Redbus LMDS Ltd. v Jeffrey Green and Russell (a firm)

Introduction

This is the claim of Redbus LMDS Ltd (“Redbus”) for professional negligence against a firm of solicitors Jeffrey Green and Russell (“JGR”). It arises out of the drafting in April 1999 of a licence agreement (“the Licence”) between Redbus and a company called JR French Limited (“JRFL”). JGR admit that they were negligent in relation to the drafting but raise issues in relation to both causation and quantum.

Redbus was a joint venture company with an unusual constitution. There were 2 groups of shareholders and directors, “A” and “B”. The Articles were designed to create deadlock in the Company if the “A” and “B” factions fell out.

The Licence concerned the Intellectual Property Rights in an invention of a machine to detonate land mines. The “A” faction was providing the finance to develop the machines. The “B” faction included the inventor of the machines. JRFL was a company set up by the inventor to which the Intellectual Property Rights were assigned.

It was intended that the Licence would be for a period of 10 years and that Redbus would be entitled to create a sub-licence without the consent of JRFL. However the Licence contained 2 errors which made the relevant clauses ambiguous. As a result of these errors it became arguable that JRFL could terminate the licence on 6 months notice, and that Redbus could not create a sub-licence without the consent of JRFL. JGR were acting for Redbus in relation to the granting of the Licence Agreement. They admit that they negligently failed to spot the errors.

The “A” and “B” factions fell out in a big way in 2004 and Redbus became deadlocked in the manner contemplated by the Articles. In an attempt to resolve the deadlock the “A” faction purported to grant a sub-licence to a company wholly under its control without the consent of JRFL.

This led to the purported termination of the Licence and litigation between the parties. There were in fact 3 actions. The actions were consolidated and tried in the Chancery Division in the spring of 2005 by Roger Wyand QC. The trial lasted some 6 days. A number of points were debated. Amongst other points JRFL argued that the Licence was terminable on 6 months notice and that Redbus could not grant a sublicence without the consent of JRFL (“the drafting issues”). A substantial amount of time at the trial was taken up with these issues as Redbus sought to argue that if they were wrong on the construction issue the Licence should be rectified to reflect the actual agreement between the parties.

In the event Redbus was substantially but not totally successful in the trial. It succeeded on a number of issues including both of the drafting issues. It lost on some other issues and was overall awarded only a proportion of its costs against JRFL. Those costs remain unpaid as JRFL is insolvent. Shortly before the liquidation of JRFL Redbus submitted a draft bill of costs to the Court for assessment. Following the liquidation (but without the permission of the Court) they obtained a default costs certificate.

In this action Redbus seeks to recover (Footnote: ¹) from JGR all of the additional costs that were incurred as a result of the drafting issues. These are said to include all of the costs incurred by Redbus on a full solicitor and client basis in relation to the drafting issues. These include the costs of attempting to enforce the judgment. I am asked to take a “broad brush” approach and to assess this at 75% of the costs incurred by Redbus in relation to 2 of the 3 proceedings.

JGR seek to defend the action on a number of grounds (Footnote: ²). Whilst they admit that they were negligent they deny that the negligence was the effective cause of the loss. They contend that it was merely an occurrence as a result of which no loss has been sustained. The principal points relied on in support of this submission were that the “A” Directors had no power to grant the sub-licence due to the Articles and that the grant of the sub-licence to a connected company without the consent of the shareholders in general meeting involved a breach of section 320 of the Companies Act 1985. It was the grant of the sublicence in breach of section 320 as a result of an inquorate meeting of directors that was the effective cause of the loss.

If contrary to its submission the breach was the effective cause of the loss, JGR take a number of points on quantum. It is not profitable to discuss them in detail in the introduction. The most important point of principle relates to the basis upon which Redbus can claim its costs against JGR. JGR contend that Redbus are limited to the standard basis upon which it claimed its costs against JRFL. Thus they contend that the Default Costs Certificate is good evidence of the amount of those costs. This is a developing area of the law where there have been a number of recent decisions from judges at first instance and where the distinguished author of McGregor on Damages has expressed strong views.

JGR also take a number of detailed points on quantum. For example they do not accept that a figure of 75% of the costs is appropriate. At the outset of the trial they contended that the figure should be 50% of 65% or 32½% of the costs certified in the Default Costs Certificate. By the end of the trial the percentage had increased.

Representation

Redbus has been represented by Christopher Parker instructed by Hamlins of Regent Street, London W1; JGR have been represented by Tom Leech instructed by Mills & Reeve of Norwich. Both Counsel have produced very full and helpful skeleton arguments. It will be apparent that I have “borrowed” extensively from each of the skeletons in this judgment. I am accordingly most grateful to them.

Witnesses

There was very little dispute as to the facts. In the event I heard two witnesses. Mr Hickling was called to give evidence on the authority of Redbus to commence these proceedings. He was, however, cross-examined on the events of May 2004 as to the extent of his knowledge of the limitations of the powers of the “A” Directors in the absence of the “B” Directors.

Mr Serota was the litigation partner in the firm of solicitors acting for Redbus. He is also a Deputy Costs Judge and thus has considerable experience in practical matters relating to costs. He gave evidence in relation to the bills of costs submitted and the difference between the amounts in the default costs certificate and the final bill submitted by his firm to Redbus. He was also asked to give an estimate of the proportion of the trial taken up with the drafting issues.

Both witnesses were honest and doing their best to assist the court. Mr Serota, however, made the point that many of the points of detail were obtainable from the disclosed documents, and/or the ledgers. He did not pretend to be able to remember all the details of what was a substantial bill of costs.

The Facts

Many of the detailed facts are contained in the judgment of Roger Wyand QC in the action between Redbus and JRFL handed down on 14^th July 2005. It is, however necessary to restate some of the facts in order to understand the issues.

Mr French is the inventor of 2 machines for detonating land mines. In 1995 he applied for his first patent. Since that time he has made various other applications covering many countries round the world.

In May 1997 Mr French and Mr King set up a company LMDS Ltd to exploit the inventions. On 30^th April 1999 LMDS changed its name to Redbus LMDS Ltd. Thus it is the Claimant in these proceedings. In June 1997 Mr French granted an exclusive licence to LMDS to exploit his intellectual property rights throughout the world.

Mr French and Mr King did not have enough money to exploit the invention and by December 1997 they had found an investor Might SA (“Might”), a company owned as to 92% by a family trust of Mr Stanford. Mr Stanford was the Managing Director of Might. It was accepted by Mr Hickling that Mr Stanford largely controls the decisions made by Might.

In April 1999 Might invested £400,000 in Redbus for a 40% share in the equity. As part and parcel of the arrangements a number of events occurred:

Redbus changed its name and altered its Articles of Association so as to make possible a deadlock situation between what might be called the “A” directors/shareholders and the “B” directors/shareholders. In the light of the argument on causation it will be necessary to look at the provisions in more detail below.

Mr French set up J.R.French Ltd (“JRFL”) at the request of Mr Stanford and the intellectual property rights were transferred to JRFL.

JRFL granted a fresh licence to Redbus in relation to the Intellectual Property Rights. It is this licence which gives rise to this negligence claim. It will be necessary to look at it in more detail below.

Between 1999 and 2004 Redbus did not perform as well as had been anticipated. A more detailed account is to be found in the judgment of Roger Wyand QC. By May 2004 Might had become the owner of 70% of the share capital in Redbus. The remaining 30% were held equally by Mr French and Mr King. In addition Redbus owed Might over £650,000 in unsecured loans and interest.

Unsuccessful attempts were made to sell Redbus. In the result relations between Mr French and Mr Stanford deteriorated.

There is no dispute as to the effect of the Articles. It is thus not necessary for me to set them out in full. I can, in substance adopt the summary contained in Mr Leech’s skeleton argument.

Following the change in the Articles in 1999 Redbus became a joint venture vehicle between Mr. Stanford (through Might) on the one hand and Mr. French and Mr King on the other hand whose interests were represented by the issue of “A” and “B” shares respectively. The constitution of the company built in no power by either side to control the company in the event of deadlock. Indeed, the Articles expressly so provided

A majority of “A” shareholders were entitled to appoint and remove “A” directors and a majority of “B” shareholders were entitled to remove and appoint “B” directors (Articles 29 to 32).

The Chairman of the board of directors had no casting vote (Article 39).

The quorum necessary for the transaction of any business at board level was one “A” director and one “B” director and if any of the “A” directors and “B” directors were not present their votes could be exercised by the “A” and “B” directors who were present (Articles 39 and 40).

The quorum to enable business to be transacted at a general meeting was one “A” shareholder and one “B” shareholder. No resolution could be passed unless one “A” shareholder and one “B” shareholder voted in favour of it (Articles 18 and 25)

The Articles were amended in this way to protect Might when it became a 40% shareholder in April 1999. By 2004 when Might owned 70% of the shares, they operated to protect Mr French and Mr King.

One consequence of these provisions was that Mr. Stanford and Mr. Hickling (the “A” directors) were not competent to authorise Redbus to enter into a sublicence agreement of the Intellectual Property Rights without at least one of the “B” directors voting in favour of the resolution.

Another consequence was that they were not competent to authorise the commencement of these proceedings. Thus the Claim Form was originally issued without Redbus’ authority.

However following the judgment in the litigation in July 2005 there was a compromise to resolve the deadlock. At an EGM on 19^th January 2006 the Articles were changed; Mr King appointed Mr Hickling as his proxy with the result that the meeting was quorate. At a meeting of directors on 7 June 2006 these proceedings were ratified.

Messrs Hewitsons acted for JRFL in the preparation of the Licence Agreement and JGR acted for Redbus. Two clauses were badly drafted and, when the two sides fell out, JRFL claimed that they had validly terminated the Licence Agreement (dated 30^th April 1999). Amongst other points they relied on their interpretation of these clauses.

The problems with the Licence Agreement are neatly summarised in paragraph 4 of Mr Parker’s skeleton argument where he sets out paragraphs 8 and 9 of the Amended Particulars of Claim in these proceedings.

“8.

In drafting the Licence Agreement Messrs Hewitsons by mistake inserted an “or” into the wording of clause 9.1 of the Licence Agreement as executed thus:

“This Agreement shall be deemed effective from the Effective Date and shall, unless otherwise terminated in accordance with its terms, continue in force until terminated by Licensor or Licensee serving on the other at least 6 months notice in writing or expiring on the tenth or any subsequent anniversary of the Effective Date”.

The effect of this mistake was to make it arguable that the Licence Agreement could be terminated on 6 months notice in writing expiring at any time……

9.

Further, Clause 12.1 of the Licence Agreement provided that

“Except as otherwise provided in this Agreement, this Agreement is personal to Licensee and Licensee shall not assign or delegate its rights or obligations under this Agreement in whole or in part Provided Always that Licensee may at any time after giving Licensor written notice of its intention to do so sub-contract and/or sub-licence its rights and obligations under this Agreement to any person”.

This reflected the instructions of the Claimant to the Defendants that the Claimant should be at liberty to sub-contract or sublicence the Rights without the consent of JRFL. However, the Defendants failed to take account of the wording of clause 2.2 of the Licence Agreement which provided:

“Licensee shall not assign, mortgage, sublicence charge or part with possession of its rights duties or obligations under this agreement or any licences granted hereunder without prior consent of the Licensor.”

The effect of the conflict between clauses 2.2 and 12.1 was that it was arguable that the proper construction of the Licence Agreement was that the Claimant could only sublicence the Rights with the consent of the JRFL”.

In their Defence JGR admit that they negligently failed to spot the mistakes.

By the end of February 2004 matters were reaching a crisis. Redbus had ceased to pay patent fees for Israel, North Korea, South Korea, China and Hong Kong; the accounts for the year ending 31^st May 2002 had not been filed and Mr French alleged he had not been paid for the months from November 2003 to January 2004. Accordingly on 28^th February 2004 Mr French resigned as a director of Redbus. He subsequently resigned as an employee on 16^th March 2004.

Mr King had resigned as a director before March 2004. The effect of Mr French’s resignation was that the deadlock situation contemplated by the Articles had come about. There were no “B” Directors with the result that no meeting of Directors could be quorate.

Mr Hickling and Mr Stanford took the view that the actions of Mr French were leading to a point where JRFL might attempt to terminate the licence which had about 5 years to run. This would have rendered Might’s substantial investment in Redbus valueless.

Accordingly on 19^th March 2004 Mr Hickling sent an e-mail to Mr French and Mr King giving notice of a board meeting to be held on 22^nd March 2004 “to discuss the future strategy of the Company”. In the e-mail Mr Hickling suggested that if the “B” shareholders wanted to be represented they might like to consider the appointment of a director by the majority vote of the B shares.

The meeting was duly held on 22^nd March 2004. As there was no “B” Director there it was declared inquorate. There was then produced to the meeting a draft sublicence agreement between Redbus and Land Mine Disposal Systems Ltd (“LMDSL”) – a wholly owned subsidiary of Might.

The Minute of the meeting reads:

In cross-examination Mr Hickling accepted that both he and Mr Stanford were aware that the meeting was inquorate. He stated that one of the reasons for the grant of the sublicence was to resolve the deadlock that had arisen between the shareholders. He was asked what he thought the reaction of Mr French and Mr King might have been if he had summoned an EGM to vote on the grant of the sublicence. He accepted that Mr French was opposed to it. Initially he said he could not speculate on Mr King’s reaction. However when shown an e-mail of 8^th April from Mr King he accepted that Mr King was also opposed to it. It was suggested that he and Mr Stanford would have been forced to go back to Mr French and to negotiate. He made the point that they did try to negotiate with Mr French. Mr French was offered shares in LMDSL. Negotiation proved impossible.

On 8^th April 2004 Mr French and Mr King appointed Group Captain Peter Moore as a “B” Director. On the same day Mr King sent an e-mail to Mr Hickling protesting at the decision taken on 22^nd March. Amongst other points he stated that the Board meeting was not properly constituted within the rules and any decisions taken were invalid. He pointed out that the meeting had decided to give away the ‘raison d’etre’ of the Company to another company, the ownership of which seems to exclude the minority shareholders.

On 9^th April 2004 Redbus purported to execute the sub licence. It was signed by Mr Hickling on behalf of the Company.

On 15^th April 2004 Mr French wrote to Redbus asserting that clause 12.1 of the Licence Agreement had to be read subject to clause 2.2 and that the consent of JRFL was necessary. He asked for information about the shareholding of LMDSL in order to enable him to consider whether consent would have been granted.

On 11^th May 2004 Hewitsons, on behalf of JRFL, Mr French and Mr King wrote a long letter to Redbus. The letter took a number of points. It alleged the sublicence was invalid for a number of reasons. There was no proper decision of the Board of Directors, there was a breach of clause 2.2 of the Licence and a breach of section 320 of the Companies Act 1985.

The letter purported to terminate the licence under cl 9.2.2 on the ground that Redbus was no longer trading.

On or about the same date Mr French and Mr King went to Redbus’ premises and took away the prototypes. That precipitated the Machine Recovery Action by Redbus. On 28 May 2004, undertakings were given by Mr French and Mr King to the Court and the articles claimed were returned to Redbus. Mr French and Mr King accepted that they had no right to take or keep the relevant articles.

The matter came before Lightman J on 25^th June 2004. He made an order that Redbus’s costs were to be the Claimant’s costs in the case. The principal relief sought in the action was thus achieved at an early stage. It, however, continued to trial on an issue of whether Mr French was in breach of his contract of employment by becoming a director of a company called ODS Ltd.

On 25^th August 2004 Mr French wrote a further letter purporting to terminate the Licence. He relied on the breach of clause 2.2 (granting the sublicence without consent) and the non payment of patent fees in breach of clause 8.3.

On 3^rd September 2004 JRFL issued the Licence Action against Redbus. JRFL claimed a declaration that the Licence Agreement had been terminated and for damages. In its Particulars of Claim JRFL relied on all 3 matters as giving grounds for termination of the Licence.

On 29 September 2004 JRFL also commenced proceedings for a declaration that Redbus had infringed a number of patents and for injunctions to restrain further infringement. The action depended on a valid termination of the Licence. If the Licence had not been validly terminated, it was bound to fail.

In paragraph 30 of his first witness statement Mr Serota sets out that there were 5 applications in the Licence action. In two of the applications the order for costs was costs in the case. In two of the applications JRFL was ordered to pay Redbus’s costs. The fifth application was an application by Redbus for further security for costs. It was heard by Laddie J on 28^th April 2005. It was dismissed with costs assessed on an indemnity basis. They were assessed at £5,200. I have not been provided with details of the costs incurred by Redbus in relation to this application. However in the course of the trial it was agreed that I could treat them as equivalent to the costs incurred by JRFL or £5,200. It may be they were slightly higher.

The three actions were consolidated and came on for trial before Roger Wyand QC on 17-20 and 23-24 May 2005. Judgment was handed down on 14 July 2005.

The Judge identified five issues in the Licence Action:

The term of the Licence (“the first drafting point”).

Whether a sub-licence could be granted without the consent of JRFL (“the second drafting point”).

Whether Redbus was in breach of the Licence by failing to pay fees in respect of JRFL’s patents.

Whether Redbus had ceased to carry on business.

Whether proper notice of termination had been given.

The judge found for Redbus. If it had been necessary to decide the question of rectification, he also rejected Mr. French’s evidence and would have found in Redbus’s favour.

He found for Redbus. It was, however necessary to rectify the Licence Agreement and he ordered rectification.

He found for JRFL. He held that Redbus was in breach of the Licence Agreement by failing to pay patent fees. But he also held that this was not a repudiatory breach: He ultimately awarded damages of £13,318.55 to JRFL and ordered Redbus to pay £10,492.99 in unpaid fees to the patent agents.

He found for Redbus. He rejected the argument that Redbus had ceased to carry on business at the time of the notice.

He also found for Redbus. He rejected the argument that proper notice of termination had been given.

It follows that Redbus succeeded on four of the five issues in the Licence Action.

Further, because of his findings in the Licence Action, it was unnecessary for the Judge to determine the issues in the Patent Action. It failed. He did however express views in case the matter went further.

Mr French succeeded in the only remaining issue in the Machine Recovery action. The judge held that Mr French’s involvement in ODS was approved by the Board of Redbus and thus there was no breach of duty.

The question of costs was debated before Roger Wyand QC on 14^th July 2005 when the judgment was handed down. I have been shown the skeleton argument in relation to costs submitted on behalf of JRFL. It is clear from paragraph 6 that JRFL advocated an issue based approach. I have also been taken to the transcript of the argument on costs before the judge. Mr Parker drew to my attention a comment made by the Judge at 620A:

When he dealt with the question of costs he dealt first with the costs of the Machine Recovery action. He made the point that Redbus had been the winner and was entitled to its costs down to the order of Lightman J. Thereafter he ordered Redbus to pay 10% of Mr French’s costs down to the trial. He also made an order in relation to Mr King.

He dealt with the Licence and the Patent action together. In paragraph 7 of his judgment he made the point that the commercial winner had been Redbus. He thought it right to reflect that in the costs order.

In paragraph 9 he ordered Redbus to pay Mr French’s costs of the misrepresentation Counterclaim.

The crucial paragraph of the judgment is paragraph 10:

As can be seen from the order he made an order for an interim payment on account of costs in the sum of £50,000

There was a further hearing on 6^th September 2005 when amongst other matters the amount due by Redbus in respect of patent fees was reduced.

The order for an interim payment of costs was not paid. In August 2005 Redbus served a statutory demand on JRFL. On 15^th September 2005 Redbus presented a winding–up petition against JRFL. The winding-up petition was unopposed and a winding-up order was made on 2^nd November 2005. Redbus incurred costs of £2,442.35 in respect of the winding-up petition. It is accepted by Mr Leech that those costs were reasonable.

Following the making of the winding up order Redbus sought to prove in the liquidation. Redbus incurred costs of £669 in respect of the proof. It is accepted for the purpose of these proceedings that those sums were reasonable.

On 10^th October 2005 Redbus gave notice to JRFL of the commencement of an assessment of the Bill of Costs pursuant to the order of 14^th July 2005. The assessment related to the 65% of the costs of the Patent and the Licence action.

The amount claimed in the Bill was 65% of £189,843.54 or £124,588.30. In submitting the Bill Mr Serota signed a certificate that included:

JRFL did not raise any points of dispute and on 7^th November 2005 a default costs certificate in the sum of £124,718.30 was sealed by the Court.

When he gave evidence Mr Serota said that he would have expected to have recovered at least 90% of the costs if the matter had been contested. For the purpose of this hearing Mr Leech accepted that the whole of the costs of £189,843.54 were properly incurred in relation to the Patent and Licence actions.

Redbus now contend that the costs of the Patent and Licence actions are in fact £283,192. This is based on the evidence of Mr Serota coupled with the invoices submitted to Redbus and the Ledgers. According to Mr Serota 90% of the costs are attributable to the Licence action.

As this sum was substantially higher than the sum in the default costs certificate it seemed to me to be a useful exercise to attempt to identify the differences between the 2 bills.

This was not an easy exercise as it was not possible to correlate the invoices, the ledgers and the bills submitted for detailed assessment. Furthermore after the order for a joint trial in December 2004 the ledger entries for the 3 actions were not kept separate. However with the help of Counsel (to whom I am indebted) and Mr Serota, who did his best to help but (not surprisingly) was vague when it came to the detailed figures and openly admitted that he stood to be corrected, it was possible to make a considerable impact on the differences.

Redbus has included the costs it was ordered to pay in the second security for costs application together with its own costs of that application. On my assumption that amounts to about £10,400.

In evidence and in his witness statement Mr Serota stated that there were no costs attributable to the Machine Recovery action after 28^th February 2005. He must be wrong about this. As I have pointed out there was a live issue in those proceedings in relation to ODS. Some costs must have been incurred after that date and those costs must be wrongly attributed to the Licence and Patent actions.

The costs of the liquidation and subsequent proof were not included in the bill submitted for assessment. These amount to £3,111.35.

In his witness statement Mr Serota had identified costs of £3,167.50 that he accepted were extraneous to the Patent and Licence actions. He had deducted these from the bills before arriving at his figure of £283,192. The industry of Mr Leech has identified a number of other items that fall into the same category. These other items come to a total of £3,987.65 (excluding the costs of the liquidation and subsequent proof). In his closing submissions Mr Leech made the point that he only had sufficient material to identify matters that were plainly extraneous. He submitted that it is plain that other extraneous matters will be in the ledger even though they cannot now be identified.

In his witness statement Mr Serota stated that his charging rate was £300 per hour and his partner’s - David Judah - £325 per hour. In fact the Ledgers show that these figures were an underestimate. For at least some of the time Mr Judah was charging at £385 per hour and Mr Serota at £365 per hour. Mr Serota points out that the charging rate recommended for a solicitor of his experience was £276 per hour for a West London firm. He included a rate of £300 per hour in the Bill submitted for assessment. The summary in the ledgers on page 864 of the bundle states that Mr Judah’s profit costs amount to £59,272 and Mr Serota’s to £30,687. This difference may produce a significant sum.

The matter in fact goes further. The 6 day trial was attended by both Mr Serota, Mr Judah and a third solicitor. Mr Serota (probably very wisely) did not include the costs of Mr Judah in the Bill for assessment. Mr Leech made the point that this was not limited solely to the trial. He identified in the ledger examples of duplication between the work of Mr Serota and Mr Judah. He pointed to items in the Bill that had been reviewed by both of them. He suggested that there was plainly a large element of duplication with the result that Mr Serota may well not have included a substantial amount of Mr Judah’s time in the Bill submitted for assessment. Mr Serota was unable to identify the differences in the bills but he did acknowledge that he would have been most surprised to have been allowed more than one partner at the trial. He also said that it was difficult to persuade costs judges to allow more than recommended rates. He said he might have tried his luck if costs had been ordered on the indemnity basis.

As both Mr Parker and Mr Leech recognised this analysis does not reconcile the £90,000 odd difference between the figure now alleged as the costs of the patent and licence actions and the bill submitted for assessment. It does, however, bring the 2 figures within a more acceptable bracket.

Causation

In his skeleton argument Mr Leech made a number of points in relation to the granting of the sub-licence

He elaborated these submissions with a detailed note on section 320 in which he sought to demonstrate that there was clearly a breach of section 320. He referred me to 2 authorities Young v. Purdy [1997] PNLR 130 and Barnes v. Hay (1988) 12 NSWLR 337 where different decisions had been made in different factual situations as to whether a particular act of negligence was “the effective cause of the loss”.

In his oral submissions he made a number of points. He made the point that the agreement had been terminated and the litigation was on foot when the points were taken; litigation was inevitable. He made the point that irrespective of the drafting point Redbus could not have granted a sub-licence to LMDSL. The decision to grant the licence was taken after the “A” Directors had taken legal advice in full knowledge that it was being done in breach of the articles. He submitted that in those circumstances the drafting errors were not the effective cause of the loss. In his submission it was the decision of the “A” directors to take a calculated risk to take control of the main asset of Redbus. In his submission the drafting errors were the occasion for and not the effective cause of the loss.

In answer to these submissions Mr Parker made a number of points. He did not concede that there was a breach of section 320. Even if there was it made the sublicence voidable and not void. At no stage had the “B” shareholders commenced a derivative action in order to avoid the sublicence. Thus it was not avoided. Similarly the “B” shareholders did not start a derivative action seeking to avoid the sublicence on the grounds that the meeting was inquorate. Indeed they relied on the validity of the sublicence to advance JRFL’s case that it could terminate the Licence for the grant of the sublicence without the consent of JRFL. Thus the points that were potentially open to Mr French and/or Mr King were not in fact taken at the trial at all.

Mr Parker points out that there is no suggestion of bad faith on the part of the “A” directors. He points out that in the litigation the negligent drafting by JGR enabled JRFL to take the 2 drafting points. If the drafting had been carried out with proper care they would not have been able to do so. In those circumstances the very substantial costs involved in the drafting issues were the direct result of the negligence. To put it another way the negligent drafting was the effective cause of the loss.

In my view Mr Parker’s submissions are to be preferred. Without any disrespect to Mr Leech’s careful and thorough research it seems to me to be clear that the negligent drafting of JGR enabled JRFL to take the drafting points in the trial. The points were taken and they did cause loss. I do not, for my part, see that the chain of causation was broken by the granting of the sub-licence whether or not that grant involved the breach of s 320.

In my view Redbus’ loss was caused by JGR’s breach of duty.

The basis of the assessment

This is an area of law that has received considerable attention recently from judges at first instance. Both Counsel were good enough to take me through all of the authorities on the point in considerable detail. It may be that this is an area ripe for consideration by the Court of Appeal but I doubt very much if anything would be gained by a further detailed analysis from a deputy judge at first instance. In those circumstances I propose to take as my starting point the detailed and clear summary of the law by Hart J in Pearce v European Reinsurance (Footnote: ³)

It will be seen that Hart J recognised that the introduction of the proportionality test in CPR 44.4(2) might have affected the rule as laid down by Carnwath J and set out in the last sentence of paragraph 23 of his judgment. However he also recognised that there were strong reasons of public policy in favour of the view adopted by Carnwath J. He took the view that the matter was unsuitable for summary determination.

The matter was again considered by Evans Lombe J in Mahme Trust v Lloyds TSB (Footnote: ⁴) In paragraphs 65 to 67 of his judgment he discusses the decision of Carnwath J in the Hextall Erskine case, the comments on it in McGregor and the judgment of Ferris J in Yudt. He then comments briefly on the Court of Appeal decision in Penn as being of limited assistance. In paragraph 68 he concludes:

Mr Parker points out that Evans Lombe J makes no reference to the judgment of Hart J in Pearce. More importantly he does not appear to have been referred to the proportionality point in CPR 44.4(2). He certainly makes no reference to it. Thus Mr Parker submits I am free to make my own choice and to state that the law is what it was believed to be before the decision in Hextall Erskine.

Although Mr Parker has invited me not to follow Carnwath J, Ferris J and Evans-Lombe J I feel that judicial comity requires me to do so in this case. There are a number of reasons for this:

Whilst I accept that the CPR regime as to costs adds proportionality to the matters to be taken into account in a standard assessment I find it difficult to accept that Evans-Lombe J was not aware of this. Even though he made no express reference to it in his judgment, it is, to my mind inconceivable that any judge, certainly such an experienced judge, was not aware of the requirement.

There are, as Hart J pointed out, strong policy reasons to support the views of Carnwath J. The steadily increasing amount of legal costs is a matter of real public concern. It is, as Mr Leech, pointed out extremely difficult for a third party, not involved in the litigation to be able to challenge the costs. If, as Mr Parker contends, the burden of establishing unreasonableness is thrown on the third party not involved in the litigation he faces an almost impossible task in having to show individual items are unreasonable.

It may be, as Hart J points out, that in individual cases there may be a good reason for allowing as damages costs which were reasonably but disproportionately incurred. I cannot for the moment think of an example of such a case. I do not, for my part, see that as a reason for going back to the rule that it is for the Defendant to establish that any item claimed is unreasonable. In my view it should in general be for the Claimant to establish that an item of costs claimed, though disproportionate, is reasonable and thus should be allowed to be included as an item of damage.

There is nothing in the facts of this case to suggest that items excluded from the costs certificate by Mr Serota were so excluded on the grounds that they were not proportionate. It has to be remembered that the bill of costs was prepared by Mr Serota and was not challenged by JRFL. It was thus allowed in full notwithstanding the charging rates were included at a rate higher than that normally allowed. This was, it has to be remembered, heavy commercial litigation in the Patents Court. Questions of proportionality more usually arise in the context of somewhat smaller litigation. When Mr Serota gave evidence he did not suggest that any items were left out on grounds of proportionality.

In respectful agreement with Evans-Lombe J it seems to me that many of the items that make up the difference between the 2 bills have in fact been shown to be unreasonable. Examples of this are the costs of the second security for costs application, the charging rate, and the costs of Mr Judah’s attendance at trial. It has to be remembered that Laddie J dismissed the application for security for costs and awarded costs on the indemnity basis. There is an inference that the application was unreasonable yet Redbus are claiming not only their own costs – presumed to be £5,200 but also the costs they were ordered to pay. Similarly I do not see why JGR should pay for the fact that 2 partners were present throughout the 6 day hearing before Roger Wyand QC or pay charging rates of £365 or even £385 per hour when the guideline rate is £276 per hour. It is to be noted that Mr Leech is not challenging the rate of £300 per hour awarded in the Default Costs Certificate.

I would therefore hold that the costs of the Patent and the Licence action for the purpose of a damages claim against JGR are to be assessed at £189,843.54.

The liquidation and post liquidation costs.

Mr Leech submitted that these costs were not caused by JGR’s negligence in that they would have been incurred in any event. In the alternative he submitted that they were too remote. Mr Parker submitted it was reasonable for Redbus to seek to enforce their judgment for costs and that the costs of enforcement were part and parcel of the costs that were incurred as a result of the negligence. Some of the costs were incurred as a result of the negligence. Accordingly an appropriate part of the costs of enforcement were recoverable.

No authority was cited on this part of the case, the sum is relatively small. It does not admit of much argument or discussion. Suffice it to say that I agree with Mr Parker. The fact that Redbus might have incurred the costs even if the drafting issues had not been argued at the trial does not to my mind break the chain of causation. Accordingly I would allow the costs of £3,111.35 to be added to the sum of £189,843.54 making £192,954.89.

The appropriate percentage.

Counsel are agreed that a two stage approach is necessary to determine the appropriate percentage. First it is necessary to determine the percentage of the Licence and Patent action attributable to the issues on which Redbus succeeded. It is then necessary to determine the percentage of those issues attributable to the drafting issues.

Mr Leech submits that as Roger Wyand QC awarded Redbus 65% of the costs of the Licence and Patent action I should adopt the same figure. He points out that Roger Wyand QC was in a far better position to assess this than this court.

Mr Parker accepts that the judge’s award is a starting point. He however points out that to take a figure of 65% is to ignore the fact that the judge applied a discount to the figure he arrived at to reflect the fact that Redbus lost on some issues and ought to paying JRFL’s costs on those issues. He says it is apparent that the judge did apply a discount here. Not only did he refer to it in paragraph 10 of his judgment on costs but he discussed the point with Counsel during the argument. He also makes the point that the judge’s approach was in accordance with principle and he referred me to paragraph 27 of the judgment of Chadwick LJ in Summit Property Ltd v Pitmans (Footnote: ⁵) where he said :

Mr Parker went on to take a strictly mathematical approach to the discount. He submitted that the judge must have assessed the discount at 17½%. He submitted that means that Redbus succeeded on 82½% (100% - 17½%) of the issues. If you apply a discount of 17½% to that figure you arrive at the figure of 65% selected by the judge.

I accept Mr Parker’s submission that an assessment of 65% ignores the question of discount. However he has failed to persuade me that an exact mathematical approach is necessary. The judge did not explain in detail how he reached his figure and it does not to my mind follow that he took the mathematical approach advocated by Mr Parker.

I have been invited by both sides to take a broad brush approach. In the circumstances doing the best I can I propose to assess the percentage of the Licence and Patent action attributable to the issues on which Redbus succeeded at 75%.

Mr Leech initially suggested that the appropriate percentage was 50%. He pointed out that Redbus had succeeded on 4 issues in the Licence and Patent action. 2 of these issues related to the negligent drafting. In the absence of other evidence he invited me to assume that an equal time was spent on each issue.

This proved a very crude analysis. Mr Parker took me through the judgment with some care. He pointed out that there was a substantial amount of evidence on the drafting issues – no doubt mainly because of the plea of rectification – whereas there was very little evidence called on the other issues. Indeed the question of the validity of the notice of termination appears to have been a very minor issue. He also relied on Mr Serota’s estimate that 75% of the Court’s time was spent on the drafting issues.

In answer to this Mr Leech conceded that his original estimate was too low and raised it to 66%. He pointed out that Mr Serota’s memory had proved fallible and thus his estimate was to be treated with caution. He also made the point that the pre-trial work in respect of individual might be different from the time spent at trial on the issue. He drew my attention to the applications that were made in respect of all the issues.

I think there is some force in the points made by Mr Leech. In the circumstances doing the best I can I propose to assess the percentage of the costs attributable to the drafting issues as 75% of Redbus’ costs on the issues on which they succeeded in the Licence and Patent action.

It follows that I would assess Redbus’ damages at 75% of 75% of £192,954.89 or £108,537.13.