R + V Versicherung AG v Risk Insurance and Reinsurance Solutions SA & Ors

This matter comes before me on an application by the claimant, R+V Versicherung A.G. (“R+V”), for an order that the sixth defendant, Mr. Jean-Claude Chalhoub, who was not originally a party to the proceedings, be jointly and severally liable with the first to fourth defendants for the payment to R+V of the costs that were the subject of the orders made on 16^th December 2004 and 18^th February 2005 following the conclusion of the trial.

The application arises out of a substantial piece of litigation between R+V, a large German insurance company, and four companies in what is known as the ‘Risk Group’. The group consists of a number of companies incorporated in various jurisdictions which carry on business under the name ‘Risk Insurance and Reinsurance Solutions’. For convenience I shall refer to the group as a whole as ‘the Risk group’ and the original defendants as ‘the Risk defendants’.

The circumstances which gave rise to the dispute between the parties and the issues that arose for decision at the trial are set out in some detail in the judgment I delivered on 18^th November 2004 ([2004] EWHC 2682 (Comm)) and need not be repeated here. It is sufficient for present purposes to say that the central issue was whether two binding authorities, under which R+V apparently authorised the first defendant, Risk Insurance and Reinsurance Solutions S.A. ( “Risk France”), to write contracts of reinsurance on its behalf obtained through the London market, were the product of a dishonest conspiracy between one of R+V’s senior underwriters, Mr. Daniel Gebauer, and the chief executive of the Risk group, Mr. Chalhoub. Having discovered what it considered to be evidence of dishonesty on the part of Mr. Gebauer and Mr. Chalhoub in relation to the London binders, R+V terminated all its underwriting authorities with the Risk group and sought relief on that basis. The Risk defendants contended that R+V had repudiated its obligations and made a counterclaim for damages in the sum of approximately US$80 million. After a trial lasting 29 days, in the course of which I heard evidence from Mr. Gebauer and Mr. Chalhoub among many others and considered a large body of documentary evidence, I reached the conclusion that there had been a dishonest conspiracy between Mr. Gebauer and Mr. Chalhoub in relation to the production and implementation of the London binders. In particular, I found that Mr. Chalhoub was aware when those agreements were signed that Mr. Gebauer was acting without authority and in breach of his duty to R+V. I therefore held that R+V had been entitled to revoke all authority given to the Risk group to underwrite on its behalf and that the counterclaim must fail. In reaching that conclusion I rejected the critical parts of the evidence given by Mr. Chalhoub on behalf of the Risk defendants. Questions of costs were adjourned to be decided at a later date.

On 16th December I ordered that the Risk defendants should pay R+V its costs of the claim and counterclaim, subject to a detailed assessment on a basis to be determined at a later date. I also ordered that they pay £500,000 on account of those costs by 13^th January 2005. The matter came back before me on 18^th February 2005 when I ordered that the Risk defendants should pay R+V its costs of the action to date (save for costs relating to the assessment of damages and an account, both of which were adjourned to another occasion), that those costs should be assessed on the indemnity basis and that the defendants should make a further payment of £500,000 on account of those costs by 4^th March 2005. Neither order for payment has been complied with.

Earlier this year Aikens J. ordered that Mr. Chalhoub be joined as a defendant to the proceedings for the purposes of costs only pursuant to CPR rule 48.2 and the claim form was duly amended and served on him through his solicitors. I now have to decide whether in the exercise of my discretion under section 51 of the Supreme Court Act 1981 it would be fair and just to make an order that he be personally liable jointly and severally with the Risk defendants for the payment of those costs.

Mr. Colin Edelman Q.C. on behalf of R+V put the application in two ways. First, he submitted that Mr. Chalhoub had exercised effective control over the litigation on behalf of the Risk defendants and in doing so had acted improperly by giving false and dishonest evidence which was the foundation both of the defence and of the very substantial counterclaim. That, he submitted, was sufficient on its own to justify making him personally liable for the costs of the proceedings. In addition he submitted that Mr. Chalhoub had controlled and financed the litigation and stood to benefit personally from the outcome, which provided a separate and independent basis for making him liable for the costs, or at any rate powerful additional grounds for making an order against him.

In support of those submissions Mr. Edelman drew my attention to a number of authorities in which the court’s jurisdiction to make an order for costs against a person other than a party to the proceedings has been considered. They included Symphony Group Plc v Hodgson [1994] Q.B. 179 (C.A.), Gardiner v FX Music Ltd (Mr. Geoffrey Vos Q.C., unreported, 27^th March 2000), Dymocks Franchise Systems (NSW) Pty Ltd v Todd[2004] UKPC 39; [2004] 1 W.L.R. 2807 and Goodwood Recoveries Ltd v Breen[2005] EWCA Civ 414. From those decisions I draw the following principles of particular relevance to the present case:

there are no hard and fast rules governing the exercise of the court’s discretion to make an order for costs against a person not a party to the proceedings; in each case the court must do what is just in all the circumstances;

an order for costs against a non-party is exceptional, but “exceptional” in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense;

particular caution must be exercised when the person against whom the order is sought is a witness whose evidence at the trial provides the foundation for the application against him;

when the person against whom the order is sought is the director or principal shareholder (or both) of an insolvent company care must be taken to ensure that there is not an unacceptable invasion of the principles of corporate identity;

nonetheless, it may be appropriate to make an order against a director or principal shareholder of an insolvent company if he controlled the proceedings and caused the company improperly to prosecute or defend them;

it will often be appropriate to make an order against a person who has funded and controlled the proceedings and who stood to benefit from them since he may well be regarded as the real party to the litigation; in such a case it is not necessary for him to have been guilty of any impropriety for an order to be justified;

the fact that the person against whom the order is sought could have been joined as a party to the proceedings at the outset is a matter to be taken into account because, as a party, he might well have been in a better position to influence the course of the proceedings; however, it is necessary in each case to consider the extent to which he has been prejudiced as a result of not having been joined at an earlier stage;

the applicant should warn the person against whom the order is sought at the earliest opportunity that an order may be sought against him so that he can decide what course he should take to protect his position as he thinks appropriate, but again the court should consider the extent to which the respondent has been prejudiced by any failure on the part of the applicant to notify the respondent of his intentions as soon as he might have.

It is necessary at this stage to say a little more about the Risk group. At the time with which I am concerned the group’s insurance activities were carried on by companies incorporated in various jurisdictions, including France, Italy, the United Kingdom and the United States. The companies incorporated in France and Italy were wholly owned by Risk Insurance and Reinsurance Solutions Ltd, a company incorporated in Cyprus (“Risk Cyprus”). The company incorporated in the United Kingdom, Risk Insurance and Reinsurance Solutions Ltd, was also owned as to 70% by Risk Cyprus. The other 30% of its shares were originally registered in the name of Risk France and were transferred to R+V pursuant to the terms of the addenda to the London binders. For tax reasons the shares in the American company were held by Mr. Chalhoub as a nominee for Risk Cyprus. It can be seen, therefore, that in terms of corporate structure Risk Cyprus was the ultimate holding company of the group. According to Mr. Chalhoub, he was the owner of a little over 25% of Risk Cyprus, the remainder of the shares being owned by his brother and various business associates including a Mr. Waheed Abdul Shakour. An examination of the companies register in Cyprus, however, has disclosed that Mr. Shakour is the registered owner of 124,999 of the 125,000 issued shares in the company. I infer, therefore, that he holds a large proportion of them as a nominee for others.

Standing outside this structure was another member of the group, Reass SARL, a company incorporated in Lebanon in 1997 (“Risk Lebanon”). According to the companies register in Baabda, 10% of the shares in Risk Lebanon are owned by Mr. Chalhoub personally. The balance is recorded as being owned by two practising lawyers, Me. Andrée Kmeid (70%) and Me. Sally Makhlouf (20%). It seems that Me. Kmeid, at any rate, has not heard anything about the company or its affairs since the time it was incorporated and it is likely in the nature of things that the two lawyers hold their shares as nominees for others. I have little doubt that Mr. Chalhoub could have cast a good deal more light on the arrangements relating to the shareholdings in Risk Lebanon, but he has not chosen to do so.

Risk Lebanon played an interesting and in some respects unusual role in the group’s operations. It was not a subsidiary of Risk Cyprus (unless Me. Kmeid and Me. Makhlouf held their shares as nominees for that company, but there is no evidence that they did), but it was the holder of an account at Banque Audi Suisse in Geneva which was used by the group as a clearing account. Mr. Cooper, the group’s chief operations officer, described at the trial how funds received by the various trading companies within the group were transferred to Risk Lebanon’s account at Banque Audi Suisse prior to being remitted to their final destinations. That evidence was given in connection with the transfer to R+V of funds received by way of premium. It was not necessary or indeed relevant in that context to explain how funds were remitted to the various companies within the group for use in connection with their operations or how funds were distributed by way of dividends or otherwise. Nonetheless, the evidence points to the conclusion that Risk Lebanon held the purse strings and to that extent controlled the movement of most, if not all, of the group’s funds.

The account at Banque Audi Suisse was opened in January 1999 by Mr. Chalhoub who was the sole signatory on the mandate. There is no reason why other signatories should not have been added later, of course, but the evidence filed in proceedings brought by R+V in Switzerland to freeze the assets of Risk Lebanon suggests that none had been added by the time the proceedings in this country began, or indeed that any have been added since. It appears, therefore, that at all material times Mr. Chalhoub was the sole signatory on the account through which most, if not all, of the funds received by the group passed. Certainly he has not made any attempt to dispel that impression.

Mr. Chalhoub was by his own admission the chief executive officer of the Risk group and largely responsible for the day to day management of its affairs. However, in a witness statement made in opposition to the present application he said that he is not, and has not at any time been, a director of any of the Risk companies and that as chief executive of the group he was responsible to a supervisory board and a management board made up of persons described as “Associates”. The Risk promotional material exhibited to his statement supports the existence of bodies of the kind he describes, but there is no evidence to support any suggestion that either the supervisory or the management board held regular meetings, took any commercial or policy decisions or exercised any effective control over the way in which he handled the group’s affairs. Evidence of that kind could well have had an important bearing on the issues that arose in the trial, but there was little or no reference to either of the boards at that stage in the proceedings and no documents were disclosed evidencing any meetings or decisions. In an affidavit sworn in May 2003 in opposition to R+V’s application for a freezing injunction Mr. Chalhoub described himself as “one of the main directing minds behind the Risk companies” and in my judgment I described him as “for all practical purposes the embodiment of the Risk Companies”. I still consider that to be a fair assessment of his position.

The impression I formed during the trial was that Mr. Chalhoub was also the person primarily responsible for the conduct of the proceedings. He may well have reported to others, such as M. Lamirand and M. Bultmann who were members of the supervisory board, but I have no doubt that he wielded a considerable amount of influence over all decisions relating to the litigation. That is hardly surprising given that the dispute arose out of business for which he alone was responsible and that success or failure depended very largely on whether the court accepted his account of events. In my view this is an important matter in the context of the present application. By persisting in his own account of his dealings with Mr. Gebauer, in particular in relation to the circumstances surrounding the negotiation and implementation of the London binders, Mr. Chalhoub effectively gave the Risk defendants little alternative but to press ahead with their defence and counterclaim. Whoever was in effective control of the litigation, therefore, he can properly be said to have exerted a profound influence over its course. However, the matter does not end there. Despite M. Lamirand’s assertion that he was responsible for all the litigation between R+V and the Risk group around the world, I am left in little doubt that it was Mr. Chalhoub more than anyone else who decided how the litigation in this country should be handled. I am satisfied, therefore, that he substantially controlled the litigation and was responsible for the fact that the Risk companies dishonestly persisted in a defence and counterclaim on what they knew was a false basis.

Sadly, it is not unknown for a claim or defence to be pursued on the basis of evidence that is ultimately rejected by the court as not simply unreliable but false and dishonest. In many such cases where the evidence in question was of central importance to the case being advanced it may be said that the dishonest witness caused the other party to the proceedings to incur the costs of the proceedings, but even so, the court will rarely be asked to make the witness personally liable for those costs and will even more rarely consider it appropriate to do so. The question is unlikely to arise unless the party by whom he was called is unable to pay the costs awarded against it and the witness himself is thought to be able to do so, and even in such cases the court may not consider that his role in the proceedings was of such central importance that it would be appropriate to make an order of that kind. Moreover, the court must bear in mind the importance of the general principle that a witness enjoys immunity from suit in respect of evidence given during the proceedings: see the comment of Balcombe L.J. in Symphony Group Plc v Hodgson [1994] Q.B. 179 at page 193. This was an aspect of the problem that received consideration in Phillips v Symes[2005] 1 W.L.R. 2043 where the application related to an expert witness. I accept, of course, that care must be taken to ensure that the principle is not infringed, but it is also necessary to bear in mind that its purpose is to encourage witnesses to tell the truth fearlessly, not to provide protection for those who seek to mislead the court by telling lies.

As I indicated when giving judgment on R+V’s application for costs to be awarded on an indemnity basis, this was a case in which the defence and counterclaim depended almost entirely on the evidence of Mr. Chalhoub and Mr. Gebauer which was both false and dishonest. That of itself is serious enough, of course, but Mr. Chalhoub’s involvement in the present litigation went far beyond that of an ordinary witness. This is a case in which he had a very large measure of control, if not complete control, over the litigation which he caused the Risk companies to pursue on the basis of his own dishonest evidence. He remained chief executive of the group until March this year and I can only assume, therefore, that until his resignation he continued to have some influence over the group’s affairs. It is significant, therefore, that the defendants have failed to comply with the order for an interim payment on account of costs or to make any proposals for doing so.

Miss Boswell Q.C. submitted that it would not be fair to make Mr. Chalhoub personally liable for R+V’s costs in circumstances where he was not made a party to the action at the outset and had not been formally warned that he might face an application of this kind if Risk’s defence failed.

These two considerations can be traced back to the judgment of Balcombe L.J. in Symphony Group Plc v Hodgson at page 193. In seeking to summarise the principles applicable to the exercise of the court’s discretion he observed that an order of the kind sought in this case will be even more exceptional where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings, thereby ensuring that he had the benefit of the protections offered by the rules of court and the opportunity to understand the issues before giving evidence.

It is convenient to deal first with the question whether R+V could have joined Mr. Chalhoub as a defendant and what would have been the consequences of doing so. Miss Boswell submitted that any claims R+V had against the Risk defendants on the one hand and Mr. Chalhoub personally on the other were mutually inconsistent and that it would therefore be particularly unfair to Mr. Chalhoub to allow R+V to obtain an order for costs against him at this stage in the proceedings given that it had chosen to pursue its claim against the Risk defendants at the trial instead of its claim against him.

Even if that were a correct description of the position, I do not think that it would necessarily militate strongly against the making of a non-party costs order against Mr. Chalhoub in this case, since the court is primarily concerned with factors such as the conduct of the person against whom the order is sought, his influence on the litigation, and thereby on the need for the successful party to incur costs, and his interest, if any, in the outcome. However, the argument is in my view misconceived. It proceeds on the assumption that R+V’s case was that Mr. Chalhoub was authorised by Risk to act as he did in connection with the London binders, but that is not so. R+V had granted other binding authorities to Risk companies as a result of negotiations between Mr. Chalhoub and Mr. Gebauer which had nothing to do with the London binders. Its case was that because Mr. Chalhoub had dishonestly conspired with Mr. Gebauer to obtain the signature of the London binders it was not bound by them and was entitled to terminate Risk’s authority to act under all the other contracts. The fact that it recognised that contracts of insurance written by Risk on its behalf with third parties might nonetheless be binding on it takes the matter no further. Mr. Edelman submitted that it was always open to R+V to join Mr. Chalhoub as a defendant to the action, had it wished to do so, on the grounds that he was personally liable for the wrongful acts which provided the basis for its claim against the companies. I think that is right. Moreover, even if the claims were mutually inconsistent, R+V would not have been obliged to make an election until the time came to seek judgment. I am satisfied, therefore, that R+V could have joined Mr. Chalhoub at the outset of the proceedings if it had wanted to do so.

In many cases the fact that the person against whom a non-party costs order is sought could have been, but was not, joined as a party at an early stage will be a factor that has to be taken into account, but I am unable to give it a great deal of weight in this case. As will be apparent from what I have said already, Mr. Chalhoub was at the centre of this litigation from the outset. He was well aware of the issues and of the implications which they had not only for the Risk group but for his personal reputation in the insurance market. He was also well aware that the outcome of the case would depend to a large extent on whether the evidence that he and Mr. Gebauer gave was accepted by the court. I have no doubt, therefore, that he was as well placed to understand the issues and to influence the course of the proceedings as he would have been if he had been a party. I think it unlikely in the circumstances of this case that he would have been separately advised and represented since there was no discernible conflict between his personal position and that of the Risk defendants and it is impossible to see how the evidence he gave could have been affected one way or the other.

The first intimation that R+V might seek an order for costs against Mr. Chalhoub personally was given on 10 ^th December 2004 when its solicitors wrote to the solicitors then acting for the Risk defendants warning them that an application of this kind might be made if it were unable to recover its costs from them. However, nothing further was said about the matter until Mr. Chalhoub was notified of this application by a letter dated 16 ^th March. It can be said, therefore, that not only was he not joined as a party, he was not warned at an early stage that he might face an application of this kind. However, I do not think that either of these matters is necessarily significant in itself given his close personal involvement in the case. What matters much more is whether he has suffered prejudice as a result.

Although Mr. Chalhoub does not suggest in his witness statement that he has been prejudiced in any way, Miss Boswell submitted that he has in fact suffered prejudice by being deprived of the opportunity to ensure that the court had before it better evidence of the administrative arrangements within the Risk group. Such evidence, she submitted, would have supported his assertions that he did not have effective control over its operations or the conduct of the litigation. In particular, she submitted that he is unable at this stage, particularly after having resigned as chief executive a few days before the application was issued, to obtain access to privileged information within the group’s control.

I can quite see that, if Mr. Chalhoub had severed his links with the Risk group in circumstances giving rise to a degree of mutual hostility, he could not expect to obtain much by way of co-operation. However, although he has ceased to be chief executive, it is not at all clear that he has in fact severed his links entirely or that he has been refused co-operation. If he had, that is something that he could be expected to have mentioned in his statement. Even if that were the case, however, it would not have prevented him from giving a much more detailed account of the matters to which he refers only in rather general terms in his statement. The suggestion that the Risk defendants might have been willing to disclose privileged information in the course of the trial in relation to a matter of this kind if only he had been a party to the action is one that I find it difficult to accept. It is not easy to see why such evidence would have been admissible, if it was not admissible already, nor is it easy to understand why Risk would have been willing to disclose it if it were not willing to do so in support of its own case. As I have already observed, evidence of reports to and discussions within the management board about the London binders and the decision to open an office in London would have been relevant to the issues as they stood. In the circumstances I am unable to accept that Mr. Chalhoub has been significantly prejudiced in relation to this application either by the failure of R+V to join him as a defendant or by its failure to give him more warning of its intention to make this application.

Mr. Edelman submitted that in addition to controlling the litigation and supporting Risk’s case with his evidence Mr. Chalhoub had funded the litigation and expected to benefit from its outcome. The basis for this submission was twofold: his admitted interest in Risk Cyprus and his position as sole signatory on the account of Risk Lebanon at Banque Audi Suisse.

I have already described the structure of the Risk group and Mr. Chalhoub’s evidence concerning the extent of his own beneficial interest in it. Although there is some doubt about the identities of the other persons interested in the company and their respective interests, I have no reason to doubt that he is the beneficial owner of a 25.5% of the shares in Risk Cyprus as he said both at the trial and again in the statement he made in opposition to this application. Mr. Edelman submitted that the fact that he was (and apparently still is) the sole signatory on the account at Banque Audi Suisse is consistent with his being the sole, or at any rate by far the largest, beneficial owner of the group and with the view that he has been funding the litigation, but I do not think that it is sufficient to support either of the conclusions for which Mr. Edelman contended. The fact that Mr. Chalhoub had, and perhaps still does have, sole control over the group’s funds is powerful evidence of his pre-eminent position within the group, but it does not point strongly to the conclusion that he held the majority beneficial interest or that he was personally responsible for providing the funds needed to maintain the litigation. At the time in question the Risk group was an active participant in the insurance market and could be expected to have funds at its disposal for use in connection with its business activities. The evidence does not in my view establish that Mr. Chalhoub was financially interested in the outcome in a way that would justify regarding him as the real party to the proceedings in the sense of the person for whose benefit they were being conducted.

Nonetheless, the matters to which I referred earlier, in particular the very high degree of control exercised by Mr. Chalhoub over the proceedings and the fact that Risk’s case rested very substantially on his own evidence, evidence which I have found to have been not only false but dishonest, do in my view make this an exceptional case by any standards. Having regard to those matters I have reached the conclusion that it is appropriate in all the circumstances to order that Mr. Chalhoub be liable for the payment of R+V’s costs jointly and severally with the original Risk defendants.