appear, I largely accept Mr Sutcliffe’s submissions in response to them.

It was fundamental to Mr Morgan’s submissions that the judge was wrong to say in her costs judgment that Mr McBraida had conducted a dishonest defence. Mr Morgan submitted that this was a mischaracterisation of what the judge had actually found in the main judgment. In the main judgment, when giving her assessment of the witnesses, the judge said this of Mr McBraida:

While to some extent the judge exonerated Mr McBraida from the allegation that his answers in cross examination were untruthful, her finding in the costs judgment that each of the defendants “deliberately pursued a case on liability that they knew to be false and, as Mr Sutcliffe pointed out, this appeared to be a collective endeavour in the sense that they had ‘learned their lines’ in advance of trial” must be seen in the context of the judge’s understanding and obvious grasp of the case as a whole. This was not a case (as Mr Morgan seemed at times to imply) of an elderly and frail defendant with no recollection of the events in question, who could do nothing more than put the claimant to proof of its case on liability. On the contrary, Mr McBraida pleaded a positive case that he “voted in favour of the Market Place Subscription because he believed that Mr Kerr would be able to secure significant investment in TMO from his clients and Market Place would pay for the shares within a matter of weeks”. That case was supported by his witness statement. As the judge pointed out in an earlier passage which applied to all the defendants, including Mr McBraida:

When Mr McBraida’s evidence was tested by cross-examination, he turned out to have little or no recollection of the events in question. If that was so, he should have said so, rather than pleading a dishonest case and relying on an untrue witness statement. The judge was entitled to conclude that Mr McBraida, like the other defendants, had advanced a dishonest case, albeit a case which he was unable fully to support in cross examination. Moreover, he had done so in the face of contemporary documents which made the positive case advanced clearly untenable.

Although Mr Morgan submitted that the judge failed to give any or sufficient weight to the unreasonable conduct of the claimant, it seems to me that this submission is untenable. The judge plainly took into account all aspects of the claimant’s conduct of which criticism was made. She dealt with them at length and explained in her conclusion which I have quoted above how that conduct impacted on her ultimate decision. There is no scope here for an appellate court to intervene.

Mr Morgan submitted that there was an inconsistency, or an element of double counting, in the judge’s reasoning. She held at [65(ii)] that the claimant should not recover its costs, contrary to the submission then advanced by Mr Sutcliffe, and that the right approach was for the defendant to be deprived of its costs incurred in advancing a dishonest case on liability. But she had then applied a further reduction of 30% of the defendants’ costs at [65(iii)] “to reflect an element of the costs incurred by [the claimant] in dealing with those issues at trial”. The effect of this, said Mr Morgan, was to do precisely what the judge had said that she would not do, that is to say to award the claimant part of its costs of dealing with the liability issue.

In my judgment this submission misunderstands what the judge was doing at [65(iii)]. It is clear that she was in fact following the approach set out in the Bank of Tokyo case at [19(ii)] which she had cited earlier in her judgment. This was to disallow the defendants’ costs in advancing a dishonest case (which she assessed at 40% of their total costs) and, in addition, to mark the court’s disapproval of this conduct by “the imposition of an additional penalty” (as to which, see [8] above), thus reducing the defendants’ recovery by a further 30%. It is clear from the judge’s reference to “a fair and proportionate additional deduction having regard to the gravity of the misconduct of the Defendants” that this is what she was doing: the language echoes what Mr Justice Briggs said in Bank of Tokyo.

This was an orthodox and appropriate course to take.

It is common ground that the offers to settle were not offers made under CPR 36 and therefore did not carry the costs consequences of such offers. They were, therefore, offers to be taken into account pursuant to CPR 44.2(4)(c), but the weight to be given to them depended on all the circumstances of the case and was pre-eminently a matter for the judge to determine. As the judge said in terms that she would give some weight to the offers to settle, made first by Mr McBraida alone and then by all of the defendants, and as she clearly did so in the passages from her costs judgment which I have set out above, the submission that she failed to do so is ambitious.

Mr Morgan submitted, however, that the judge cannot in fact have done so because the same order was made in respect of Mr McBraida as in respect of the other defendants who had not made an offer at the outset before proceedings commenced. Mr Morgan submitted that this showed that Mr McBraida had in fact received no credit at all for this early offer which, if it had been accepted, would have avoided the whole claim against him. I do not accept this submission. While Mr McBraida was the only defendant to have made an offer to settle at the outset, he was also the only defendant to have made what was described as the “Undervalue Allegation”. This was an allegation, relevant to quantum, that the claimant’s sale of the business to a third party was a sale at an undervalue. The allegation was the subject of expert evidence, but in the event was dropped shortly before the trial. The judge decided not to make a separate costs order in respect of this allegation. However, she was entitled to weigh this in the balance when considering what weight to give to the offer made by Mr McBraida. Moreover, it was too simple to say that acceptance of Mr McBraida’s offer would have avoided the need for proceedings against him. It was an offer which came with strings attached, namely the requirement for an indemnity in the event of a contribution claim against Mr McBraida by the other defendants.

Overall, therefore, the judge was entitled to take the view that Mr McBraida should not be treated differently from the other defendants and I see no reason to doubt that she did take into account the offers to settle when reaching her conclusion as to what was required by the overall justice of the case.

I need say next to nothing about indemnity costs. The submission that it was an error of principle not to award costs on the indemnity basis in favour of a defendant who had conducted a dishonest case is hopeless.

Finally, there is no error of principle in the judge’s decision not to make a separate order in respect of the costs which were reserved at the pre-trial reviews.

For the reasons which she explained with clarity in her admirable judgment, the judge was entitled to make the costs order which she made. I would dismiss the appeal.

I cannot leave this case without observing that it is a great pity that the suggestion of a mediation was not taken up. Far from being a case for which mediation was not suitable, this was in my judgment just the kind of case where a skilled and independent mediator would have been able to help both parties to a realistic assessment of their prospects and to achieve a settlement. That would have benefited all parties. It would have avoided the trashing of the defendants’ reputations which has occurred despite their success in resisting the claim. It would have forced the claimant to focus on the flaws in its case on causation and quantum and to adopt a more realistic approach to what was clearly a grossly exaggerated claim. It would have avoided for all parties the stress and expense of heavy commercial litigation and a lengthy trial. Instead, because none of the parties was prepared to be reasonable, they marched on with colours flying to the disaster which the trial proved to be for them all.

I agree.

I agree that the appeal should be dismissed for all of the reasons which Lord Justice Males has set out. I also endorse his postscript in relation to mediation. It is particularly unfortunate that the defendants took the view that mediation would be “an expensive waste of time.” On the contrary, this case was ideally suited to mediation, especially in the light of the fact that reputations were at stake, the defendants contended that the claim was deeply flawed and the claimant was open to discussing the provision of additional information about its claim. Rather than being an expensive waste of time, it would have forced both sides to take a more realistic approach to the litigation. It would have been likely to have saved much of the very considerable amount of time and costs which were ultimately expended. In the end, the negative attitude towards an attempt at negotiated dispute resolution which was adopted, cost everyone dear. In future, both parties and their advisers should approach the possibility of mediation in a more positive light.