Interactive Technology Corporation Ltd v Ferster & Ors

On 19 June 2017, I heard applications for various orders which were claimed as consequential on a reserved judgment which I handed down in this case on 15 November 2016. The neutral citation of that judgment is [2016] EWHC 2896 (Ch). As my present judgment deals with one short point only, I will not summarise my earlier judgment but I will seek to make this judgment self-contained so that there need not be any reference back to my earlier judgment. I do need to explain however that the judgment dealt with a number of disputes between three brothers, Warren, Stuart and Jonathan Ferster who were equal one-third shareholders in the Claimant, Interactive Technology Corporation Ltd (“ITC”).

At the hearing on 19 June 2017, I made a number of orders but I declined to make one particular order for which ITC had applied. ITC had applied for an order for costs against the Defendants (apart from the 12^th Defendant which had taken no part in the proceedings) in relation to part of the costs incurred by ITC in respect of its claim, as distinct from the costs of other claims which were the subject of my earlier judgment. I declined to make that order but instead I reserved the costs of ITC’s claim. The present judgment contains my reasons for doing so.

ITC had claimed against the Defendants a number of heads of relief giving rise to various issues. As a result of orders made on 25 November 2015, 18 May 2016 and 1 July 2016, the scope of the trial was defined and, in particular, it was directed that the trial should determine issues of liability arising in ITC’s claim and the form of any relief but would not determine any issues of quantification in relation to any such relief. ITC’s claim was heard together with the hearing of a Petition under section 994 of the Companies Act 2006 which Jonathan Ferster had presented against Warren Ferster, Stuart Ferster and ITC (as a nominal defendant). In my earlier judgment, I determined all of the issues arising in the Petition.

In their skeleton argument in support of ITC’s application for part of ITC’s costs of its claim, Ms Stanley QC and Mr Atkinson have divided the issues which were involved in the ITC claim into two groups. They called the first group of issues “the Liability Issues” which were all determined in my earlier judgment. The Liability Issues were defined as the issues as to the ownership of a business and whether two agreements were binding on ITC. These were not the only issues as to liability which I determined in that judgment. The second group of issues included some issues which I determined and other issues which I did not determine. Within the second group, there were issues as to Jonathan Ferster’s remuneration as de facto managing director of ITC. I held that Jonathan Ferster had paid himself substantial sums as remuneration which had not been authorised by ITC and, on the election of ITC as to remedy, I held that ITC was entitled to equitable compensation in respect of the unauthorised remuneration. ITC applied for an order that Jonathan Ferster do pay ITC’s costs of the Liability Issues and an order reserving the position in relation to ITC’s costs of the other issues.

At the hearing on 19 June 2017, I was told that the Defendants had made three Part 36 offers in relation to ITC’s claim against them and an issue arose as to the approach which the court should adopt to ITC’s application for costs in the light of that information. In particular, I had to consider the effect of CPR 36.16 in this case. Ms Stanley QC, leading Mr Atkinson, made submissions on behalf of ITC on this point. The Defendants did not appear and were not represented at the hearing. However, this potential relevance of CPR 36.16 had been the subject of two earlier skeleton arguments prepared by counsel acting on behalf of the Defendants at earlier hearings in this litigation. Their counsel had been Mr Andrew Thompson QC and Mr Ben Shaw and I have considered their written submissions on the point which I am now considering.

CPR 36.16 provides:

“36.16.— Restriction on disclosure of a Part 36 offer

(1)

A Part 36 offer will be treated as “without prejudice except as to costs”.

(2)

The fact that a Part 36 offer has been made and the terms of such offer must not be communicated to the trial judge until the case has been decided.

(3)

Paragraph (2) does not apply—

(a)

where the defence of tender before claim has been raised;

(b)

where the proceedings have been stayed under rule 36.14 following acceptance of a Part 36 offer;

(c)

where the offeror and the offeree agree in writing that it should not apply; or

(d)

where, although the case has not been decided—

(i)

any part of, or issue in, the case has been decided; and

(ii)

the Part 36 offer relates only to parts or issues that have been decided.

(4)

In a case to which paragraph (3)(d)(i) applies, the trial judge—

(a)

may be told whether or not there are Part 36 offers other than those referred to in paragraph (3)(d)(ii); but

(b)

must not be told the terms of any such other offers unless any of paragraphs (3)(a) to (c) applies.”

Applying CPR 36.16 to this case, the position is as follows:

As explained, I now know that there are Part 36 offers and that they do not relate only to the issues which I have decided. That leaves two possibilities in relation to the Part 36 offers. Either they relate only to issues which I have not decided or they relate both to issues which I have decided and issues which I have not decided. I am not entitled to be told which of these two possibilities applies so I have to proceed on the basis that the Part 36 offers do, or at least might, relate to issues which I have decided.

The position therefore is that ITC applies for an order that the Defendants pay part of ITC’s costs at a time when the court is aware that the Defendants have made three Part 36 offers and the court does not know the terms of those offers but it does know that they might relate to issues which I have decided. In these circumstances, it was submitted on behalf of the Defendants that the appropriate course is to reserve the costs until the stage is later reached when the court can be told the terms of the Part 36 offers and can then take them into account when determining issues as to costs. In support of that submission, Mr Thompson and Mr Shaw relied on the decision of the Court of Appeal in HSS Group plc v BMB Ltd [2005] 1 WLR 3158. That case concerned an earlier version of Part 36 but it seems to me that the part of the reasoning in that case, to which I will refer, is still relevant in a case like the present where the court has determined some of the issues in the case but has not determined others and where there is a Part 36 offer which is not confined to the issues which have been determined.

In the HSS case it had been directed that the court should first consider the issue of liability and then, if appropriate, determine quantum. Prior to the direction splitting the trial, the defendant had made a Part 36 payment into court. The claimant succeeded at the trial on liability. The court was told that the defendant had made a Part 36 payment into court but not its amount. The judge held that the payment into court was not relevant to the question as to the costs of the trial on liability and he ordered the defendant to pay the costs of that trial. The Court of Appeal held that this approach was wrong in principle. Waller LJ said at [35] that in a case where the issue of damages remained to be decided then “in any but perhaps the most exceptional case” the judge could not do otherwise than to reserve the question of costs until after the damages were quantified.

Ms Stanley put forward a number of arguments as to why it was appropriate in this case to determine the liability for the costs of the Liability Issues at a time when I do not know the terms of the Part 36 offers. Her first argument was that it would have been open to the Defendants, and Jonathan Ferster in particular, to have conceded the Liability Issues so that ITC’s costs incurred in succeeding on the Liability Issues could all have been avoided. I do not accept that argument as a reason for determining an issue as to costs whilst I am in the dark as to the terms of the Part 36 offers which might be relevant. Her argument is similar to the argument which was held to be wrong in principle in HSS.

Next, Ms Stanley submitted that under the current wording of rule 36.16, and unlike the position under earlier versions of Part 36, it was open to someone in the position of the Defendants to make a Part 36 offer which relates only to the issues which are directed to be tried prior to any necessary determination as to quantum. She submitted that as the Defendants, and Jonathan Ferster in particular, had not protected themselves in that way, I could proceed on the basis that there was no Part 36 offer in relation to the issues which I have decided and award costs accordingly. I do not accept that argument. Even where there is a direction which splits the trial between issues of liability and quantum, or in some other way directs the trial of specified issues, it is open to a defendant to make a Part 36 offer which deals with the whole case and to expect the court to take that Part 36 offer into account when the court eventually deals with all of the costs of the action including the costs of the trial on liability, or on specified issues only. Quite apart from that general consideration, there is the further point that Ms Stanley’s definition of the Liability Issues in relation to which she applies for ITC’s costs is narrower than the issues which I have determined in accordance with the earlier directions as to the scope of the trial.

Ms Stanley sought to support her argument by referring to the note in the White Book 2017 at 36.16.1 which discusses the attitude which a court might adopt where a party has made a Part 36 offer which relates to the issues which have been decided and also a Part 36 offer which relates to all of the issues raised by the claim. That example is not what happened in this case and might give rise to different considerations. The note also refers to what sometimes happens in relation to the costs of interlocutory applications. As to that, it is sometimes the case that the court is satisfied that it is appropriate to make an order for costs in any event, rather than in the case, so that the potential effect of a Part 36 offer on the costs in the case will not be material. I do not consider that the note in the White Book is of any real relevance to the situation with which I am dealing.

Then, Ms Stanley argued that I could form the view that the Part 36 offers were simply “not relevant” to the Liability Issues so that I should separate out the costs of the Liability Issues and the other issues (to which the Part 36 offers might be relevant) and so make an award in relation to the costs of the Liability Issues at this stage. She submitted that I could reach the conclusion that the Part 36 offers were not relevant to the Liability Issues because of what had happened in relation to the Petition which Jonathan Ferster presented against Warren Ferster, Stuart Ferster and ITC (as a nominal defendant). She pointed out that the Liability Issues were also relevant to the issues raised by the Petition. When I heard submissions in relation to the costs of the Petition it was not suggested on behalf of Jonathan Ferster that the Part 36 offers were relevant to the decision as to those costs and I made an order dealing with the costs of the Petition. However, I do not accept the argument that these facts demonstrate that the Part 36 offers are not relevant to the Liability Issues. The reason that the Part 36 offers were not relevant to the costs of the Petition was that the Petition was a separate proceeding and both sides asked me to deal with the costs of the Petition separately. It was not submitted to me that Jonathan had made any Part 36 offer in relation to the Petition.

Then, Ms Stanley submitted that because of the overlap between the issues raised in the ITC claim and the issues raised in the Petition, it would not have been open to ITC to accept the Part 36 offers in relation to the ITC claim because, even after that acceptance, the parties would have had to litigate the same issues in the context of the Petition. I do not know that that is the case. It all depends on the terms of the Part 36 offers, which I do not know. If the Part 36 offers had disposed of the Liability Issues, or some of them, then that might have narrowed the matters which would have to be determined in the Petition. In any case, the submission would only be relevant if the overall result of the ITC claim was that ITC had failed to beat a Part 36 offer and ITC wished to argue that the usual result as to costs should not follow because it had an independent reason, attributable to the existence of the Petition, for not accepting the Part 36 offer.

Finally, Ms Stanley had a point based on the potential effect of rule 36.17. She pointed out that if it were to emerge, when all of the issues in the ITC claim were determined, that ITC had failed to beat a Part 36 offer, so that the normal result under rule 36.17 would be that Jonathan Ferster would be entitled to costs from the end of the relevant period (see rule 36.17(3)), the court would be free to override that result where it would be just to do so. She submitted that it would be unjust in this case to award any costs to Jonathan Ferster because for most of the time (but not all of the time) during this litigation, Jonathan had paid the legal fees which he had incurred with money which was held by various companies on trust for ITC. Thus, it was submitted, on the indemnity principle, Jonathan had not incurred any costs. I will assume for the sake of argument that this submission is sound in relation to Jonathan’s costs. If so, the court might hold that Jonathan Ferster could not recover costs against ITC, even if ITC failed to beat a Part 36 offer made by him. However, I am not at present persuaded that rule 36.17 would produce the result that ITC should have an order for costs against Jonathan Ferster in such a case. This point was only mentioned in passing at the hearing. Following the hearing, I released a draft judgment which gave my reasons for holding that rule 36.17 would not produce that result. I then received an email from Ms Stanley and Mr Atkinson inviting me not to reach a final conclusion on this point as it might arise for decision at a later stage in this litigation at a time when I would have the benefit of more detailed submissions on the point. In these circumstances, I have revised my earlier draft simply to record that I am not at this stage persuaded that whatever might be said later on this point should deflect me from making an order at this stage reserving ITC’s costs of the Liability Issues.

This is the reasoning which persuaded me that the right order as to costs to make at this stage in the ITC claim is that the costs should be reserved.