Hitachi Capital (UK) Plc v V-12 Finance Ltd & Ors

I have before me two applications for costs orders under section 51 of the Supreme Court Act 1981.

The first application is made by the Claimant (“Hitachi”) against each of the Third and Fourth Parties (respectively “Mr Davies” and “Mrs Davies”).

The second application is made by Mr and Mrs Davies against the Fifth Party (“Clode”).

Both the applications arise from the insolvency of the Defendant (“V-12”) which has resulted in its inability to meet various orders. It now stands liable to the Claimant in the sum of £521,218.14 plus interest and costs. This situation arises from the determination in favour of Hitachi of two issues concerning the construction of an agreement (“the agreement”) that governed the relationship between Hitachi, the financier, and V-12. The general relationship is set out in paragraphs 3 and 4 of my judgment dated 7 July 2008 as follows:

“3.

… V-12 specialises in using the internet to introduce the services of retailers of goods and services to members of the public who borrow money from financial institutions to pay for such goods and services. The loans are covered by the statutory regime that covers consumers in these situations.

4.

Part of V-12’s function is to make credit available to consumer customers (“customers”) in the event that they fulfil the relevant criteria applicable to such loans. V-12 does not provide the credit. The institution that does provide the credit stands on all fours with the retailer in respect of goods or services provided to that customer. The obligation arises under section 75 of the CCA. Thus if a retailer fails to provide a holiday that accords with its contractual obligations to the customer, it is the finance house as well as the retailer that must provide compensation. This will be the case whatever the nature of the damage …”

The collapse on 10 August 2006 of a travel agent called Tapestry Holidays Ltd triggered a claim against V-12 by Hitachi to be indemnified under the terms of the agreement. This was set out in a letter dated 7 September 2006. By a letter dated 11 September 2006 Lee & Priestley, the solicitors acting for V-12, put forward a different construction of the agreement and rejected the indemnity claim. They also made a claim to a sum, that remained to be quantified, for accrued bonuses which were apparently performance related. Whatever the reason may have been, it seems that it was beyond the capability of V-12 to make any sensible calculation of what might have been due without recourse to data provided by Hitachi. This was to have an important bearing on the relationship between Clode and Mr and Mrs Davies.

At the time when Hitachi made its claim, Clode owned 25 percent of the shares in V-12 Holdings Limited (“Holdings”). Holdings owned all the shares in V-12. By an agreement dated 3 November 2006 (“the SPA”) Clode purchased the remaining 75 percent of the shares, being respectively 5 shares from Mr Davies and 70 shares from Mrs Davies. For his shares Mr Davies received £444,020 in cash. For her shares Mrs Davies acquired an interest in £1,000,000 of loan notes that were repayable in the circumstances described in the SPA. For present purposes it is enough to know that when this action was started by Hitachi on 24 October 2007 there remained owing on the loan notes £500,000 against which, at least on the view of Mr Davies and one assumes Mrs Davies, there fell to be set off such sum as might become due on the claim. During the course of the proceedings, Clode advanced the view that, under the terms of the SPA, the mere making of the claim was enough irrevocably to effect the set off.

The SPA also provided for further payments to Mrs Davies in respect of what the SPA described as ‘Earn-outs’, which had the potential to arise over three years.

The SPA recognised the interest that Mr and Mrs Davies had in the outcome of the Hitachi claim by giving Mr Davies, subject to an ultimate veto in Clode and Holdings, power to defend the claim. Later in this judgment I shall set out the provisions in the SPA that related to the Hitachi claim.

For about a year after the date of the SPA, relations between Clode and Mr and Mrs Davies appear to have been reasonably satisfactory. (For all practical purposes Clode may be equated with a Mr Nick Davies.) Mr Davies remained a director of V-12 and he was also an employee.

When Hitachi started this action relations do not seem to have been too bad but so swiftly did they go downhill that, on 10 January 2008, Mr Davies was suspended from his employment pending an inquiry into a variety of alleged misdemeanours that had the potential to result in his dismissal. On 10 April 2008 he was dismissed for gross misconduct, resigning as a director on the 11 April.

I do not need to attempt to resolve the merits of the dispute between Mr Davies and Clode/Mr Nick Davies. It is enough that this dispute took place during a critical part of these proceedings, involving interests that were self-evidently diametrically opposed.

Meanwhile, in September 2007 the business activities of V-12 had been brought into Clode Holdings Limited (see Note 10 to the accounts for V-12 Holdings Limited for the year ending 31 March 2007). Thus, at much the same time as this action was started, V-12 ceased to have any assets apart from a counterclaim that has never been properly quantified but whose value has been variously stated as £200,000 (email, Mr Davies to Mark Murphy 24 August 2006) and “likely to be minute if any” (letter, Burges Salmon to Lee & Priestley 6 February 2008).

The Defence and Counterclaim was served on 17 December 2007. The right in Hitachi to claim repayment of any bonuses was contested. There was a counterclaim for accrued bonuses. And, central to everything, was the allegation that Hitachi had misconstrued the agreement. Lee & Priestley were on the record for V-12. They were also acting for Mr and Mrs Davies. In respect of V-12, Mr Davies was acting under the power conferred on him by the SPA.

A Reply and Defence to Counterclaim was served on 12 February 2008. Trial of the Preliminary Issues was ordered on 4 March 2008 and took place on 9 and 10 June 2008. V-12 lost the Issues and effectively lost the case.

Hitachi claims its costs of the action against Mr and Mrs Davies according to well established principles. It says that Mr and Mrs Davies funded and controlled V-12’s part in the litigation from entirely selfish motives that caused it to incur the costs that it claims. As to Mrs Davies (who gave no evidence), it says that her personal interest in the outcome of the litigation was no less than that of her husband who was her agent in all that he did.

The answer to Hitachi’s assertions appears mainly to be that Mr Davies wanted to settle the claim (and counterclaim) with a consequential saving in costs but was prevented from doing so by Clode/Mr Nick Davies through a destructive meddling that fell short of veto but was much to the same effect. Therefore say Mr and Mrs Davies it is Clode that should pay all or part of Hitachi’s costs. Hitachi makes no claim against Clode.

In respect of Mr and Mrs Davies, the law requires no extended analysis. The governing principles are set out by Lord Brown of Eaton-under-Heywood in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, [2004] 1 WLR 2807 at paragraph 29 as follows:

“ … generally speaking where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit he should be liable for the costs if his claim or defence or appeal fails …”

At paragraph 25 Lord Brown said:

“… Nor indeed is it necessary that the non-party be “the only real party” to the litigation in the sense explained in the Knight case, provided that he is “a real party in … very important and critical respects” … ”

It is therefore in respect of Clode that any difficulty of analysis arises, the authorities being of less direct assistance.

By way of general approach I remind myself of the extracts set out in the decision of the Court of Appeal in Oriakhel v Vickers and others [2008] EWCA Civ 748, [2008] All ER (D) 69 (Jul) from Longmore LJ’s lead judgment in Petromec v Petroleo Brasileiro [2004] EWCA Civ 1038 where he says:

“10.

I would observe that, although funding took place in most of the reported cases, it is not, in my view, essential, in the sense of being a jurisdictional pre-requisite to the exercise of the court’s discretion. If the evidence is that a respondent (whether director or shareholder or controller of the relevant company) has effectively controlled the proceedings and has sought to derive potential benefit from them, that will be enough to establish the jurisdiction. Whether such jurisdiction should be exercised is, of course, another matter entirely and the extent to which a respondent has, in fact funded any proceedings may be relevant to the exercise of discretion.

11.

There is a danger that the exercise of the jurisdiction to order a non-party to proceedings to pay the cost of those proceedings becomes overcomplicated by reference to authority.”

Bearing the above in mind, it seems to me that the answer to the question of whether an order should be made where there is a claim over must depend both on the conduct of the party against whom the claim over is made in respect of the person initiating the original claim for costs (in this case Clode’s conduct from the perspective of Hitachi) and the relationship between the immediate parties to the claim over (Clode and Mr and Mrs Davies). This second element of the inquiry is supported by consideration of Oriakhel.

In Oriakhel the court was clearly influenced by the view that the proper way to gain redress against a person in respect of whom there is alleged to be a substantive cause of action is to join him as a party in order to pursue that cause of action. Where, as in this case, it is not the claimant that is asserting a cause of action but the new party against whom the claimant is seeking a costs order, it seems to me that similar considerations must apply to the relationship between the new party and the subject of the claim over. It also seems to me that it is no necessary part of my function to decide whether such a cause of action actually exists or to consider whether it has been expressly asserted that there is such a cause of action. What I think that I have to consider is whether it is section 51 that provides the appropriate mechanism for determining the relative positions of the parties or whether there is some other mechanism, such as a contract, that is the proper method for establishing such matters.

I should also refer to the principles governing the lack of warning of the applications. None was given to Mr and Mrs Davies who make no complaint at its absence. None was given to Clode, which does make complaint.

In Dymocks,lack of warning was regarded as no more than a factor in the exercise of the discretion. But both in Oriakhel and Equitas Ltd and another v Horace Holman & Co Ltd and another [2008] EWHC 2287 (Comm), [2009] BCLC 662 very great weight was placed upon such an omission.

Unsurprisingly, I think that a failure to warn must be viewed in its context. Where the failure creates a trap for the unwary, the reason for concern is clear. By contrast, where a non-party plays ‘hardball’ with the assistance of experienced solicitors, I see no reason why a failure to warn should provide a technical obstacle to doing justice.

Both applications fall to be considered by reference to clauses 5.9 to 5.12 of the SPA which read as follows:

“5 WARRANTIES

…

5.9

[Mr and Mrs Davies] agree with [Clode] (for itself and as trustee for each Group Company) to indemnify and keep indemnified [Clode] and each Group Company against any claims made by Hitachi against [Holdings] or [V-12] for whatever reason (a “Relevant Claim”). …

“5.10

[Mr and Mrs Davies] shall indemnify and keep indemnified [Clode] and each Group Company against any and all reasonable costs (including legal costs on an indemnity basis), expenses and other liabilities (together with any VAT which is not recoverable by [Clode] or a Group Company) which [Clode] or a Group Company may reasonably incur whether before or after the commencement of any legal proceedings, in connection with the negotiations or settlement by the parties of any Relevant Claim.

“5.11

If, prior to payment in full of the Loan Notes, [Clode] has notified either of [Mr Davies] or [Mrs Davies] of any Relevant Claim then [Clode] shall set-off against any payment due in respect of the Loan Notes the value of any such Relevant Claim.

5.12

The parties agree that [Mr Davies] shall have the sole conduct of any Relevant Claim, including the conduct of all negotiations, correspondence and the reaching of all agreements. [Mr Davies] shall keep [Clode] and [Holdings] informed of how any Relevant Claim is being conducted and shall provide them with copies of all relevant material documents. If either [Clode] or [Holdings] receives any documentation from Hitachi in relation to a Relevant Claim, [Clode] shall and shall procure that [Holdings] shall provide copies of such documentation to [Mr Davies] as soon as reasonably practicable after receipt. [Mr Davies] agrees to take all reasonable action to seek to minimise any loss or damage which [Holdings] or [V-12] may suffer in consequence of a Relevant Claim and he shall use his best endeavours to ensure that his conduct of a Relevant Claim does not bring [Holdings] into disrepute. [Mr Davies] shall consult with and take into account any comments made by [Clode] and [Holdings] in relation to the conduct of a Relevant Claim and [Clode] and [Holdings] shall have the right to veto any decision made by [Mr Davies] in relation to the settlement of a Relevant Claim.”

Insofar as Hitachi’s claim against Mr and Mrs Davies is concerned, one has only to read these provisions against the background that I have set out to see the blueprint for an application the strength of which is amply confirmed by the words of the Defendant and his solicitors. Out of a number I choose the following as being the most impressively unequivocal:

“ … Our client derives the authority to instruct us from clause 5.12 of the SPA. As we have said on numerous occasions now, V-12 is simply the vehicle through which our client exercises the rights given to him by clause 5.12.”

(Lee & Priestley to Burges Salmon, letter dated 7 March 2008.)

From first to last that was the position that Mr Davies took. His overall objective was to protect his wife’s position in respect of the £500,000 outstanding on the Loan Notes. To do this he managed and funded the V-12 defence in this action. The extensive documentation shows that at no stage was Mr Davies motivated by anything that came close to a concern for the interests of V-12, a virtual shell of which by far the greatest creditor was Hitachi. It was he who caused Hitachi to incur the costs of this litigation.

Mr Davies appears to suggest that, because he acted reasonably in conducting V-12’s defence and tried to save costs, he should not have to pay those of Hitachi. Even if he is right as to the facts he is wrong as to the principle. There is no reason why a party who controls and funds proceedings from purely selfish motives should be able to resist an order for costs on the grounds of the efficiency of his conduct.

Not only is the evidence remorselessly to the effect that I have jurisdiction to make the order for which Hitachi asks but it is clear that, subject to the claim over, my discretion should be exercised to that effect.

I now turn to Mrs Davies. Given her silence and the fact that Lee & Priestley act just as much for her as they do for her husband, one must assume that she is fully aware of all that is being and has been said in these matters. Thus she would have been aware of the passage in a letter dated 29 April 2008, which was sent to Burges Salmon by Lee & Priestley and states:

“V12 would offer to pay £250,000 to Hitachi to compromise all claims, including the counterclaim. Our client would require your client to pay the £250,000 to Hitachi (if accepted) and this sum would be deducted from the Loan Notes monies. The balance of the Loan Notes (i.e. £250,000 plus interest at the agreed rate) would be paid to our client within 14 days of acceptance of the offer by Hitachi.”

The client in question appears to be Mr Davies. ‘Loan Notes monies’ are those monies which, absent the claim, would be paid to Mrs Davies whose consent would be necessary before making such an offer. Obviously there is no reason in principle why a generous wife should not be allowed to give her husband access to funds without exposing herself to a non-party costs order. The difficulty for Mrs Davies is that, without evidence to the contrary, the inference from all the documentation is that her financial interests were so closely concerned with the outcome of the litigation that Mr Davies must be treated as having been her agent in representing interests which they shared. Bearing in mind that it was to Mr, and not Mrs Davies, that it was suggested that the balance of £250,000 be paid, the offer was a manifestation of a joint enterprise. If Mrs Davies was indeed the client in question, the position is even stronger.

Subject to the question of Clode, both Mr and Mrs Davies must pay Hitachi’s costs.

Should there be a section 51 order against Clode?

Mr and Mrs Davies say that, although not using the veto, Clode, by Mr Nick Davies, wrecked all prospects of settling the case and should be made to pay.

Clode, by Mr Nick Davies, says that it did what it was allowed to do. It asserts that it acted in the interests of V-12 on the counterclaim and doesn’t meet any of the criteria concerning a degree of involvement that grounds jurisdiction. At paragraphs 55 and 56 of his statement dated 1 May 2009 Mr Nick Davies says:

“55 Contrary to Mr Davies’s statements, Clode was always in favour of the Hitachi claim being settled as long as it did not involve prejudicing either Clode’s or V12’s interests in other respects. This, however, had nothing to do with Clode’s exercise of its contractual rights under 5.11.

56 Regardless of what Clode’s position was, Clode never prevented Mr Davies from taking a decision as to settlement or conducting the Hitachi Litigation in a certain way. Clause 5.12 made it clear that he had the sole right of conduct and Lee & Priestley constantly asserted that he had sufficient funds to settle the claim or meet any liability that V12 had as a result of the Hitachi Litigation. …”

Insofar as Mr Nick Davies is seeking to give the impression that he adopted a hands off approach to the conduct of the litigation, he is very far from the mark. From February through to the hearing of the Preliminary Issues in June, Lee & Priestley and Burges Salmon were involved in intensive correspondence. That correspondence, including the without prejudice letters produced after the date of the statement, reveals a deep and manipulative involvement by Clode in the Hitachi litigation calculated to impede settlement, not least by what appears to have been an unrealistic valuation of the counterclaim over which V-12 and thus Mr Nick Davies retained control. On at least one view of matters, the intention would appear to have been to sever relations with Mr and Mrs Davies on the basis of a package that produced the greatest benefit for the Clode side. Of itself, such an objective cannot be criticised, but the question that has to be asked is whether such activities were for the benefit of V-12 and the answer is that they were not.

The picture revealed by the documents (by way of contrast with Mr Nick Davies’s stated position) is confirmed by the evidence of an ex-senior employee of Hitachi, Mr Cutbill.

Mr Cutbill, in a statement dated 15 June 2009, says that, in early January 2008 and again on 5 February 2008, he met Mr Nick Davies to discuss settlement of the litigation by V-12 trading with Hitachi on a basis that would give the latter a sufficient profit to equal a figure representing the claim. In the end no settlement was reached. Mr Cutbill expressly contradicts the assertion by Burges Salmon in their letter dated 2 April 2008 that any meeting held was “on a purely commercial basis to discuss possible commercial opportunities between the two companies”.

The ethos of all that I have said is encapsulated in a short letter from Burges Salmon to Lee & Priestley dated 23 April 2008. It says:

“Our client has recently become aware of the fact that your client has had direct discussions with Hitachi regarding settlement of the Hitachi Claim. In breach of his obligations under the Agreement, your client has failed to keep our client informed of the content or even the existence of these discussions.

The discussions your client has been having are with senior officials at Hitachi and we understand that your client is currently awaiting a response to a proposal that he has made to them.

Aside from the obvious issues this raises for your client’s compliance with his contractual obligations, we do not understand what your client is hoping to achieve given that our client has a right of veto in relation to settlement of the Hitachi claim.

In the circumstances, we require clarification in full as to the extent of the discussions that your client has been having with Hitachi, with whom he has had them and the content of any proposals made by either Hitachi or your client.”

It seems to me that the letter neatly illustrates two aspects of the application against Clode.

First, it is indicative of a high degree of involvement by Clode (not V-12) in the Hitachi litigation.

Second, it emphasises, as can be seen throughout the correspondence coming from both sides, the fact that their disputes are being argued within the context of the SPA.

As to the first aspect, although I can see strong arguments the other way, I am not persuaded that Clode’s involvement was of that nature that permits an order. Apart from the two meetings with Mr Cutbill, Clode’s involvement did not really constitute control of the proceedings in relation to Hitachi but rather a wrestling match between Clode and Mr and Mrs Davies.

As to the second point, I am confident that the summary process afforded by section 51 is not the correct means of resolving a dispute which arises from the terms of the SPA. Any such dispute should be decided by separate proceedings.

The application against Clode must therefore fail.

Mr and Mrs Davies must pay Hitachi’s costs of this action.

The application against Clode is dismissed.

No one need attend the handing down of this judgment. All consequential matters will be dealt with at a time and in a manner convenient to the parties. That hearing will be an adjourned hearing of the one at which judgment is handed down.