Sharp & Ors v Blank & Ors

I now have to deal with the costs of various matters. The parties have submitted very detailed and helpful written submissions, and I have been invited to deal with the costs on paper without a hearing, which I am content to do. Because of the many points raised by the submissions this judgment is more elaborate than a judgment on costs would normally be; but there are significant sums in issue and I accept that the parties are entitled to a fully reasoned judgment.

The relevant matters are as follows:

the Defendants’ application, by application notice dated 15 July 2015, for summary judgment in relation to certain allegations in the Particulars of Claim, and/or for parts of the claim to be struck out (“the summary judgment application”);

the Claimants’ application, by application notice dated 29 September 2015, for specific disclosure (“the specific disclosure application”);

the Claimants’ application, made in the course of the second case management conference (“CMC”), for permission to amend the Particulars of Claim (“the amendment application”);

the second CMC itself, which dealt with a miscellany of matters.

It is agreed that the costs of the CMC should be costs in the case. I agree and will therefore make an order to that effect. The other matters are however more contentious.

This sought summary judgment or a strike out in relation to a number of discrete allegations in the Particulars of Claim. I heard it initially over 3 days from 21 to 23 October 2015; that left one remaining part of the application which was adjourned and heard on 24 and 25 February 2016. There were 6 parts to the application which were argued, and on which I gave judgment, separately.

These 6 concerned the following allegations in the Particulars of Claim (in the order in which I heard them):

An allegation that Lloyds would not have had to raise additional capital if it had not proceeded with the acquisition of HBOS (“the recapitalisation issue”). I gave an oral judgment on 23 October 2015 declining to grant summary judgment on this part of the application.

An allegation that the Director Defendants were aware that HBOS (through its subsidiary Bank of Scotland) was manipulating its LIBOR submissions (“the LIBOR issue”). I handed down a reserved judgment on 12 November 2015 declining to grant summary judgment on this part of the application.

An allegation which relied on statements in the Prospectus as giving rise to a duty of care in tort (“the prospectus issue”). I gave an oral judgment on 22 October 2015 upholding this part of the application.

Allegations that (i) the Director Defendants owed a broad range of fiduciary duties; (ii) that the Director Defendants owed a duty in tort to take all reasonable steps to prevent the Claimants from suffering loss and damage; and (iii) that the Director Defendants had acted in breach of duty in putting the proposed acquisition of HBOS to an EGM (“the duties issue”). I gave a reserved judgment on 12 November 2015 largely, but not entirely, upholding these aspects of the Defendants’ application.

An allegation that the Defendants had included numerous misleading and tricky statements in their documents (“the tricky issue”). The Defendants’ application was for these to be particularised. I gave an oral judgment on 23 October 2015 requiring particulars to be given.

Allegations that HBOS was valueless at the time it was acquired, and that the exchange of Lloyds shares for HBOS shares constituted a gross overvaluation of HBOS (“the valueless issue”). This was argued at the adjourned hearing in February and I gave an oral judgment on 25 February 2016 refusing summary judgment on this part of the application.

I have divided the application into 6 parts; it is always possible to subdivide an issue further and the Claimants have identified 7 issues by treating the duties issue as comprising a fiduciary duties issue and an EGM issue (although accepting these were closely connected), whereas the Defendants have identified 8 issues by also splitting out the prevention of loss duties (both fiduciary and tortious) from the duties issue. I do not think this level of subdivision is necessary: I think it is more appropriate to regard the general fiduciary duties, the prevention of loss duties and the calling of the EGM as all tied up together, as is reflected by the fact that they were argued together, and as comprising different aspects of what was really one overall issue.

It can be seen that the Defendants’ application had mixed success. The Claimants’ overall submission is that I should make an estimated apportionment of the costs attributable to the parts of the application on which they were successful and order the Defendants to pay those costs. The Defendants’ overall submission is that having regard to the issues on which they were successful and those on which they were not, the appropriate order is costs in the case.

On either view it is necessary for me to identify who is the successful party on the relevant issues and to form some view of the proportion of costs spent on the different issues.

Certain aspects are relatively straightforward. It is not disputed that the Defendants were the successful party on the prospectus and tricky issues. So far as the prospectus issue is concerned, the Claimants point out that I said in my judgment that it is doubtful whether striking it out would make any practical difference to the trial, but this is a point which cuts both ways: however unimportant the point may have been, the fact remains that the Claimants opposed this part of the application, and argued against it, and lost. They also point out that so far as the tricky issue is concerned, I did not accede to the Defendants’ suggestion of an unless order; but I regard this as not materially detracting from the fact that in substance the Defendants obtained what they sought, namely an order requiring the Claimants to particularise the allegation.

I also take the view that the Defendants were the successful party in relation to the duties issue. They succeeded in obtaining a strike out both of the broad fiduciary duties pleaded (other than those consistent with the sufficient information duty admitted in Paragraph 37(f) of the Defence), including in particular the duty pleaded to prevent shareholders from suffering loss, and of the tortious duty to take all reasonable steps to prevent shareholders from suffering loss. These latter two duties, the prevention of loss duties, were ones that they had specifically taken issue with in their Defence (at Paragraph 37(h)). The Claimants suggest that their success did not have any practical effect on the claim or narrow the issues. I do not accept this submission which I think understates the potential significance of the point: it seems self-evident that a prevention of loss duty, whether framed as a fiduciary duty or as a duty of care in tort, is much more wide-ranging than the sufficient information duty, or the various tortious duties pleaded, and I can well understand why the Defendants wished to dispose of the prevention of loss duties, and indeed the broad range of fiduciary duties pleaded, at an early stage.

The Claimants also suggest that overall the parties were drawn on the duties issue, once allowance is made for the fact that the Defendants did not entirely succeed in striking out the allegations in Paragraphs 121, 122(2) and 127 relating to the calling of the EGM. Again I disagree. The Defendants’ overall concern, as Ms Davies made clear in argument, was that the combination of the duties pleaded and the plea that it was a breach of duty to call the EGM might be intended to lay the groundwork for a causation argument that would avoid the need for the Claimants to prove what would have happened had fuller or different information been given. Although I took the view that this causation argument was not open to the Claimants, it was I think a legitimate concern on the way the pleadings were framed; and I did agree with the application to strike out Paragraphs 121 and 127 in which it was pleaded that the holding of the EGM was a breach of duty. Taken as a whole my judgment achieved what the Defendants sought to achieve. In these circumstances, the fact that I left in Paragraph 122(2), and the fact that I was subsequently persuaded to allow the Claimants to reintroduce Paragraph 121 (once it had been redrafted), do not seem to me to amount to reasons for regarding the Defendants as unsuccessful on the EGM point, or for treating the duties issue as having resulted in a draw overall.

There is no dispute that the Claimants were the successful party on the valueless issue.

In relation to these four issues the position on costs seems to me to be relatively straightforward. Although contained in one application notice, the Defendants in effect brought 6 separate applications, each with their own evidence and each argued separately, and each (as it happens) the subject of a separate judgment. In these circumstances I think the costs of each issue should in principle be looked at separately. The starting point is therefore the general rule in CPR r 44.2(2)(a) that the unsuccessful party should pay the costs of the successful party, that is that the Claimants should pay the Defendants’ costs of the application so far as they related to the prospectus, duties and tricky issues, and the Defendants should pay the Claimants’ costs of the application so far as they related to the valueless issue.

There is one subtlety to add to this: where the Defendants have succeeded in having an allegation struck out, they should in principle be entitled, as Ms Davies points out, to recover all costs incurred on that issue not just the costs incurred on the application. But in practice at this stage of the proceedings it must be doubtful what separate costs have been incurred on these matters that are not costs of the application, and I have not been given any indication of what such costs might amount to.

Both parties have made various miscellaneous points. The Claimants say that the issues on which the Defendants have succeeded were minor and have had no impact in terms of narrowing the issues or shortening the cost and length of trial, that the application has delayed the proceedings by some 6 months, and that the Defendants’ success was “technical” and their victory “pyrrhic”. I do not accept these characterisations of the Defendants’ success; in particular the duties issue as I have already said was in my view one of some potential significance. I am not persuaded that any of these matters constitutes a good reason to depart from the general rule that the Defendants should in principle have their costs of the issues on which they won.

The Defendants for their part say that the Claimants should not have their costs of the evidence which they filed on the valueless issue, because the work would have been necessary in any event and the material in question will almost certainly be deployed at trial. I am not persuaded that this is a good reason to depart from the general rule either. It is quite difficult at this stage to form any very clear view as to how much of the work done will turn out to be useful at trial: certainly I would expect some of Mr MacGregor’s work (in particular on explaining the own credit adjustment) to be deployed at trial; but other parts are likely to be overtaken by developments. In any event the natural consequence of a defendant issuing and pursuing a summary judgment application is to require a claimant to bring forward at least part of his evidence early, and I do not see anything objectionable in principle to the defendant in effect bearing the risk of having to meet the cost of doing so if his application fails.

So far as the recapitalisation and LIBOR allegations are concerned, it is again not disputed that the Claimants were the successful party. Ms Davies makes the point however that the Defendants were justified in issuing a summary judgment application in relation to these allegations in the light of the very thin particulars that were provided by the Claimants in response to requests for further information. There is I think considerable force in this. In my judgment on the recapitalisation allegation, I accepted that the pleading as it stood amounted to an allegation that Lloyds would not have had to raise any additional capital (at [29]), and that the Claimants obviously faced some difficulties in making out this extreme version of the facts (at [30]). In my judgment on the LIBOR allegation, I said that the FCA’s findings did not establish or even really begin to suggest that the Defendant directors were aware that Lloyds was manipulating its own LIBOR submissions, and so formed no basis for the assertion that they would have been aware of the possibility that HBOS might be doing the same thing (at [14]); and that the material put before me by Ms Davies cast real doubt on whether there was any sound basis for drawing the inference the Claimants had pleaded (at [23]).

I do not think I should say any more about the apparent merits of the pleaded case as these allegations will remain for trial and I am currently due to be the trial judge, but without going beyond the views I have already expressed, it can be seen that in effect I allowed these allegations to proceed not because of material that the Claimants had produced in support of them, but despite the lack of it. In the case of the recapitalisation allegation this was because it was not clear that it would serve any useful purpose to strike out the allegation where the relevant facts were going to be in issue at trial anyway. In the case of the LIBOR allegation, it was because I could not be confident that disclosure would not shed a different light on the allegation.

These circumstances do to my mind raise a real question as to whether a simple order that the Defendants pay the Claimants their costs of these parts of the application does most justice between the parties. I fully accept that the general rule is that costs should follow the event; and that it is a salutary principle that those who make interlocutory applications and lose them should normally pay the costs of the applications, and should do so when they lose them, not at the end of the day. But costs are always in the discretion of the Court: under CPR r 44.2(2)(b) the Court has power to make a different order from the general rule, and under CPR r 44.4 the Court is to have regard to all the circumstances.

In the present case both these parts of the application were in my judgment reasonably brought having regard to the nature of the case pleaded; if it turns out at trial that there is indeed nothing in either allegation, it is not obvious to me that it would be just to require the Defendants to pay the Claimants the costs of the evidence deployed, and the argument presented, in support of the submission that they should be free to take forward claims for which they have little support at the moment, and may never have sufficient to make good their case. In such a case I think it would be more just to leave the Claimants to bear their own costs of these allegations. That suggests to me that so far as the Claimants’ costs are concerned, it is fairer to order that the Defendants should pay them only if the allegations are made good at trial, rather than being paid by the Defendants now regardless of what happens to these particular allegations.

On these aspects therefore, I accept the Defendants’ submission that the costs should await the outcome of the trial, but with two significant differences. First, I do not think the costs should simply be expressed as costs in the case, as this would mean that the Claimants, if successful overall, would recover them even if they lost on these particular allegations. Rather the costs should I think stand or fall with the fate of these particular allegations, as what might be termed “costs in the issue”.

Second, although I consider this is appropriate for the Claimants’ costs, I do not think the same applies to the Defendants’ costs. It is one thing to say that the Defendants should not have to pay the Claimants their costs if the allegations turn out to be groundless; it is another thing to require the Claimants to pay the Defendants their costs of applications which the Defendants have persisted in to judgment and which they have in the event lost. I do not think it would be fair to do this even if these claims ultimately turn out to be unfounded.

In principle therefore it seems to me that the fairest course is not, as submitted by Mr Steinfeld, for the Defendants simply to pay the Claimants’ costs of these aspects of the application, nor, as submitted by Ms Davies, for the costs to be wrapped up in a general order for costs in the case, but for the Claimants’ costs to be costs in the issues. By that I mean that the Defendants should pay the Claimants their costs of the application in relation to the recapitalisation issue if but only if they succeed in that issue at trial; and the same with the LIBOR allegation. I will not formally make an order in those terms however as it may give rise to difficulties if the allegations in fact established at trial are not identical to those originally pleaded – it is already foreseeable that this might arise in the case of the recapitalisation allegation which has since been amended. The better course is therefore to reserve the costs to trial, but with the intention that they should be costs in the issues as explained. Reserving the costs of interlocutory applications to trial is in general now discouraged, not least because the trial judge will very often not have heard the application; in the present case however I am due to be the trial judge and this particular consideration does not apply.

In summary therefore I consider the appropriate order in principle to be as follows;

The Claimants to pay the Defendants their costs of the application so far as regards the prospectus, duties and tricky issues.

The Defendants to pay the Claimants their costs of the application so far as regards the valueless issue.

The Claimants’ costs of the recapitalisation and LIBOR allegations to be reserved to the trial judge with the intention that they be costs in the issues as explained above.

Under CPR r 44.2(7) however the Court is enjoined not to make an order in relation to a distinct part of the proceedings under r 44.2(6)(f) (which would include the costs of particular issues) if it is practicable to make an order in relation to a proportion of another party’s costs under r 44.2(6)(a) instead. That exercise requires one to apportion the costs incurred on the various aspects of the application.

The Claimants have sought to do this. The Defendants have not sought to do it themselves, but equally they have not taken issue with the particular apportionment put forward by the Claimants (save in relation to Mr MacGregor’s expert’s report, which I will consider separately). The Claimants’ calculations are elaborate and detailed, and calculations of this type tend to give a spurious air of mathematical precision to what is necessarily an imprecise exercise, but I propose to follow the Claimants’ methodology to see where it leads.

I will take the Claimants’ figures for the percentages of time spent at the hearing, and the written argument and evidence, as a starting point. I will not however adopt the Claimants’ overall percentages. These give different weight to the hearing time and written material per issue, so that for example on the duties issue they propose allocating 15% of the costs to it, which is less than the average of hearing time (26%) and written material (7%), whereas on the valueless issue they propose allocating 28% which is rather more than the average of hearing time (32%) and written material (21%). Instead, I propose to proceed on the basis that, leaving aside Mr McGregor’s fees, 50% of the Claimants’ costs were incurred on the hearing and 50% on the written material. That produces a consistent basis for each issue under which the overall percentage is in each case the average of the two other percentages. That gives the following figures:

That leaves 14.5% unallocated which is attributable to common matters. The Claimants’ approach is to allocate such unallocated costs (and the 2% attributable to the para 2(3) point) proportionately to the other issues. The Defendants make three points in relation to this.

First they say that the 2% attributable to the para 2(3) point should not be dealt with in this way as they were the successful party in that I proceeded to hear the application. I agree: the para 2(3) point was an attempt to stop the application in its tracks which failed.

Second, they say that the unallocated costs should not be apportioned as a matter of principle as they are matters on which neither party was successful. I do not agree: these are not matters on which neither party was successful, but matters which cannot be attributed to any particular part of the application (for example a chronology). In principle the Claimants’ approach of allocating these common costs proportionately to the other issues seems to me appropriate.

Third, the Defendants say that the Claimants’ calculations are wrong as a matter of arithmetic. They take as an example the share of the 16% (on the Claimants’ figures) attributable to the 3 issues on which the Claimants won (62% on the Claimants’ figures) and say the apportionment should be 62% x 16% = 9.92%. I do not agree; I think it is the Defendants whose maths is unfortunately faulty as their approach would leave some of the 16% unallocated. The correct apportionment (on these figures) is not 62% of 16%, but 62/84 (or 73.8%) of 16%, namely 11.8%, which is how the Claimants have calculated it. On the figures I have adopted above, the apportionment is of course different, but in principle the Claimants’ approach seems to me mathematically sound.

Using the figures above, there is not 16% but 14.5% to apportion to the other issues. To find the appropriate apportionment it is necessary to take the percentage given above for the issue, say P; the formula for the additional allocation is then given by P/85.5 x 14.5. In the case of LIBOR for example, the percentage given above is 9% and the appropriate additional allocation is 9/85.5 x 14.5 = 1.53%, making a total of 10.53%. It can be seen that an alternative (and simpler) way of expressing the formula for the additional allocation is P x 14.5/85.5 or P x 16.95%.

Applying that approach consistently gives the following figures:

On the assumption, in the absence of any other indication, that the Defendants’ costs were incurred in the same proportions, this would mean that:

The Claimants should pay the Defendants 30.41% of their costs.

The Defendants should pay the Claimants 30.99% of their costs.

38.6% of the Claimants’ costs should be costs in the issues.

That leaves the fees payable to Mr MacGregor which have been separately apportioned by the Claimants. Their apportionment is 70% to the valueless issue, and 30% to the recapitalisation issue. The Defendants’ proposed apportionment is the other way round – 30% to the valueless issue, and 70% to the recapitalisation issue. I have looked back at Mr MacGregor’s report. I accept that it is too simplistic to look just at the specific parts of the report where he deals with the valueless allegation (sections 7 to 9) as some of the introductory sections are relevant to both issues; and although only one section (section 10) deals directly with the recapitalisation issue, some of the introductory sections do seem to be more directly relevant to that issue. Taking this into account, I start from the position that Mr MacGregor was asked to deal with, and dealt with, two substantive issues, neither of which was obviously more time-consuming to consider than the other, and that the default position is that the costs should be apportioned equally between the two issues. I then ask myself whether any sufficient reason has been shown by either party to depart from equality. I have not been persuaded that there has, so I will adopt an overall apportionment of 50% to each issue.

It follows from the principles I have adopted above that the Claimants should be entitled to recover 50% of the costs of the report. That leaves the question of the other 50%: should these be included in the costs of the recapitalisation issue which are reserved to trial? In my judgment the answer is No. As Ms Davies points out, the transcript of the first CMC at which I gave permission to adduce expert evidence makes it entirely clear that the permission was to do so on the valueless issue alone – see transcript for 22 July 2015 at p 11 where I said:

It is true that the Order drawn up to give effect to the directions I made at the CMC simply refers to:

The Defendants also incurred costs on instructing their expert, Mr Deetz, whose report was confined to the valueless issue. It follows that they should not recover any part of those costs.

I can now summarise what I consider to be the appropriate order for costs of the summary judgment application. I see no reason to award costs other than in accordance with the principles I have identified above. I will therefore order:

The Claimants to pay the Defendants 30% of their costs of the application other than Mr Deetz’s fees.

The Defendants to pay the Claimants 30% of their costs of the application other than Mr MacGregor’s fees.

The Defendants to pay the Claimants 50% of their costs so far as they consist of Mr MacGregor’s fees.

40% of the Claimants’ costs of the application (other than Mr MacGregor’s fees) be reserved to the trial judge.

I have not overlooked Ms Davies’ point that in principle the Defendants should have their costs of the issues on which they succeeded not just their costs of the appropriate part of the application, but in the absence of any reason to think that any significant costs have been incurred, it seems to me unnecessary to make any special provision for such costs. If the Defendants are successful at trial they can expect to recover them anyway.

The Claimants ask for an interim payment. Since I have directed detailed assessment, CPR 44.2(8) requires me to make an order for payment of a reasonable sum on account of costs unless there is good reason not to. This requires me to assess the likely overall effect of the costs orders in (1), (2) and (3). Taking the figures in the parties’ costs schedules produces the following:

Defendants’ costs

Claimants’ costs

Claimants’ expert fees

That calculation is of course based on 100% of actual costs incurred. The Claimants ask for an interim payment on the basis of 40% of actual costs incurred. Assuming the same level of recovery for both parties this produces the following net figure payable by the Defendants:

The Claimants’ specific disclosure application sought disclosure of 16 classes of documents under 3 heads (LIBOR, the 2009 Accounts and Recapitalisation). Before the resumed hearing the parties agreed to dispose of this application by the Defendants giving specific disclosure of 4 classes of documents, 2 relating to LIBOR and 2 relating to the 2009 Accounts and Recapitalisation. The agreement did not include any agreement as to costs.

The Claimants seek an order that the costs be in the case. They say that the disclosure that has now been agreed is substantial and would not have been forthcoming without the application. They accept that they did not obtain all the classes of documents that they sought but say that they came to a sensible compromise agreement.

The Defendants seek their costs of the application. They say that the Claimants significantly narrowed the scope of their application, which indicates that as issued it was misconceived; that the Claimants issued the application without any attempt to engage with the Defendants beforehand; and that had the Claimants sought to do that, it would not have been necessary to issue the application.

These submissions raise in effect two issues. One is the question of how significant or substantial is the disclosure that the Defendants have now agreed to give when compared with the disclosure originally sought; the other is what would have happened had the Claimants, as they no doubt should have done, sought disclosure in correspondence first. On both issues I have the difficulty that I have not heard the application. I find it impossible to form any reliable view of either issue. The Defendants may be right that what they have now agreed to disclose is only a small part of what was originally sought; and that if only it had been asked for, it would have been given: they can point to the much reduced scope of what has been agreed compared to what was originally sought. Equally however the Claimants may be justified in their assessment that they have achieved the agreement of the Defendants to disclose significant material which they would not have done without making the application: they can point to the fact that the Defendants appear to have opposed the application in its entirety. Neither position is obviously implausible, and in the absence of any exploration of these issues in the hearing before me, I do not see how I can sensibly form a view of them – to do so would I think be little better than poorly informed speculation.

In these circumstances I agree with the Claimants that the appropriate order is for costs to be in the case.

I can take this quite shortly. In the course of the second CMC, the Claimants sought permission to amend in a number of respects. Some amendments were consented to: in principle the costs of and occasioned by these amendments should be borne by the Claimants in any event.

The dispute is over the costs of the amendments which were opposed by the Defendants. In principle it seems to me that the costs of an opposed application to amend fall to be treated in the same way as the costs of any other opposed application, namely that they should follow the event. This requires one first to identify the successful party. But in the present case both parties had a considerable degree of success. The Claimants were granted permission to amend in certain respects, but the process of arguing the amendments identified certain problems with them, and in some respects the Claimants agreed to think again. I find it difficult to characterise either party as in substance the successful party. The application to amend was brought as part of the second CMC and it seems to me fair to both parties to treat the costs as costs in the case.

I will order the costs of the specific disclosure application, the CMC and the amendment application to be costs in the case.

In relation to the summary judgment application, I will order:

The Claimants to pay 30% of the Defendants’ costs of the application other than the expert’s fees (Mr Deetz and Navigant and VAT thereon).

The Defendants to pay 30% of the Claimants’ costs of the application other than Mr MacGregor’s fees (and VAT thereon).

The Defendants to pay 50% of the Claimants’ costs so far as they consist of Mr MacGregor’s fees (and VAT thereon).

40% of the Claimants’ costs of the application other than Mr MacGregor’s fees (and VAT thereon) be reserved to the trial judge.

The costs in (1), (2) and (3) to be the subject of detailed assessment on the standard basis if not agreed.

The Defendants to pay the Claimants £35,000 as an interim payment on account of costs within 14 days of the date this judgment is formally handed down.