Gallaher International Ltd v Tlais Enterprises Ltd (No. 2)

On 23^rd February 2007, I handed down a judgment which dealt with two out of four applications made by the parties at a pre-trial review (“PTR”) in this case. This judgment deals with the other two substantial applications that had been made for decision at the PTR and also some miscellaneous matters. Unfortunately the parties considerably underestimated the time needed for the PTR. Instead of the estimated one day hearing, it lasted two full days. The hearing days could not be consecutive. By the end of the hearing on second day, there was insufficient time for the claimant (“GIL”) to make reply submissions on the issue of security for costs of the counterclaim of the defendant (“TEL”). I was unable to hear any oral argument in the last major issue, which was an application by TEL for an order that the evidence of an expert witness of the claimant be declared inadmissible and that the expert be debarred from giving evidence at the trial.

The parties agreed that the balance of the argument in the security for costs application should be made in writing. They also agreed that I should deal with the application in relation to the expert evidence on the basis of the parties’ Outline Submissions that they had already served.

As I stated in the judgment I handed down on 23^rd February 2007, I will not set out the detailed facts which form the background to the claim and counterclaim in the two actions with which I am concerned. The facts are set out fully in a judgment of Gloster J, which was handed down on 20^th September 2006. In that judgment, Gloster J gave her reasons for ordering TEL to pay £550,000 by way of security for the costs of GIL in respect of its defence of TEL’s counterclaim in the principal action between GIL and TEL. I shall have to return to Gloster J’s analysis of the facts and the pleaded issues in relation to the present application for security for costs.

GIL’s first application for security for costs was made before the hearing in a Case Management Conference (“CMC”) on 26^th – 27^th July 2006. The original application by GIL was for security for all the costs of the action (i.e. both GIL’s claim and its defence to TEL’s counterclaim) for the period up to the exchange of experts’ reports. GIL sought security of £2.6 million. In the alternative, GIL applied for security for costs relating to TEL’s Part 20 claim, i.e. its counterclaim. On that alternative basis, GIL sought security of £595,000 of which £400,000 was estimated as the cost of an accountancy expert.

At the CMC on 26/27 July 2006, Gloster J dismissed GIL’s application for security for the costs of both the claim and the counterclaim of TEL. However, the judge concluded that GIL was entitled to security for costs in respect of TEL’s counterclaim and made an order that security of £550,000 be provided. In the light of the argument before me on Friday, 23^rd February, it is important to summarise the reasoning of Gloster J, which was set out in the reserved judgment handed down on 20^th September 2006.

First, Gloster J analysed the nature of the counterclaim, which had been pleaded (in the substantially amended form of February 2006) as having a value which exceeded US$500 million. The judge said that the first element of the counterclaim had been pleaded as consisting “of losses alleged to flow from GIL’s allegedly wrongful termination” of the Distribution Agreement between GIL and TEL. Under this general heading, the judge identified three particular items of loss claimed. The first is the loss of profits that TEL says it would have made during the remainder of the period of the Distribution Agreement. The second consists of unsold stock held at the date of termination of the Distributorship Agreement. The third is in respect of irrecoverable credits extended by TEL to customers at the time of the termination of the Distributorship Agreement.

Secondly, however, the judge stated (Footnote: ¹) that the counterclaim was not limited to profits that TEL claimed it would have achieved had the Distribution Agreement run its course, together with consequential losses, as I have described above. Gloster J continued:

In addition to the three heads of counterclaim referred to in that passage, in paragraphs 17, 18 and 19 of the judgment six further heads of counterclaim are identified. It is important that these be noted for the purposes of the present application by GIL.

First, TEL alleges that GIL supplied defective stock for the Iranian market. That stock is referred to in the pleadings and evidence as “the Damaged Dorchester stock”. The supply of defective stock is alleged to have cost TEL losses of over US$228 million, together with consequential losses. Secondly, TEL alleges that GIL failed to provide additional cigarettes brands under an agreement that was outside the terms of the Distribution Agreement. Thirdly, TEL alleges GIL failed to provide marketing support pursuant to yet another agreement outside the scope of the Distribution Agreement. Fourthly, TEL alleges that GIL failed to honour obligations undertaken outside the scope of the Distribution Agreement to ensure that TEL could recoup investment made during the period between May 2002 until 4^th March 2005. Fifthly, TEL counterclaims losses from GIL’s alleged breach of a further agreement, dated June 2003, by which GIL is said to have agreed to provide goods to TEL on 365-day credit terms. Goods provided under that agreement have been referred to as “the 365-day goods”. Lastly, TEL claims losses said to have been suffered because of GIL’s alleged supply of inaccurate information regarding a particular customer which caused TEL to lose the credit which it had extended to that customer.

Gloster J made further important findings in her judgment. First, the judge noted that TEL is a company incorporated under the laws of Cyprus and “it has failed to file any accounts with the Cypriot Companies Registrar since its incorporation in 2002, in breach of Cypriot Company Regulations.” That position remains the same today. Secondly, Gloster J found that the accounts of TEL, as presented to the court, “do not appear to show anything like a true and fair view of TEL’s financial position”. Mr Hill accepted at this PTR (in argument on the question of relief from sanctions) that TEL never kept any proper accounts at all in the relevant period. This has given rise to one of the problems with the preparation of the trial, because there have been delays by TEL’s accountancy expert who has been trying to produce “reconstituted” accounts for the relevant period of trading.

Thirdly, Gloster J held that “even on a cursory reading of TEL’s Defence and Counterclaim”, there could be no doubt that TEL’s counterclaim had “an independent vitality of its own”. (Footnote: ²) Gloster J characterised the issues raised by the counterclaim as:

Fourthly, Gloster J accepted the concession made by leading counsel for GIL, (for the purposes only of the security application then before her) that GIL had a liability to TEL in the sum of US$6.3 million, in respect of the destroyed or damaged “Dorchester” stock. The effect of this concession, as recorded at paragraph 37 of Gloster J’s judgment, is that “for the purposes of the security application it was right that I should regard GIL as secured to that extent.” However, the judge also concluded that against this figure must be set off GIL’s undisputed claim for US$3.239 million in respect of the so called “365-day goods”. Further, the judge held that the sum of US$4 million, which is admittedly owed by Mr Tlais to GIL (and is the subject of the personal action by GIL against Mr Tlais) must be set off against the sum of US$6.3 million. The judge held that the result of all this was that the US$ 6.3 million could not count towards security in respect of GIL’s costs of defending the counterclaim. That decision of the judge (Footnote: ³) has never been appealed by TEL. However, it tried to reopen the issue in the present hearing, in circumstances that I set out below.

Fifthly, the judge concluded that, although GIL had estimated the additional costs of defending the counterclaim as being 5% of the total costs of preparing disclosure and of preparing factual statements and 10% of the total costs of considering TEL’s disclosure, those percentages were chosen “on a very conservative basis”. The judge held that they had been produced by those acting for GIL on “an underestimated basis”. (Footnote: ⁴)

Lastly, Gloster J concluded (Footnote: ⁵) that security for costs of the counterclaim should be awarded. The judge held that “the figure of £550,000 was a conservative estimate for what could properly be characterised as the costs of the counterclaim. Indeed, as I have said, I regard it as an extremely conservative estimate”.

TEL did not attempt to appeal any part of that judgment.

GIL applied for additional security on 30^th August 2006. The sum sought as further security for the costs of defending TEL’s counterclaim was £1,120,018, in addition to the £550,000 that Gloster J had already ordered on 27^th July 2006. The hearing of this application took place before Gloster J on 22^nd September 2006. In estimating the additional further costs for which GIL sought security, its solicitors, Slaughter & May, had concluded that 50% of the further costs of GIL would be attributable to the counterclaim of TEL, save for the costs of disclosure where the percentage was estimated at 40%. This contrasted with Slaughter & May’s earlier estimation that the proportion of costs attributable to the counterclaim was between 5 and 10% of the total costs. Mr Richard Hill, who appeared for TEL at the hearing before Gloster J on 22^nd September 2006, heavily criticised this change of estimate by GIL’s solicitors.

Gloster J gave judgment on the second application on 22 September 2006. On the question of which issues could properly be attributed to the claim or the counterclaim, (in order to decide which costs could be allocated to the claim or the counterclaim), the judge said (Footnote: ⁶):

Gloster J concluded that it would be oppressive to order further security in the sum of £1.1 million in addition to the £550,000 security already given., Therefore, the judge ordered that a further £500,000 be provided by way of security, thus making the total of £1,050,000 as security for the costs of and incidental to the counterclaim. The judge stated that this figure was to stand as security “up to and including experts’ reports”.

In the judgment that I handed down on 23^rd February 2007, I set out the sequence of events and the actions and inactions of the parties between the hearing of 22^nd September 2006 and the PTR before me on 14^th February 2007. I shall not repeat that chronology.

GIL issued its present application for further security for costs of the counterclaim, up to and including trial, on 22^nd January 2007. The application sought further security of £1.3 million in addition to the security of £1,050,000 which had already been ordered by Gloster J. The parties have estimated that the trial of the claim and counterclaim will last 12 weeks. As I stated at the PTR, my view is that this is an underestimate. If all aspects are fought out I think the trial will last 14 weeks. Mr Nicholas Archer, the partner in charge of the case for GIL at Slaughter & May, has stated that GIL will be calling 17 witnesses. He says that of those, 3 would deal with the claim, 6 would cover both claim and counterclaim and 8 would deal only with the counterclaim. (Footnote: ⁷) Mr Archer has exhibited a schedule of estimated costs of GIL until the end of the trial. This estimate totals £2,691,267.00. (Footnote: ⁸)

Mr Hill, for TEL, accepted that the court had jurisdiction to grant an order for further security for costs in this case, because the condition set out in CPR Part 25.13(2)(c) is fulfilled. In short, he accepts that the Part 20 claimant, TEL, is a company or other body and there is reason to be believe that TEL will be unable to pay the costs of the defendant to the counterclaim if ordered to do so. Mr Hill also did not challenge the figures given in the estimate of the GIL costs to the end of the trial. However, Mr Hill submitted that no further security should be ordered in this case, for two reasons: first he submitted that GIL is already adequately secured, indeed he submitted it is over secured. On his best case, Mr Hill submitted that part of the security (currently paid into court) should be returned to TEL. Secondly, Mr Hill submitted that an order for further security for costs would stifle the counterclaim that TEL wished to bring. Mr Hill’s fallback position was that if some further security was to be ordered, then the amount sought was far too large. He submitted that the percentage of extra costs attributable to the counterclaims alone constituted only 5% of the total costs that are to be outlaid by GIL.

Mr Rabinowitz QC, who appeared for GIL, challenges each of these arguments.

In order to advance his first and third arguments, Mr Hill invited me to consider in detail an analysis of the issues in the case, so as to identify those issues which relate to GIL’s claim or to the part of TEL’s counterclaim that is independent of the claim of GIL. To do this, Mr Hill has asked me to examine various analyses of the issues. The first is a list of issues relating to the claim and the counterclaim set out in paragraphs 13(1) and (2) of the witness statement of Mr Archer, dated 22^nd January 2007. But TEL does not accept that this analysis fairly characterises the issues in the case. Its analysis is set out in paragraph 29 of the witness statement of Mr Tlais dated 9^th February 2007. A more sophisticated analysis of the issues going respectively to the claim and the counterclaim was undertaken by those advising TEL between the first and the second hearings of the PTR. The result of that further analysis is set out in a document exhibited to Mr Tlais’ witness statement dated 21^st February 2007. Mr Tlais’ list identifies 28 separate issues. Of these, he attributes 17 to the claim, 9 exclusively to the counterclaim and 2 to the personal claim against him.

Mr Hill also produced, at the second hearing, a table he had prepared. This sets out the parties’ rival contentions concerning which issues go to the claim and the counterclaim; references to the pleadings; whether or not a particular issue was within the list identified by Gloster J in her judgment of 20^th September 2007, and whether the item appeared in Mr Tlais’ schedule.

TEL’s advisors have also analysed the statements of five of the main witnesses in the two actions. They have attempted to attribute particular paragraphs or pages of the witness statement to claim issues or counterclaim issues. The conclusion drawn from this exercise is that the counterclaim takes up, on a rough average, about 6% of the witness statements that have been analysed. From this exercise, Mr Hill argues that, at best, only 5 or 6% of the total costs of the preparation for the trial and the trial itself can be attributed to counterclaim issues.

Mr Hill submits, therefore, that GIL is only entitled to 6% of the total costs of £2,691,267 as security for costs of the counterclaim. Thus, assuming that GIL can retain the security already granted, the maximum further security for costs to which GIL is entitled totals £161,476.02.

I do not accept that Mr Hill’s approach to the calculation of the percentage of costs relating to the counterclaim issues is the correct one. First, it is very well known that it is frequently the case that huge swathes of statements produced by witnesses contain evidence which turns out to be uncontroversial and so occupies the court no time at all at the actual trial. Obviously I cannot presently identify those parts of witness statements which will give rise to extended cross examination, which is what will take up most of the time at the trial itself.

Secondly, a large part of the costs of trial preparation will be taken up with the collation and production of trial bundles. I am not in a position to estimate accurately what part of the trial bundle preparation exercise (or the other aspects of trial preparation) can be specifically attributed to the claim or the counterclaim. This would be difficult enough even if there was agreement between the parties on what constituted a claim issue or a counterclaim issue. However, as is clear from Mr Hill’s latest schedule, there is much dispute about this question. I cannot resolve those disputes without a very detailed analysis of the pleadings and probably the witness statements and expert reports as well. In my view this is not an exercise that the Court should undertake (or be expected to undertake) on an application for further security for costs. A much more broad-brush approach has to be adopted.

It is clear from Gloster J’s analysis of the pleadings, in paragraphs 16 – 19 of the judgment of 20^th September 2006, that there are at least nine broad issues which arise on the counterclaim and which the judge has held give rise to losses that are not based on the termination of the Distribution Agreement. TEL does not (and cannot) challenge that analysis. Secondly, I am satisfied that a number of the issues identified by Gloster J will result in heavy costs being incurred by GIL both in relation to the preparation for trial and the trial itself. This is clear, in my view, from the evidence given in the 6^th witness statement of Samuel Coulthard, an associate solicitor with Slaughter & May.

In particular, he identifies the following issues:

TEL’s allegation of loss flowing from alleged breaches by GIL of an implied term of the Distribution Agreement to act in good faith towards TEL in its dealings with TEL and Her Majesty’s Customs and Excise (now HMCR). In relation to that claim there are numerous factual issues concerning (a) TEL’s allegation that GIL deliberately procured HMCE to issue a “red card” to TEL, and (b) whether TEL suffered a loss of reputation as a result and/or other losses. TEL claims that its losses under this claim are several hundred million pounds.

In relation to the “damaged Dorchester stock” counterclaim (for losses totalling $228 million or more) there will be much documentary evidence and oral evidence about the damaged Dorchester stock and the consequences (if any) of it being supplied to TEL.

The counterclaim concerning GIL’s alleged failure to fulfil its obligation to use best endeavours to reach an agreement with TEL to introduce a substitute brand or brands in place of the Sovereign brand will also involve much documentary and oral evidence. This counterclaim is valued at US$ 148 million. On Mr Tlais’ own evidence (Footnote: ⁹), this will involve an investigation of the history of the Sovereign brand during the “Namelex era” i.e. before TEL became the distributor in April 2002. I accept that all the evidence about Sovereign as a brand and the issues surrounding its replacement are counterclaim issues.

In relation to TEL’s counterclaim for US$45 million in respect of GIL’s alleged failure to honour obligations undertaken outside the Distribution Agreement to ensure that TEL could recoup investment made during the “Namelex” era, much documentary and/or evidence will be needed at the trial.

There are two heads of counterclaim which are said to arise out of agreements other than the Distribution Agreement. First there is the counterclaim for alleged failure by GIL to provide additional brands. Secondly, there is the alleged breach by GEL to supply goods on 365 days credit. TEL will have to establish that these agreements existed. GIL must prepare its defences on these counterclaims and to do so, must prepare relevant documentary and witness evidence.

At the hearing on 23^rd February 2007, Mr Rabinowitz submitted that, taken in the round, the work involved in the preparation for the trial and the trial itself which related to the counterclaim must account for between 40 – 50% of the total costs to be incurred by GIL from now on. However, Mr Rabinowitz accepted if the costs of the market and accountancy experts are left to one side (being totally associated with the counterclaim) then to date GIL has been awarded approximately 21 - 22% of its costs of the case as security for costs for the counterclaim. Mr Rabinowitz submitted that GIL was entitled to further security at least on this basis. If so, then GIL would be entitled to additional security for costs on the counterclaim of £600,000.

Neither side has put in evidence of a direct attempt to work out what percentage of time and work in trial preparation (eg. preparation of bundles etc) would be attributable to counterclaim issues. No-one has attempted to put a cost estimate on such work. Both sides have attempted to identify counterclaim issues and have attempted to calculate (by reference to witnesses or an analysis of witness statements) what percentage of pre – trial and trial time (and so costs) will be taken up with those issues.

I am not satisfied that either side has correctly estimated the pre- trial time and costs or the trial time and costs that will be taken up with counterclaim issues. I doubt it will be as high as 50% (as GIL asserts) or as low as 5% (as TEL asserts). On the information that I have about the nature and scope of the counterclaim issues, as I have attempted to summarise above, I have concluded that it is reasonable to assess the pre-trial work and the trial time attributable to the counterclaim issues at about 22% of the total work and time involved. I doubt that it will be less, but I am not satisfied that GIL has proved that it will be a greater percentage. Therefore, the maximum amount of additional security for costs to which GIL would now be entitled is £600,000.

However, I must now deal with TEL’s next argument which is that GIL is already amply secured for the whole of the costs of the counterclaim issues up to the end of the trial. This second argument is based on paragraphs 37 - 40 of Gloster J’s judgment given on 20^th September 2006. Mr Hill starts with the concession by Counsel for GIL (made wholly without prejudice and for the purposes of the security for costs application only) that GIL had a liability to TEL for US$6.3 million for the damaged Dorchester stock, so that for the purposes of the security for costs application, GIL should be regarded as secured to that extent. (Footnote: ¹⁰) Mr Hill accepts that a figure of US$3.239 million must be deducted from the figure of US$6.3 million to see what net security is in GIL’s hands. However, Mr Hill points out that Mr Tlais has alleged in his defence in the personal action that the parties agreed that US$3 million of TEL’s claim in respect of the Dorchester destruction/damaged goods could be set off against the US$4 million which is claimed by GIL in that personal action. Mr Hill submits that Mr Tlais would be entitled to amend his defence in the personal action to withdraw the allegation that the parties had agreed this set off TEL’s claim in respect of the Dorchester goods against the claims by GIL for US$4 million from Mr Tlais.

Mr Tlais has stated (Footnote: ¹¹) that “if it were absolutely necessary in order to allow TEL to continue to judgment in this action” he would “be prepared to consider abandoning” the claim in the personal action to set off US$3 million of the Dorchester destruction costs against the claim of US$4 million that GIL says is owed to it by Mr Tlais. But I fail to see how this could assist TEL’s position. If I assume, in TEL’s favour, that GIL owes TEL a sum of US$6.3 Million in respect of destroyed or damaged Dorchester stock, the fact remains that GIL says that Mr Tlais owes it US$4 million on the personal claim. Even assuming Mr Tlais waived the plea of an agreed set off in respect of the US$ 3million, the fact is that GIL’s claim for US$ 4 million remains. It has not been paid by Mr Tlais or TEL. I agree with Gloster J (at paragraph 39 of her judgment of 20 September 2006), that, for the purposes of security for costs, the US$ 4million has to be taken into account on the other side of the calculation, against the sum of US$6.3 million which GIL accepts (for these purposes) it owes TEL.

Therefore, I reject entirely the suggestion that GIL is over-secured or the suggestion that Mr Tlais or TEL can improve the position by the proposed amendment to the defence in the personal action.

Lastly, I must deal with Mr Hill’s submission that any order for further security of costs to be provided by TEL at this stage would lead to the counterclaim being stifled. He submits that if the court ordered that pursuit of the counterclaims is dependent on the provision of further security by TEL then the counterclaims would be stifled because TEL does not have the funds to provide further security to GIL.

Mr Hill accepts that a court will only refuse to order security on the ground that to do so would unfairly stifle a valid claim if, in all the circumstances, the court is satisfied that it is probable that the claim would be stifled as a result of such an order. Mr Hill also accepted that the court has to consider whether funds can be obtained from “other backers or interested persons” as well as TEL’s own resources. The burden is on TEL to demonstrate that there is no prospect of funds being available and forthcoming from any outside source. (Footnote: ¹²)

Mr Tlais states in his witness statement of 9^th February 2007 (paragraph 45) that TEL is not in a position to meet any order for payment of any additional security, nor is he personally, nor is there any other “backer” that can do so. Mr Tlais accepts that his wife owns three properties. Two of these are residential properties in Limassol, with a combined value of CY£1.3 million (Footnote: ¹³) (ie. £1.5 million sterling). The third is a commercial property in Nicosia. That is currently valued at CY£2.8 Million, (i.e. £3.2 million sterling). Mr Tlais’ evidence is that it has not proved possible to use the two residential properties as security to raise loans to provide the security for costs that has already been ordered by the court. He says that the Bank of Cyprus will not release the two properties to be given as security because there is an outstanding mortgage in the sum of CY£112,000 secured against these properties. Mr Tlais states that the mortgage covers facilities provided to a company called Coley Enterprises Limited, which is owned by his daughter. He says that the company cannot repay the indebtedness and the Bank of Cyprus is maintaining its security for the overdrawn account accordingly.

Mr Tlais goes on to explain that banks in Cyprus are generally unwilling to take residential properties as security for commercial debts, “because the courts in Cyprus are unwilling to allow repossession of residential properties when they have been given as security in such circumstances”. Mr Tlais explains that the two properties cannot be sold because one is his home and the other is the home of his daughter.

With regard to the commercial property in Nicosia, that is already subject to a mortgage to secure a loan of CYP£1.5 Million (ie £1.7 million sterling). That money has been used to provide the security already ordered and various costs concerned with the current litigation, totalling £1,320,000. Of the balance, £120,000 has “been ring fenced to meet interest payments”. Mr Tlais says that the remaining £200,000 “is the sum that TEL now has to see this matter through to its conclusion”. Mr Tlais says that this is not enough and he estimates that TEL’s total costs to pursue this matter to the end of the trial will be approximately £1,480,000 Sterling.

All this evidence is challenged by GIL. In emphasising the burden that lies on TEL to demonstrate that it is probable that the claim will be stifled if an order for security for costs is made, Mr Rabinowitz noted that the effect of this is that, effectively, TEL has to prove a negative. It must show, on the balance of probabilities, that there are no other funds available to either TEL or its “backers” to finance the litigation. Mr Rabinowitz submits that TEL cannot demonstrate this, not least because neither TEL nor Mr Tlais himself has given full and frank disclosure of the financial position of TEL, Mr Tlais himself or his family or the businesses associated with Mr Tlais and his family.

Mr Rabinowitz submits that, on the evidence, there are four sources of funds available to TEL. First, he submits the three properties belonging to Mrs Tlais can provide security for further funding. Secondly, funds would be available from the family’s bankers “Banque De Liban et D’outre Mer” (“BLOM”). Thirdly, TEL, through Mr Tlais, has access to funds from trading companies with which Mr Tlais is concerned. Lastly, the Tlais family has further assets which can be used to provide the security against further loans which can then be used to furnish security for costs. I heard detailed submissions on each of these four areas.

In relation to the two residential properties and one commercial property owned by Mrs Tlais, the evidence of Mr Tlais (at paragraph 29) in his witness statement of 5^th December 2006 was that the two residential properties would provide sufficient security to enable the then outstanding order for security of £1,050,000 to be met. With regard to the commercial property, Mr Tlais said that it had already been “earmarked” as security to fund the defendant’s defence and counterclaim for the remainder of the proceedings. Subsequently, Mr Michael Clarke, an employee of TEL, said in his witness statement dated 29^th January 2007 that the two residential properties could not be used as further security. Paragraph 6 of Mr Clarke’s statement says that the properties remained charged to the Bank of Cyprus, where TEL has “an overdrawn facility” and the two properties were “encumbered to the extent of that facility”. Mr Clarke also states in the same paragraph that there had been a change in the law in Cyprus affecting banks’ ability to enforce their security in the case of private residences. As a result of this banks were “in principle refusing to secure commercial debts on residential property” so that TEL would not be able to raise any further funds on either of these two properties.

In Mr Tlais’ witness statement of 9^th February 2007 (at paragraph 58) he states that the two residential properties are security for facilities provided to Coley Enterprises Limited, a company owned by his daughter. He goes on to reiterate (in paragraph 59) that banks in Cyprus are unwilling to take residential properties as security for commercial debts for the reasons given in Mr Clarke’s witness statement. Mr Tlais does not explain why the Bank of Cyprus has apparently been prepared to take mortgages on these two residential properties in respect of a facility granted to Coley Enterprises Limited, but would not be prepared to do so for TEL. Nor does Mr Tlais explain why, in his statement of 5^th December 2006, he described the residential properties as “unencumbered” whereas, subsequently in his statement of 9^th February 2007 he says there is an outstanding mortgage as security for the facility granted to Coley.

In a witness statement of 13^th February 2007, Mr Coulthard, an assistant solicitor of Slaughter & May, states that a trainee of GIL’s solicitors spoke to Mr Jonathan Mills of Barclays Bank Branch in Nicosia, Cyprus, on 6^th February 2007. He asked whether a Bank in Cyprus would be prepared in principle to lend funds to finance commercial litigation secured on residential property in Cyprus. The information given by Barclays was that in principle such loans would be given, although only up to 50% of the value of the residential property concerned. Mr Coulthard also states that GIL’s Cypriot lawyers had told him there had been no recent change in law affecting the willingness of banks to lend money for commercial purposes where it is secured on residential property.

At paragraph 13 of his witness statement of 22^nd February 2007, Mr Tlais refers to a letter “confirming the Bank of Cyprus’ position” in relation to Coley Enterprises Limited. This letter, dated 7^th February 2007, deals with the current balance owed by Coley Enterprises Limited and records an agreement that this will be repaid in full by the end of March 2007. However it does not deal at all with the question of possible other advances in favour of TEL to finance commercial litigation.

The position with regard to the two residential properties is therefore, in my view, very unclear. I am not satisfied that it would be impossible for TEL, through Mr and Mrs Tlais, to raise funds to finance payment of additional security for costs or to finance the litigation generally, on the basis of the security of these two properties.

With regard to the commercial property of Mr Tlais in Nicosia, the original position of Mr Tlais in December 2005 was that this property was available to fund the litigation (see paragraph 29). However in his statement of 9^th February 2007, Mr Tlais says that at the time of his last witness statement, he approached various Banks, including the Laiki Bank, for an advance on the security of this property. Laiki bank advanced CY£1.5 million against the security of the Nicosia property. However, the only evidence adduced in support of this arrangement, which is exhibited to Mr Tlais’ statement of 9th February 2007 is a letter dated 8^th February 2007, addressed to Messrs C A-Sarels Developers Limited, Limasol. It is signed by Marfin Popular Bank Public Co Ltd. The letter states:

In a subsequent witness statement of 22^nd February 2007, Mr Tlais refers (at paragraph 13) to a subsequent letter, in the form of a fax sent from “Laiki Group”. This letter also refers to CA-Sarels Developers Limited. The letter states:

Mr Tlais also exhibits two printouts of accounts of C A-Sarels Developers Limited. One shows a debit of £1,451,073 as at 20^th February 2007. The other shows a modest credit balance of £44,000.

It remains entirely unclear whether C A-Sarels Developers Limited is the owner of the Nicosia property, as opposed to Mrs Tlais, or whether there is in fact, any existing mortgage on the property. Overall it appears to me, on the evidence I have seen, that there is no existing mortgage. Given this state of the evidence, I am not satisfied that TEL has demonstrated in respect of the three properties that there is no prospect of funds being available to TEL, using these properties as security.

In relation to the question of whether or not further funding could be provided by BLOM, the evidence is even more unclear. When Gloster J gave judgment on 8^th December 2006 (Footnote: ¹⁴), the judge described Mr Tlais’ previous witness statements as being “coy about the financial position of Mr Tlais and his family interests”. Gloster J also commented that Mr Tlais’ witness statement did not depose to his current financial position and whether or not he was currently in business and, if so, in what field and whether or not he was generating any type of income.

In his witness statement of 9^th February 2007, Mr Tlais states (at paragraph 47) that the “facilities of my family at BLOM utilised to trade TEL remain substantially overdrawn”. He also states (at paragraph 48) that BLOM is “not now prepared to provide any further funding or loans”. Mr Tlais states ( at paragraph 47 of his statement) that he believes the current balance on his families’ facility at BLOM is some US$25 million overdrawn.

In his witness statement of 13^th February 2007, Mr Coulthard comments (at paragraph 59) that it is not credible that someone could have an overdraft of US$25 million but not have any written evidence of it at all. He further comments (at paragraph 60) that there is no written evidence to corroborate Mr Tlais’ assertion that BLOM will not provide Mr Tlais with any further overdraft facilities.

Mr Tlais has responded to these criticisms in his witness statement of 21^st February. Mr Tlais attaches two schedules to the witness statement. The first sets out what he describes as “the up to date” balances of family bank accounts. There are 69 separate accounts in the names of brothers of Mr Tlais or associates. There are five accounts in the name of High Street Enterprises Limited. There are nine accounts in the name of TEL. There are three accounts in the name of Coley Enterprises Limited. All the personal accounts are with BLOM. All of the accounts of TEL are with BLOM, save for one which is with the Bank of Cyprus. All the Coley Enterprises accounts are with the Bank of Cyprus. CA-Sarels Developers Ltd has three accounts. One is with the Bank of Cyprus and two are with Laiki bank. Tlais Trading Co Ltd has two accounts with the Bank of Cyprus. Mrs Tlais has two accounts, one with BLOM and one with the Bank of Cyprus.

In Schedule B to Mr Tlais’ witness statement of 21^st February 2007, he sets out a summary of the present position. Tlais Enterprises Limited has a negative balance of US$1,319,404.47. High Street Enterprises has positive balance of US$2,837.50. Mohammed Ahmed Tleiss and Fahd Ahmad Ismail have negative balances of US$508,702.74. However, there are deposits of US$18 million in accounts in the name of those two gentlemen. Taleb Ahmad Tleiss has a credit balance of US$624,309.00. Mr Taleb Ahmad Tleiss has a credit deposit of US$14,624,308.00. Mr Mohammed Ahmed Tleiss has a debit balance of US$42,909.92. However, he also has a credit deposit of US$6,500,000. The net position of all these accounts is that they are US$1,243,958.23 in debit.

Mr Tlais has also exhibited a letter dated 20^th February 2007 from BLOM, Limassol branch, addressed to “Messrs Tleiss Limasol” for the attention of Mr Abdel Aziz Tleiss. This letter apparently refers to two accounts, respectively account number 895296, in the name of Mohammed Tleiss and Fahd Ismail and account number 895512 in the name of Mohammed Tleiss. The letter was sent in response to a letter of the same date from Mr Tlais himself. In that he had asked BLOM to confirm “if there are any other facilities that can be made available by the Bank in relation to” the Tlais family accounts. BLOM’s answer is equivocal. It states:

I draw two conclusions from this evidence. First, it was incorrect of Mr Tlais to say (as he did at paragraph 37 of his witness statement of 9^th February 2007) that he believed the current balance on his families’ facility at BLOM was US$25 million overdrawn. The net debit balance appears to be US$ 1,243,958.23. Secondly, I am not satisfied, on the basis of the very equivocal letter from BLOM dated 20^th February 2007, that further facilities would not be granted by BLOM to either Mr Tlais himself or the Tlais family generally. The letter simply states that the credit facilities that have been granted at the Cyprus branch for two specific accounts “have been fully utilised as at present”. It says nothing about the future or any possible future facilities, if some are sought for the purpose of fighting litigation which, if TEL and Mr Tlais are successful in the counterclaim, could result in damages being awarded for hundreds of millions of dollars.

Mr Rabinowitz reminded me that Mr Tlais has stated in his witness statement for the trial (at paragraph 33) that he has business interests in the Middle East, Cyprus and Africa in the retail, property and textile areas. There is no evidence before me in relation to the security for costs application on these businesses or their credit position or whether it would be possible to raise funds from those businesses to finance the current litigation by TEL.

In reviewing the figures, I have taken account of the evidence of Mr Rondel’s fourth witness statement of 13 February 2007, filed on behalf of TEL. In relation to the BLOM accounts, Mr Rondel’s evidence would appear to have been overtaken by that of Mr Tlais in his witness statement and exhibits that were filed on 21 February 2007. The statements from BLOM that Mr Rondel exhibits appear to relate only to two particular accounts. The letter from BLOM dated 8 December 2006, which is addressed to Messrs Mohamad Tleiss and Fahd Ismail, relates to one account only and refers to a request of 8^th November 2006 to increase a credit facility by US$ 5million. The letter states that this request is refused, but it does not state the purpose of the proposed additional facility nor the proposed security, other than it would be property.

I have also taken account of the fact that when the Distribution Agreement was started, Gallaher agreed to place a US$5 million deposit with BLOM in account 895269, in order to induce BLOM to continue over the next five years to extend banking facilities to Fahd Tleiss and Mohammed Tleiss and other signatories to their accounts. That deposit is still in place and I understand that it will remain so for the present.

The last aspect I have to consider under the general heading “stifling” is whether Mr Tlais and TEL have satisfied me, on a balance of probabilities, that further funds will not be forthcoming from the Tlais family generally. From the evidence that I have already set out it is clear that the Tlais family is much involved in various businesses. Mr Hill accepted that the Tlais family has already backed Mr Tlais and TEL considerably in the current litigation. Mr Hill also accepted that TEL is a family business and that it had had backing from Mr Tlais’ family. He did not accept Mr Rabinowitz’s submission that the Tlais family will generally benefit if the counterclaim is successful. However, it seems obvious to me that the family will indeed benefit if TEL is successful in its counterclaim. There is no evidence from any other member from Mr Tlais’ family to suggest that they will not benefit and, given the backing already provided by the family to TEL, I must conclude that the family would benefit if the litigation by TEL were to be successful. No family member has made a witness statement saying he (or she) will not provide further backing for the present litigation. On the current evidence, including the list of bank accounts exhibited to Mr Coulthard’s statement of 13^th February 2007 (page 47 of the exhibit) it appears that at least one member of the family, Taleb Ahmad Tleiss, has substantial funds available to assist TEL.

Accordingly I conclude that TEL has not satisfied me, in all the circumstances, that it is probable that the counterclaim would be stifled if TEL was ordered to pay security. I am not satisfied on the evidence available that there is no prospect of funds being available and forthcoming from any source outside TEL to finance the litigation by TEL. Accordingly, this defence to the application for security for costs fails.

I have concluded, for the reasons set out above, that:

There are substantial issues which constitute free standing counterclaims by TEL in the main action and the counterclaim is for very substantial sums indeed;

GIL is not already “over secured” by reason of the admitted amount due to TEL in relation to the “Dorchester brand”.

I am not satisfied that an order for security for costs of the counterclaim against TEL would probably stifle the counterclaim.

In these circumstances, I have to consider, as a matter of discretion, whether to order further security for costs of the counterclaim in favour of GIL and if an order should be made in principle, what sum it should be. Mr Hill has advanced no other general basis on which I should refuse to grant security for costs of the counterclaim. I am quite satisfied that the costs of preparing for the trial of the counterclaim and of the trial itself will be very considerable. As I have already stated, on the basis that approximately 21-22% of the total trial preparation and trial costs are attributable to the counterclaim, the additional costs to GIL will be in the region of £600,000.

However, in my view it would not be right to order that sum as security for costs. There is the possibility that the whole case may settle between now and the trial. There is also the possibility that some issues will be resolved either before trial or during the course of the trial itself, thus cutting the trial down and reducing costs. It is impossible to estimate whether this will happen or not or when it might happen. But as that must be a real possibility, I have concluded that I should, as a matter of discretion, discount the claim for security for costs by 33%.

Accordingly, I order that TEL will provide additional security for GIL’s costs of the counterclaim up to and including trial (in addition to the security already ordered by the orders of Gloster J) in the sum of £400,000. This security must be provided within 28 days of this judgment being handed down.

TEL’s application notice dated 6^th February 2007 seeks an order that the expert report of Mr Goel in the fields of Industry Practice and Markets should not be admissible at the trial and that Mr Goel should be debarred from giving expert evidence. The ground given in the application notice is:

Mr Goel is an employee of Gallaher Limited, which is an associate company of the claimant in the main and the personal actions. Mr Goel has prepared a report dated 19^th January 2007 on behalf of GIL. The report deals with three matters which are set out at paragraph 3 of the report. These are: first, the steps that, in his opinion, a person could or should make in developing legitimate business in an export market and an analysis of the relevant importance of those steps. Secondly, the nature of the specific conditions in each of various markets in Middle Eastern countries that would effect the steps necessary or available to develop legitimate business in those markets. Lastly, his view on the relevance of the clauses of the TEL Agreement to the building of legitimate businesses and the prevention of smuggling.

Mr Goel states in paragraph 1 of his report that he has spent most of his career working in the tobacco industry, in particular being involved in the building of legitimate business in export markets. Mr Goel describes in detail his experience and expertise at paragraphs 19 – 39 of his report. He officially became an employee of Gallaher Limited on 1^st July 2006, that is after the Distribution Agreement between GIL and TEL had been terminated.

In paragraph 40 of his report, Mr Goel states that he has read and considered Part 35 of the CPR together with the Practice Direction and “the protocol for the instruction of experts to given evidence in civil claims”. He states he has also read Appendix 11 to the Commercial Court Guide. He says he has “been trained on the nature of my duties as an expert by an independent barrister, David Cavender, who has had no other involvement with this case.”

At paragraph 41 of the report, Mr Goel states that Gallaher Limited has seconded him from his usual commercial role in order that he might act as an expert in the current case and “in order to ensure my independence and objectivity”. In paragraph 42, Mr Goel states that he has not been offered any reward for writing the report other than his usual salary and a fixed bonus payment in lieu of the performance related bonus that he would have been eligible to receive had he not been seconded from his commercial role. The fixed bonus has been calculated on the basis of the bonus that he received for 2006. At paragraph 43, Mr Goel states that he has not discussed the litigation or the facts underlying it with anyone employed by Gallaher nor with anyone for whom a witness statement has been served.

Mr Goel has been involved in the tobacco industry for 16 years since 1990. Between 1990 and 2004, he worked for British American Tobacco (“BAT”). At paragraph 35 of his report, Mr Goel says:

It is implicit in that statement that there are very few experts in the international cigarette industry who can give authoritative opinions on matters concerning the development of legitimate businesses in exports markets in the tobacco industry.

CPR Part 35.3 provides as follows:

Mr Hill, on behalf of TEL, submits that Mr Goel is not independent, because he is an employee of Gallaher Limited and will continue to be so after the litigation has ended. Mr Hill points out that the solicitors for TEL, Picton Howell, have written to Slaughter & May (solicitors for GIL) to ask why GIL had chosen an employee to be its industry/markets expert as opposed to a non-employee and also to ask when Mr Goel was first provided with information, documentation and instructions. Mr Hill notes that the letter from Gallaher Limited to Mr Goel which sets out the terms of his secondment is dated 12^th January 2007, that is only one week before Mr Goel’s report was completed.

Mr Hill submits that Mr Goel’s involvement with various areas of Gallaher’s business will prevent him from being an independent expert witness and also mean that his report is “contaminated”. Mr Hill relies particularly upon the fact that Mr Goel was made a consultant for the Middle East market in July 2005 and was responsible for introducing Gallaher to a “large regional distributor to access the Iran/Iraq and UAE markets”: (Goel report, para.38). Mr Hill submits that it would therefore appear that Mr Goel had responsibility for appointing a replacement to TEL for the distributorship in those areas. It is TEL’s case that one of the reasons Gallaher wished to terminate the TEL Distribution Agreement was because GIL wished to replace TEL with another distributor for commercial reasons.

Mr Hill also relies upon the fact that Mr Goel must have had discussions with people or been party to information that would make it very difficult, if not impossible, for Mr Goel to provide independent opinion evidence in relation to the market in the Middle Eastern area at the relevant time.

Mr Hill submits that GIL has provided no reason why it should use an employee as its expert. In the light of this failure and GIL’s failure to deal with TEL’s concerns as to Mr Goel’s independence, the court should declare Mr Goel’s reports inadmissible and debar him from giving expert evidence at the trial.

I was referred to a number of authorities which have considered the question of whether an expert who is employed by the party wishing to call him can fulfil the requirement of independence required by the CPR. The authorities are: Field v Leeds City Council [2000] 1 EGLR 54 (Court of Appeal); Admiral Management Services Ltd v Para-Protect Europe Ltd [2002] EWHC 233 (CH) (Stanley Burnton J.); Regina v Factortame Ltd & Others v The Secretary for Transport, Local Government and the Regions (No. 8) [2002] 3WLR 1104 (Court of Appeal); and Armchair Passenger Transport Ltd v Helical Barr plc [2003] EWHC 367 (QB) (Nelson J).

In the last of these cases Nelson J considered a number of authorities including Factortame (No 8) and the Field v Leeds CC case. At paragraph 29 of his judgment he stated:

I respectfully agree with and adopt that summary of the principles.

In this case I have no hesitation in concluding that, the report of Mr Goel should be admitted and he should be permitted to give evidence. I have reached this conclusion for a number of reasons.

First, the fact that Mr Goel is an employee of Gallaher Limited is openly declared. Secondly, the terms on which Mr Goel is to be employed for the period that he is providing expert evidence in relation to the current case are set out in the letter of 12^th January 2007 which has been disclosed to TEL and Mr Tlais. That letter makes it clear that for the period of Mr Goel’s secondment, his duty is to act as expert witness in accordance with the CPR and as instructed by GIL. The letter also states that GIL “undertakes not to make any claim or demand and not to assert any right or interest of any kind or nature whatsoever in whatever capacity or jurisdiction arising out of, related to or connected with any evidence that you may give in fulfilling your role as an expert witness in he case”. The letter also provides for remuneration during the period of Mr Goel’s secondment. I am therefore satisfied that GIL has done as much as it can to isolate Mr Goel from the rest of Gallaher during the time he will be used as an expert.

Thirdly, I am satisfied that Mr Goel not only has the relevant expertise, but also that he is keenly aware of his primary duty to the court if he gives expert evidence and that he is both willing and able, despite the connection with GIL, to carry out that duty. That is all clear from the terms of the report that Mr Goel has prepared. TEL has produced no reason why I should doubt the statements of Mr Goel in his report. If I were to doubt them, that would be tantamount to finding bad faith on the part of Mr Goel. That has been neither asserted nor proved.

Fourthly, it is clear from Mr Goel’s report that experts in this area are scarce. If I were to conclude that Mr Goel could not adduce his report or give evidence, then GIL would be forced to search for a new expert on the cigarette market/industry in the Middle East. In my judgment that would be onerous and unfair at this late stage of the preparation for the trial starting in mid April.

Lastly, I appreciate that nothing I have said will preclude TEL from cross examining Mr Goel on the issue of his independence or making submissions about the matter in the trial. The weight of his evidence may well be affected by the fact that he is employed by Gallaher Limited. That will be a matter for the trial judge to decide.

At the renewed hearing of the PTR on 23^rd February 2007, GIL invited me to impose additional conditions to the relief against sanctions which I granted to TEL in respect of the forensic accountancy evidence. The only additional condition I am prepared to impose is that relating to the work product of the Cypriot accountant which will have been produced to TEL’s English accountancy expert who is now working on TEL’s forensic accounting report. As I stated at the hearing, TEL will, sooner or later, have to disclose to GIL the Cypriot accountant’s “ work product” if it is relied upon by the English accountant for the opinions which he states in his report. Paragraph 9 of TEL’s written submissions dated 2^nd March 2007 state that the Cypriot accountant has produced, effectively, draft accounts for TEL. To the extent that TEL’s English accountant wishes to rely on this material for his opinions, then this must be produced to GIL, or else its expert cannot possibly understand the basis for and deal with the opinions put forward by TEL’s accountancy expert.

In the circumstances I think it is proper that TEL should prepare and file a document identifying the draft accounts that have been produced by the Cypriot accountant. That document must include sufficient detail of all the facts and assumptions made by the Cypriot accountant. That should be served on GIL as soon as possible. When TEL’s English accountant serves his report, at the same time TEL must disclose and serve upon GIL all documents on which TEL’s English accountancy expert relies for his expert opinion, including but not limited to draft accounts prepared by the Cypriot accountant in support of the opinions stated in his expert report.

There is an issue as to the timing of GIL’s market expert report. GIL proposes that its expert evidence on markets should be produced at the same time as its response to the forensic accountancy evidence. TEL opposes this.

TEL served a further expert report in the field of markets on 13^th February 2007. This evidence was served almost four weeks after it was due to be served and it substantially amended a previous report. I accept GIL’s submissions that the evidence of TEL’s accountancy expert will be relevant to GIL’s expert’s report on the future markets for various brands of cigarettes. I accept that forecasts for future sales are bound to be based (at least in part) on the historic success of individual brands in individual territories at given price levels, assuming certain levels of investment in advertising and distribution. In order to comment on the future market for particular brands, therefore, GIL’s market expert will be only able to give a reasoned view once the expert has seen TEL’s accountancy evidence which will have reconstructed (as far as possible) detail of past sales by TEL.

Therefore, I order that the timetable for market evidence should match that ordered for the forensic accountancy evidence.

In relation to the costs of the application by TEL for relief from sanctions, I have ordered that TEL should pay costs on an indemnity basis. TEL submits that despite this order, the court should disallow GIL’s costs to the extent of the disbursements for Mr Toledano, who appeared as first junior to Mr Rabinowitz on the application. I agree with that submission. In my view, it was not reasonable for GIL to incur the costs of three counsel on that interlocutory application. Therefore the sum of £2,800 will be disallowed from GIL’s costs of that application.

The last matter that has been raised in written submissions since 23^rd February 2007 concerns the production of trial bundles. The solicitors for TEL will be acutely aware of their obligation to cooperate in the production of trial bundles. I trust that they will cooperate and that no formal order is needed in this respect.

I shall have to deal with the issue of the costs in relation to the application for the further security for the costs of the counterclaim (by GIL) and the application of TEL in relation to the evidence of Mr Goel. If these cannot be agreed then I shall hold a short hearing and at that hearing I will deal with any other outstanding matters that cannot be dealt with at the further PTR which is to be held later this month by the trial judge, Christopher Clarke J.