Automotive Latch Systems Ltd v Honeywell International Inc

The Defendant (Honeywell) applies for an order that the Claimant (ALS) provide security for Honeywell’s costs of these proceedings. The application is made on the ground that there is reason to believe that ALS will be unable to pay Honeywell’s costs if ordered to do so: CPR 25.13(2)(c). This provision of the CPR mirrors section 726(1) of the Companies Act 1985. ALS oppose the application on grounds both of jurisdiction and discretion.

As to jurisdiction, ALS submits (rightly) that the rule looks to the ability to pay costs at the time an order to pay costs is made and contends that, whilst presently ALS could not meet such an order, in two years’ time or so when any litigation would be likely to be the subject of a judgment and a costs order, ALS finances will be transformed by the success of its business such that it would be more than able to pay Honeywell’s costs should it then be ordered to do so. It is for Honeywell to show that ALS would be unable to pay the costs if and when ordered to do so.

As to discretion, ALS submits that any order for security would or might well stifle its proper claim, would seriously affect the ability to develop its business and that Honeywell is acting oppressively exemplified by the amount of security it seeks and the “inequality of arms” between ALS, an admittedly small start-up company, and Honeywell said to be “a massive American multi-national”. ALS also contends that its current financial weakness is itself the result of Honeywell’s conduct.

In May 2001 Honeywell and ALS entered into an agreement under which the parties agreed to collaborate in the development of ALS’ design for a latch system for car doors. The collaboration was not a success. Each party blames the other. Honeywell contends that the latch could not be made to work consistently or reliably and that its manufacture for mass production would have been uncommercial. ALS contends that Honeywell was in breach of the agreement in failing to develop the latch.

ALS purported to terminate the agreement for breach in late 2003. Honeywell treated this as repudiatory and accepted that the agreement was terminated.

In April 2004, ALS, by solicitors’ letter, claimed against Honeywell damages in excess of £2 billion for loss of contracts for sale of the latch which it alleged would have been achieved but for Honeywell’s breaches of the agreement. In July 2004, Honeywell’s solicitors responded in a long letter refuting the claim. A mediation took place, as provided for by the agreement, on 28 July 2004, but failed to resolve the dispute.

In September 2005, new solicitors for ALS wrote pursuing ALS’ claim now quantified at £173 million for loss of sales to four named manufacturers and a “loss of chance” case in respect of further sales of between £1.12 billion and £3.45 billion.

The present proceedings were issued on 12 January 2006. The allegations of breach were wide-ranging. Damages up to £3.45 billion were claimed. Honeywell’s defence was served on 15 March 2006. The defence raises further wide-ranging issues about the design of the latch, the conduct of ALS, causation and loss.

The hearing of this application for security was also the hearing of the first case management conference in the proceedings. ALS had served draft Amended Points of Claim at the end of July and, without opposition, permission was given for the amendments at the hearing. The amendments introduce causes of action in negligent misrepresentation and/or under the Misrepresentation Act 1967 and amend the allegations of loss and damage. Oral misrepresentations are alleged to have been made by four Honeywell employees at four different meetings between January and September 2000. Damages are now claimed on the basis that the breaches of the agreement by Honeywell caused sales of the latches to be delayed by some four years resulting in a loss of £632 million.

There can be no doubt that these proceedings are major commercial litigation involving (even as amended) very significant sums and issues of some complexity. A useful measure of the nature of the proceedings is that, with the reluctant acceptance of ALS, the case management directions provide for evidence from experts in four disciplines and a trial not before 3 March 2008 with a provisional estimated length of 6 to 8 weeks. Honeywell have named 11 potential witnesses of fact and ALS 5. Honeywell’s evidence, which I see no reason to question, is that the disclosure exercise will involve consideration of more than 60,000 e-mails and more than 250 files of electronic and hard copy documents.

It is, as I have said, for Honeywell to establish as a matter of probability that ALS would be unable to pay its costs should it be ordered to do so. Ignoring the possibility of interim costs orders in Honeywell’s favour, I accept Mr Auld QC’s submission for ALS that should there be a trial of ALS’ claim in accordance with the case management directions the probability is that the costs of such a trial would be unlikely to be dealt with before the late summer or early autumn of 2008. The sums then involved, on any view, will be substantial. It is ALS’ evidence that its own costs to the conclusion of disclosure will be £750,000 to £800,000 (of which it seems some part is the cost of the mediation and some £400,000 has already been incurred) and ALS has budgeted for total legal costs in the years 2006 to 2008 of £2.350 million, of which £1.5m is estimated to be incurred up to the end of 2007. Honeywell’s estimate of the costs to be incurred by it up to and including disclosure and inspection is £1.4 million.

The management accounts of ALS at 31 March 2006 show negative shareholders’ funds of £840,000. The most substantial asset is an inter-company loan to a subsidiary shortly described as VSS. VSS itself (which is the corporate entity now seeking to develop and market the latch) has negative current assets of £893,000 and negative shareholders’ funds of £931,000. The value of the loan should therefore be disregarded. Trading losses have continued and are budgeted to continue to the end of this year at a rate of £100,000 a month or more. As Mr McQuater QC, for Honeywell submitted, “as matters stand, quite obviously ALS lacks the ability to meet any substantial costs liability”.

Mr Roberts, ALS’ accountant, has produced a budget for VSS which shows income of £113,000 and a loss of £1.497 million for 2006, but an income of £19.2 million and a profit in excess of £15.5 million for 2007 and an income approaching £100 million and a profit of some £93 million for 2008. Of these figures some £9.8 million (2007) and £37.6 million (2008) is attributed to latches and the balance to other products about which there is almost no evidence and none which suggests the figures are really much more than wishful thinking. The figures for latches are themselves sub-divided into what are described as “firm” orders (some £19.6 million in total over the three years) and 3 other categories said to reflect lesser degrees of interest from possible customers.

In his submissions, Mr Auld understandably concentrated on the figures for latches said to reflect “firm” orders. So, too, did Mr McQuater. I do not think it necessary to address the evidence of these “orders” in detail. The essential facts are that no orders for any latches have been placed by anyone. The highest that ALS could put its case is that in one instance a letter of intent has been sent by Nanjing Automotive Corporation (the purchaser of “Rover”) to a company (“JHA”) with which ALS/VSS has an agreement for the manufacture by JHA of latches. The letter of intent is dated 18 April 2006 and specifically authorises only the supply of samples before 31 July 2006. ALS’ evidence is that “prototypes off tools of production latches” were successfully fitted to some Nanjing models in August 2006, but there is no evidence of any further letters of intent, let alone orders, for any further supplies at all either of samples or on a commercial scale. Nor is there proof that JHA is able to manufacture latches on any scale nor when it might be able to do so. Not one penny has been received by ALS or VSS from sales.

On the evidence, whilst I think it is fair to conclude that major motor vehicle manufacturers are showing interest in the latches, it is not such interest as has led to any firm orders or income now nearly 2½ years after the termination of the agreement with Honeywell. In my judgment the court can properly conclude that it is probable that ALS would be unable to meet a costs order against it should one be made in these proceedings. It is of some materiality that the climate of the automotive industry generally is not presently a happy one and remains fiercely competitive. There is also a further concern, rightly raised by Mr McQuater. If sales of the latches (or any of the other products) are made not only must the income from them be sufficient to exceed the accrued deficit of ALS and VSS at the time but the income will be the income of VSS not ALS. There is, apart from repayment of the loan and possible dividends, no basis on which ALS would itself be entitled to payment from VSS. It cannot, I think, be right to assume that the directors of VSS would determine that payments be made to ALS to cover the liabilities of ALS not least because VSS might properly require whatever funds were available to it to continue to develop its own business or to repay the investors in it.

For these reasons, in my judgment Honeywell has established the jurisdiction of the court to make an order for security on the basis for which it contends.

The submission that Honeywell caused the financial difficulties of ALS is not one which can, I think, be properly taken into consideration. So to determine would be to pre-judge one of the major issues in dispute in the proceedings. Nor is this a case in which it can be said that ALS ever had any resources of which it has been deprived by any conduct of Honeywell. ALS is and was at all times a start-up company dependent on its backers. ALS claims damages in effect for the failure of Honeywell to procure revenue for it. Counsel are agreed that whilst ALS’ claim is itself properly brought and reasonably arguable so, too, is Honeywell’s defence to the claim, and neither counsel contends that at this stage the merits can be seen to be sufficiently favourable to one party that such a consideration is material to the exercise of the court’s discretion.

I accept that any order for security in a significant sum would risk diversion of such resources as are available to ALS/VSS from the development of the business. But it is a common, if not inevitable, feature of any order for security that the paying company would expect to find a better use for the money if it did not have to pay it as security. There is a balance to be struck. ALS and its investors, are, it appears, able and prepared to see the products through to sales of the size budgeted for and to back the claim to the extent of sums for its own costs in excess of £1.5m. ALS has brought the claim and pursues it for a considerable sum. Yet ALS seeks to pursue it without exposure to the risk, which is a normal incident of commercial litigation in this country and a risk of which it was aware, of an effective costs sanction should the claim fail. That is potentially unfair and oppressive to Honeywell.

The evidence from ALS addressed to whether or not an order for security would stifle the claim is, I think, elliptical. There is evidence that ALS has an agreement with an investor to raise £2 million for a 2% stake in the company. But it is said (in the first witness statement of Mr Chevalier, the Chairman and Managing Director of both ALS and VSS) that the commercial position of the company “would be severely damaged if it were obliged to provide any security for Honeywell’s costs”. That falls short of evidence that the provision of security would stifle the claim. In his second witness statement, Mr Chevalier states that “it is equally clear that if, for example, ALS was suddenly required to find £1.4 million or any other substantial sum in cash as a result of the Defendant’s present application, this would seriously interfere with the development of the business and/or stifle the present claim”. This statement goes a little but not much further. It is nowhere said that should an order for security be made ALS could not meet it.

The evidence is that ALS firmly believes both in the products and the claim. So, too, it appears do those who finance it, although not much is known about them. I am not satisfied that an order for a substantial sum by way of security would stifle the claim. No doubt it would concentrate the minds of those who bring the claim and might impact on the finance available for the business of ALS/VSS, but if the figures put forward for that business and the confidence in the claim are in any way reliable then I think it reasonable and fair to conclude that such an order would not preclude the pursuit of either. Plainly, however, the amount of any security to be ordered is a real factor in that judgment. Indeed the amount of security claimed may not only cause oppression of itself but may also be an indication that the motive for the application is indeed to kill the claim or tactical rather than to secure the risk of an unsatisfied costs order.

As I have said, Honeywell seeks security up to and including disclosure and inspection in the sum of £1.4 million. Mr Auld characterised that amount as absurdly large and indicative of an unacceptable motive on the part of Honeywell. Mr Auld also criticised the nature of the evidence to support the figure which consists largely of hours of work done or to be done by Honeywell’s advisers and general descriptions of what some of that work has been or will be. To an extent I think these criticisms are justified. The figures do lack detail. The sum claimed caused at least one judicial eyebrow to be raised. But there are countervailing considerations. This is serious and major commercial litigation. Large sums are at stake as well as reputational issues. Honeywell is, as Mr Auld readily acknowledged, entitled to engage expensive representation but, he would add, not to do so at ALS’ expense. ALS itself has incurred and will incur very substantial costs to the same stage even deducting the costs of mediation. I do not find it difficult to accept that the bulk of the work and so costs of disclosure will fall upon Honeywell.

Allowing for the principles upon which costs of this magnitude would likely be assessed on a standard basis, and the greater work-load for Honeywell, in my judgment the figures put forward by ALS are more likely to be appropriate. I also think it right to keep in mind the burden any order will place upon ALS and its backers. Whilst I acquit Honeywell of using the application for the sum they seek as a means of oppression, I do think the company would have been well advised to moderate the demand.

My conclusions are that Honeywell has established the jurisdiction of the court to make an order for security and there are no discretionary considerations which would justify the court in nonetheless refusing to do so. The sum by way of security which I will order is a sum of £500,000. That figure is intended to cover all the work described in the evidence of Honeywell as costing or to cost £1.4million. Honeywell will, of course, be able to seek further security for other future costs which are not the subject of those calculations but plainly the basis and merits of any such application will have to be addressed in the light of the circumstances as they are then shown to be.

I will hear the parties when this judgment is handed down on the form and timing of the provision of the security, the appropriate form of order, and any other matters which remain outstanding.