Case No: 2009-FOLIO 1204
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE HAMBLEN
Between :
Mr Ali Burak Dumrul | Claimant |
- And - | |
Standard Chartered Bank | Defendant |
Mr Alain Choo Choy QC and Mr Sebastian Isaac (instructed by Gibson & Co.) for the Claimant
Mr Neil Kitchener QC (instructed by Clifford Chance) for the Defendant
Hearing dates: 15th September 2010
Judgment
Mr Justice Hamblen :
INTRODUCTION
The Defendant bank (“the Bank”) applies for security for costs under CPR 25.12 and 25.13(2)(a) on the basis that the Claimant, Mr Dumrul, is resident in Turkey.
Mr Dumrul was a customer on the Bank’s Collateralised Trading Programme Desk, purchasing foreign exchange options and trading in currencies (Turkish Lira and US Dollar). Following a period of marked volatility in the Lira/Dollar exchange rate, the Bank made a margin call on Mr Dumrul in early October 2008, which he failed to pay. The Bank closed out Mr Dumrul’s positions on or around 8 October 2008 and demanded payment of US$ 20,021,619. Mr Dumrul refused to pay this (or any) amount, alleging that the Bank was in breach of contract and/or duty, amongst other things. Mr Dumrul started proceedings in September 2009 claiming approximately of US$ 53 million from the Bank, based on the allegation that the Bank’s credit risk management system (the GIFT system) failed properly to value Mr Dumrul’s foreign exchange options amongst other things. The Bank has counterclaimed US$ 20,021,619, being the amount allegedly owing to it following the close-out.
THE RULES
The provisions of the CPR relevant to this application are as follows:
CPR r. 25.12(1): “A defendant to any claim may apply under this section of this Part for security of his costs of the proceedings.”
CPR r. 25.13: “(1) The court may make an order for security for costs under rule 25.12 if – (a) It is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and…(2)(a) the claimant is (i) resident out of the jurisdiction; but (ii) not resident in a Brussels Contracting State, a State bound by the Lugano Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982.”
THE ISSUES
There are two main issues raised by the Bank’s application:
Whether it is an appropriate exercise of the court’s discretion to make an order for security for costs in circumstances where the claim and counterclaim and the defences thereto raise the same issues; and
Whether the Bank faces such obstacles or costs of enforcing any costs order in Turkey as to justify an order for security.
Issue (1) Whether it is an appropriate exercise of the court’s discretion to make an order for security for costs in circumstances where the claim and counterclaim and the defences thereto raise the same issues.
The law in relation to co-extensive claims
As a general rule, the Court will not exercise its discretion under CPR Part 25 to make an order for security of the costs of a claim if the same issues arise on the claim and counterclaim and the costs incurred in defending that claim would also be incurred in prosecuting the counterclaim - see BJ Crabtree v GPT Communication Systems(1990) 59 BLR 43 (“the Crabtree principle”).
In the Crabtree case, the claimant was a building contractor which claimed £78,000 for additional works which it said it was instructed to undertake by the defendant. The defendant denied the claim on the basis that it had not authorised the variation to the programme of works, and also (additionally) counterclaimed damages of £105,000 for the cost of rectifying defective work and completing uncompleted work. In that case, Bingham LJ said (at p6-7):
“It is, however, necessary as I think, to consider what the effect of an order for security in this case would be if security were not given. It would have the effect, as the defendants acknowledge, of preventing the plaintiffs pursuing their claim. It would, however, leave the defendants free to pursue their counterclaim. The plaintiffs could then defend themselves against the counterclaim although their own claim was stayed. It seems quite clear and, indeed, was not I think in controversy -- that in the course of defending the counterclaim all the same matters as would be canvassed if the plaintiffs were to pursue their claim, but on that basis they would defend the claim and advance their own in a somewhat hobbled manner, and would be conducting the litigation (to change the metaphor) with one hand tied behind their back. I have to say that that does not appeal to me on the facts of this case as a just or attractive way to oblige a party to conduct its litigation.
…
It may in some cases be fair and just to make such an order even though the defendant is himself counterclaiming, but I am persuaded that it would be wrong to do so here because the costs that these defendants are incurring to defend themselves may equally, and perhaps preferably, be regarded as costs necessary to prosecute their counterclaim.”
As stated by Park J in Anglo Petroleum v TFB [2003] EWHC 1177, where the issues before the court would be substantially unaffected by the trial of the counterclaim without the respondent’s claim, an order for security will generally be inappropriate. In that case, the judge said, at §32-33, that where:
“… A [the respondent] could, and presumably would, defend B’s [the applicant’s] claim by advancing essentially the same arguments as those which he, A, wanted to advance in his own claim. It would in my view be largely pointless for the court to have ordered A to provide security for the costs of his own claim.
In general, the courts recognise that, where there are cross-proceedings, the position is as I have described, and the courts do not order a person in the position of A to provide security for the costs of the claim he is making himself.”
Not every case in which there is a claim and counterclaim falls within the Crabtree principle. In particular:
Where the claim raises substantial factual inquiries which are not the subject of the counterclaim, an order for security may be appropriate notwithstanding the fact that the claim provides a defence to the counterclaim: see Shaw-Lloyd v ASM Shipping [2006] EWHC 1958; Newman v Wenden [2007] EWHC 336. In those circumstances, an order for security will normally be limited to the costs of addressing additional issues raised only by the claim.
In cases where the claim and counterclaim raise additional issues, it may also be relevant to consider whether the quantum of the claim in respect of which security is sought is substantially greater than the applicant’s claim: see Newman v Wenden; Hutchison Telephone v Ultimate Response [1993] BCLC 307.
Discussion
The first issue which arises is whether Mr Dumrul’s claim raises substantial additional factual inquiries (and therefore costs) not arising on the Bank’s claim. I am satisfied that it does not, and the Bank did not contend otherwise.
Analysis of the essential issues between the parties shows that they arise on both claim and counterclaim. In particular:
The pleaded contents of the Bank’s counterclaim incorporate all the facts and matters stated in its defence [Defence and Counterclaim (“DCC”) §120].
It is the Bank’s pleaded case that either all or at least some of the losses which Mr Dumrul claims under his own claim, “are in fact monies that he owes to the Bank and has not paid” [DCC §109(a)].
On the Bank’s counterclaim it claims that it was entitled to close out Mr Dumrul’s positions on 8 October 2008, and that it was so entitled because of Mr Dumrul’s failure to meet margin calls made between 6 and 8 October 2008 [DCC §121]. As regards that claim:
This entails the assertion that the margin calls made by the Bank were proper margin calls within the terms of the facility, and that they were calculated in accordance with the terms of the facility.
The Bank has confirmed that the calculations by which it determined Mr Dumrul’s Required Margin (the basis on which made its margin calls) were performed by the GIFT system [Bank’s First Further Information (“Bank FI 1”) §13].
This assertion necessarily engages the central issues of the purpose, and the fitness for purpose, of the GIFT system and the Bank’s calculation of its account metrics.
Mr Dumrul’s defence of this claim denies that the Bank was entitled to rely on the margining or close-out provisions of the facility in circumstances where the exposures on his account were caused by the Bank’s own breaches of duty (contractual, tortious or regulatory) as detailed in his claim [Reply and Defence to Counterclaim (“RDCC”) §57.1].
Mr Dumrul’s defence also relies upon the fact that the allegedly wrongful close-out (which is the heart of the Bank’s claim) caused him losses following the Close Out Date [RDCC §57.3].
The Bank’s claim on close-out is from the balance on Mr Dumrul’s positions as they were closed out by the Bank, in the sum of US$20,021,619. As regards that claim:
The claim is premised upon the Bank’s margin calls and close-out of Mr Dumrul’s facility being valid: see e.g. RDCC §58.1.
It entails the assertion that the sum was properly accrued and calculated by the Bank in the close-out of his positions, so that it is due and owing from Mr Dumrul. It is, therefore, sought to be answered in part by Mr Dumrul’s claims regarding the wrongful manner in which the Bank conducted the close-out of his positions [Particulars of Claim (“PoC”) §39-42].
The balance of this claim is sought to be answered by:
Mr Dumrul’s claim that any alleged debit arose in whole or in part as a result of the Bank’s own breaches of contract in the manner in which it calculated and reported his account metrics [RDCC §58.2], and
Alternatively, Mr Dumrul’s alleged right to set off the sums claimed by him in damages against the sums claimed by the Bank [RDCC §59].
I accept that this analysis shows that:
The issues set out above constitute the main issues which would have to be addressed on Mr Dumrul’s own claim.
This is a case in which the original claim could have been brought by either Mr Dumrul or the Bank, making the other party the defendant and part 20 claimant. In fact, the usual pattern for this type of litigation would be for the Bank to have sued on the alleged debt owed by Mr Dumrul. In those circumstances, Mr Dumrul would have set up an identical defence and counterclaim.
The points which are elements of Mr Dumrul’s defence to the Bank’s claim are not merely cross claims arising out of the same transaction (i.e. the facility between Mr Dumrul and the Bank). Mr Dumrul does not simply seek to set off unconnected claims for damages against the Bank’s debit. Rather, the losses which Mr Dumrul claims in damages are either (a) the very losses which were crystallised by the Bank’s close-out of Mr Dumrul’s facility, or (b) caused by the Bank’s close-out of the facility; and in every case the underlying cause will fall to be determined by reference to the same account information calculated by the GIFT system, and the same transactions entered into by Mr Dumrul in reliance on that information.
In these circumstances, the Bank cannot identify any points, or costs, which would be incurred solely in relation to Mr Dumrul’s claim and it has not sought to do so.
However, the Bank seeks to avoid the effect of the Crabtree principle by offering to undertake “not to pursue the Counterclaim while the main claim is stayed.”
In Crabtree, Bingham LJ addressed the possibility that the problems of one-sided litigation which made an order for security for costs inappropriate in a case such as the present might be addressed if the party counterclaiming did not maintain its own claim. He said (at p7):
“Of course, as Mr Phillips [Counsel for the applicant] points out, they may decide later not to prosecute their counterclaim, but that would be a different situation from that which now presents itself before the court and upon the basis of which we have to rule.”
It is conceded on behalf of Mr Dumrul that if the Bank were to withdraw its counterclaim, or undertake to do so, the problem of one-sided litigation presented by the Bank’s counterclaim would similarly be removed, and there would be no objection to an order for security on this basis. However, to date the Bank has not been prepared to adopt that position.
The Bank’s offer to undertake that its claim should be stayed was first made by a letter of 5 March 2010. There, it said that:
“…to put the matter beyond doubt, our client is prepared to agree that, in the event that your client fails to put up security and his action is stayed, our client will not pursue its counterclaim until the stay is lifted.”
In answer, Gibson & Co pointed out that:
“Mr Dumrul’s claim would not be stayed indefinitely; it would [be] struck out eventually if he did not provide security. Therefore the bank’s proposal simply defers the mischief identified in Crabtree until such time as the claim is struck out; it does not prevent one- sided litigation.”
In making the present application, the Bank seeks an order that “Unless security is given as ordered … the claim is struck outwithout further order” but offers an undertaking “not to pursue the Counterclaim while the main claim is stayed.”
As a result, by letter of 8 September 2010, Gibson & Co sought clarification of the nature of the Bank’s offer. They said:
“Please confirm whether, in the event that our client fails to provide security and his action is ultimately struck out (as per the draft order that your client seeks), your client will:
1. Prosecute its counterclaim;
2. Discontinue its counterclaim; or
3. Take some other action, and if so, please explain what that action would be.”
The Bank’s response was received on 13 September 2010. It said:
“This issue can be dealt with if and when it arises. If your client fails to put up any security that he is ordered to provide, his claim will be stayed and the bank has offered to stay its counterclaim. Should our client apply for your client’s claim to be struck out at some later date, the further conduct of our client’s counterclaim can be dealt with as part of that application.”
This remained the Bank’s position at the hearing.
I accept, however, that this is not sufficient to address the problem. The Bank seeks an order for security now, and wishes to use its offer of a stay to address the objection that it seeks security in respect of a claim which addresses all the same matters which arise on Mr Dumrul’s defence. It therefore asks the court to make an order for security which requires the court to assume that the order could not lead to one-sided litigation. Yet the Bank asks the court to make that assumption in circumstances where it refuses to give the undertaking in a form which would prevent the possibility of one-sided litigation for good. Instead, the Bank wishes to reserve to itself the right to contend that it would be entitled to pursue one-sided litigation against Mr Dumrul as a result of his failure to meet an order for security.
Further, there could be real unfairness if the Bank’s claim could be pursued after strike-out of Mr Dumrul’s claim. In particular:
The outcome would be that Mr Dumrul would have to conduct a defence addressing all the issues underlying his claim, and that he would, if successful, be unable to secure judgment on his claim.
Mr Dumrul (a) would therefore know that his claim would, if pursued to judgment, have been successful, and (b) would have incurred all the costs required to bring that claim to judgment in the prosecution of his defence of the Bank’s counterclaim; but he would be debarred from ever securing judgment on it.
I accept that the Bank should make its position clear now rather than holding the issue over. The practice of the Commercial Court in relation to security for costs is not to stay proceedings since this leads to delay and disruption (see Appendix 16 to the Commercial Court Guide). If security is not put up the likely outcome is dismissal of the claim. If the Bank wishes to obtain security it should make it clear now what its position would be in that eventuality. If it was prepared to undertake to consent to the dismissal of the counterclaim in the event of the Claimant’s claims being dismissed for failure to put up security then the difficulty raised by the Crabtree principle would be avoided. However, unless an undertaking is given to that effect, I do not consider that it would be appropriate to exercise my discretion to order security.
Conclusion on Issue (1)
A security for costs order should only be made if the Bank is prepared to undertake to consent to the dismissal of the counterclaim in the event of the Claimant’s claims being dismissed for failure to put up security
Issue (2) Whether the Bank faces such obstacles or costs of enforcing any costs order in Turkey as to justify an order for security.
The law where security is sought on the grounds that a person is resident out of the jurisdiction
The general principles regarding applications for security for costs under CPR r.25.13(2)(a) are set out in Nasser v United Bank of Kuwait [2002] 1 WLR 1868. That case makes it clear that security is not available against a person resident out of the jurisdiction except in respect of additional obstacles to and burdens in enforcement in the jurisdiction of domicile as compared to the obstacles or burdens of enforcement in any Brussels or Lugano state (“the Nasser approach”). In Nasser, Mance LJ explained the approach to be taken as follows:
The exercise of the discretion conferred by rule 25.13(1) and (2)(a)(i) and (b)(i) raises, in my judgment, different considerations. That discretion must itself be exercised by the courts in a manner which is not discriminatory. In this context at least, I consider that all personal claimants (or appellants) before the English courts must be regarded as the relevant class. It would be both discriminatory and unjustifiable if the mere fact of residence outside any Brussels/Lugano member state could justify the exercise of discretion to make orders for security for costs with the purpose or effect of protecting defendants or respondents to appeals against risks to which they would equally be subject, and in relation to which they would have no protection, if the claim or appeal were being brought by a resident of a Brussels or Lugano state. Potential difficulties or burdens of enforcement in states not party to the Brussels or Lugano Convention are the rationale for the existence of any discretion. The discretion should be exercised in a manner reflecting its rationale, not so as to put residents outside the Brussels/Lugano sphere at a disadvantage compared with residents within. The distinction in the rules based on considerations of enforcement cannot be used to discriminate against those whose national origin is outside any Brussels or Lugano state on grounds unrelated to enforcement.
In this connection I do not consider that one can start with any inflexible assumption that any person not resident in a Brussels or Lugano state should provide security for costs. Merely because a person is not resident in England or another Brussels or Lugano state does not necessarily mean that enforcement will be more difficult. The modern European equivalent of the Queen's writ may not run. But the entire rest of the world cannot be regarded as beyond the legal pale. For example, the United Kingdom has reciprocal arrangements for recognition and enforcement with many Commonwealth and common law countries which have introduced legislation equivalent to Part I of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (or Part II of the Administration of Justice Act 1920 ) and which have highly sophisticated and respected legal systems. Many other countries have well established procedures for recognising English judgments. The exercise of the discretion on grounds of foreign residence should not be either automatic or inflexible.
…
Returning to rules 25.15(1) and 25.13(1) and (2)(a) and (b), if the discretion to order security is to be exercised it should therefore be on objectively justified grounds relating to obstacles to or the burden of enforcement in the context of the particular foreign claimant or country concerned. The former principle was that, once the power to order security arose because of foreign residence, impecuniosity became one along with other material factors: see the Thune case [1990] 1 WLR 562 cited above. This principle cannot, in my judgment, survive in an era which no longer permits discrimination in access to justice on grounds of national origin. Impecuniosity of an individual claimant resident within the jurisdiction or in a Brussels or Lugano state is not a basis for seeking security. Insolvent or impecunious companies present a different situation, since the power under CPR r 25.13(2)(c) applies to companies wherever incorporated and resident and is not discriminatory.
The justification for the discretion under rules 25.13(2)(a) and (b) and 25.15(1) in relation to individuals and companies ordinarily resident abroad is that in some — it may well be many — cases there are likely to be substantial obstacles to, or a substantial extra burden (e.g. of costs or delay) in, enforcing an English judgment, significantly greater than there would be as regards a party resident in England or in a Brussels or Lugano state. In so far as impecuniosity may have a continuing relevance it is not on the grounds that the claimant lacks apparent means to satisfy any judgment but on the ground (where this applies) that the effect of the impecuniosity would be either (i) to preclude or hinder or add to the burden of enforcement abroad against such assets as do exist abroad or (ii) as a practical matter, to make it more likely that the claimant would take advantage of any available opportunity to avoid or hinder such enforcement abroad.
It also follows, I consider, that there can be no inflexible assumption that there will in every case be substantial obstacles to enforcement against a foreign resident claimant in his or her (or in the case of a company its) country of foreign residence or wherever his, her or its assets may be. If the discretion under rule 25.13(2)(a) or (b) or 25.15(1) is to be exercised, there must be a proper basis for considering that such obstacles may exist or that enforcement may be encumbered by some extra burden (such as costs or the burden of an irrecoverable contingency fee or simply delay).
The courts may and should, however, take notice of obvious realties without formal evidence. There are some parts of the world where the natural assumption would be without more that there would not just be substantial obstacles but complete impossibility of enforcement; and there are many cases where the natural assumption would be that enforcement would be cumbersome and involve a substantial extra burden of costs or delay. But in other cases — particularly other common law countries which introduced in relation to English judgments legislation equivalent to Part I of the Foreign Judgments (Reciprocal Enforcement) Act 1933 (or Part II of the Administration of Justice Act 1920 ) — it may be incumbent on an applicant to show some basis for concluding that enforcement would face any substantial obstacle or extra burden meriting the protection of an order for security for costs. Even then it seems to me that the court should consider tailoring the order for security to the particular circumstances. If, for example, there is likely at the end of the day to be no obstacle to or difficulty about enforcement, but simply an extra burden in the form of costs (or an irrevocable contingency fee) or moderate delay, the appropriate course could well be to limit the amount of the security ordered by reference to that potential burden.
I also consider that the mere absence of reciprocal arrangements or legislation providing for enforcement of foreign judgments cannot of itself justify an inference that enforcement will not be possible. The present case illustrates this. It is a remarkable fact that no country has ever entered into any treaty providing for recognition and enforcement of judgments with the United States of America. But the reason is concern about the breadth of American jurisdiction, the corollary of which has been a willingness on the United State's part to recognise and enforce foreign judgments by action on a similarly liberal and flexible basis: see, e.g. Kevin M. Clermont, ‘Jurisdictional Salvation and the Hague Treaty’ (1999) 85 Cornell Law review 89, 97-98. I am not aware that anyone has ever suggested that access to justice or to the means of executing justice is an American problem. Certainly no evidence has been put before us to suggest that the defendants would, or even could, face any real obstacle of difficulty of legal principle in enforcing in the United States any English judgment for costs against this claimant.
…
The risk against which the present defendants are entitled to protection is thus not that the claimant will not have the assets to pay the costs, and not that the law of her state of residence will not recognise and enforce any judgment against her for costs. It is that the steps taken to enforce any such judgment in the United States will involve an extra burden in terms of costs and delay, compared with any equivalent steps that could be taken here or in any other Brussels/Lugano state. Any order for security for costs in this case should be tailored in amount to reflect the nature and size of the risk against which it is designed to protect.”
That case suggests that the essential question is whether “there would be substantial obstacles to, or a substantial extra burden (such as costs or delay) in, enforcing an English judgment, significantly greater than there would be as regards a party resident in England or in a Brussels or Lugano state.”
The present case raises two issues of law in relation to the Nasser approach. The first is the standard to which the court has to be satisfied that there would be an obstacle or burden. The second is whether the Nasser approach applies not just to obstacles/burdens to enforcement but also to obstacles/burdens to execution.
In relation to the first issue, the Bank submits that it is sufficient to show that an obstacle or burden is a real possibility. It is not necessary to show that it is likely. A real risk suffices.
In my judgment as a matter of both principle and authority the court needs to be satisfied that there is likely to be an obstacle or burden. A mere possibility of this should not justify treating a party resident outside a Brussels or Lugano state differently. This is particularly so given that all that needs to be shown is an “obstacle” to enforcement. This is also supported by a number of passages in Mance LJ’s judgment. For example:
“61. … if the discretion to order security is to be exercised it should therefore be on objectively justified grounds relating to obstacles to or the burden of enforcement in the context of the particular foreign claimant or country concerned…
….
62. The justification for the discretion under rules 25.13(2)(a) and (b) and 25.15(1) in relation to individuals and companies ordinarily resident abroad is that in some — it may well be many — cases there are likely to be substantial obstacles to, or a substantial extra burden (e.g. of costs or delay) in, enforcing an English judgment, significantly greater than there would be as regards a party resident in England or in a Brussels or Lugano state…
….
64… it may be incumbent on an applicant to show some basis for concluding that enforcement would face any substantial obstacle or extra burden meriting the protection of an order for security for costs….
….
66….no evidence has been put before us to suggest that the defendants would, or even could, face any real obstacle of difficulty of legal principle in enforcing in the United States any English judgment for costs against this claimant…
67 The risk against which the present defendants are entitled to protection is thus not that the claimant will not have the assets to pay the costs, and not that the law of her state of residence will not recognise and enforce any judgment against her for costs. It is that the steps taken to enforce any such judgment in the United States will involve an extra burden in terms of costs and delay, compared with any equivalent steps that could be taken here or in any other Brussels/Lugano state….”
(Emphasis added)
In relation to the second issue, the Nasser approach is stated and explained in terms of obstacles to and burdens in “enforcement”. It does not suggest that the same approach should be adopted in respect of difficulties in execution, and I have not been shown any case in which security for costs has been ordered on that basis, or where this has even been argued.
Further, underlying the Nasser approach is the common enforcement regime in Brussels and Lugano states. It is this which enables a comparison to be made between the obstacles to and burdens in enforcement in those states and other countries. Neither the Brussels nor the Lugano Convention addresses means of execution and there is no commonality of regime. Each country has its own processes by which judgments may be executed.
As Mance LJ states:
“It would be both discriminatory and unjustifiable if the mere fact of residence outside any Brussels/Lugano member state could justify the exercise of discretion to make orders for security for costs with the purpose or effect of protecting defendants or respondents to appeals against risks to which they would equally be subject, and in relation to which they would have no protection, if the claim or appeal were being brought by a resident of a Brussels or Lugano state.”
The risk of not being able to execute an enforceable judgment is a risk to which a defendant or respondent would equally be subject if the claim or appeal was being brought by a resident of a Brussels or Lugano state.
For all these reasons, in my judgment the Nasser approach applies to obstacles to and burdens in enforcement but not execution.
Obstacles to enforcement
The Bank identifies one alleged obstacle to the enforcement of its judgment in Turkey, namely that there is a possibility that a Turkish Court could refuse to enforce a costs order of the English court on public policy grounds under Article 54(c) of the Turkish Code Concerning Private International Law and Civil Procedure (Law No. 5718) (“the public policy exception”), which provides that (for the Turkish court to make an order for enforcement) “the judgment must not be manifestly contrary to public order.”
The basis on which it is suggested that an English costs order could engage the public policy exception is by reason of the fact that it exceeds the costs which would be recoverable in a similar case in Turkey.
In fact, Mr Bezen, the Bank’s Turkish law expert, does not give any strong evidence that Article 54(c) could be engaged by a costs order of the English court. His opinion is expressed in notably guarded terms:
In his first report (“Bezen 1”) he states at §13: “In my view it is possible that a Turkish court would exercise its discretion not to enforce a costs award in circumstances where the costs award significantly exceeded the amount of costs that would have been awarded in Turkey.”
In his second report (“Bezen 2”) at §8: “I have discussed the matter of public policy in the past. However, given the lack of precedents it is difficult for me to say with certainty that a Turkish court might decide one way or the other in this particular case.”
At Bezen 2 §28: “However, from my perspective, it would not be justified to make an assumption as to whether a particular costs award (especially taking into consideration the high level of the amount to be enforced) would in any circumstances be enforced in Turkey as I have not been able to obtain sufficient precedents that suggest it would or would not be enforced.”
By contrast, Mr Verdi, Mr Dumrul’s Turkish law expert, is much firmer in his opinion. He says:
In his first report (“Verdi 1”) §19: “In my view, there is no realistic chance that the public policy exception would be engaged to prevent an order for costs made by the English courts being enforced in Turkey. The suggestion that the public policy exception could apply is unrealistic.”
At Verdi 1 § 38: “I consider that the suggestion that an order for costs made by an English court (in any amount) could be in violation of the Turkish public policy exception is fanciful.”
Further, Mr Bezen does not in his evidence identify any case in Turkey in which it has been even argued, let alone decided, that the public policy exception could be engaged merely by reason of the size of a costs award made by a foreign court. He also does not identify any academic (or other) writing suggesting that the public policy exception could be so engaged.
By contrast, Mr Verdi confirms that the Turkish Courts regularly enforce costs orders of the English courts, and costs orders of foreign courts which exceed the amount of costs recoverable in a similar case in Turkey. He refers to a Turkish case concerned with the applicability of the public policy exception, in which the Court enforced an English judgment for damages, interest and costs in which the English costs order was more than 5 times the costs which would have been recoverable in Turkey.
In addition, Mr Bezen’s only substantive ground for suggesting that he cannot be sure of the approach of the Turkish court to the public policy exception is the fact that there is no statutory definition or binding precedent governing the meaning of the term ‘public order’ under Article 54(c).
By contrast, Mr Verdi identifies six separate reasons to consider that a foreign costs order could not be “manifestly contrary to public order” in Turkey. They are:
Construction of the words of Article 54(c) on their own language, with the assistance of commentary from the Turkish legal writings regarding the ambit of the public policy exception.
Guidance to be found in leading Turkish Court of Appeals cases dealing with the ambit of the public policy exception, which make it clear that the provision is limited to the indispensable values forming the basis of the Turkish legal system.
The principle that foreign rules (such as rules regarding costs) which are merely procedural will not engage the public policy exception because they are a matter for the lex fori.
The practice of enforcing foreign costs awards in Turkey.
The fact that the public policy exception is typically applied in relation to family law and the personal status of Turkish citizens, and only very rarely engaged by commercial matters.
The general rule that the Turkish courts are not entitled in enforcement proceedings to substitute their judgment for that of a foreign court, even in circumstances where the judgment of the foreign court is contrary to a mandatory norm of Turkish law.
I find the evidence of Mr Verdi to be far more convincing than that of Mr Bezen on this issue and accept his reasoning and conclusions. I am not therefore satisfied that it has been shown that refusal of enforcement on public policy grounds is a real risk or possibility, or that it is sufficiently likely or probable to be an “obstacle”. In any event it assumes that Mr Dumrul would, and would be able, to advance a case and evidence directly contrary to that put forward by him in this court.
Burdens in enforcement
As regards the time for enforcement, Mr Bezen says that:
The enforcement claim could take one to two years at first instance, and a further year for appeal, however it is “realistic to think that a judgment from the Court of First Instance would take about a year” [Bezen 2 §29];
Mr Dumrul would have an automatic right of appeal from the court at first instance if it enforced the English judgment;
The appeal would not bar execution of the judgment of the court of first instance, so that Mr Dumrul would have to apply for a stay of execution from the High Court of Appeals which would only be granted if that court determined that Mr Dumrul had an arguable case on appeal; and
If the Court of Appeal regarded an appeal as hopeless, it could dismiss it without a hearing. This would probably be done about 6 months after the appeal is lodged.
Mr Verdi did not take issue with these points, save that he considered that enforcement of an English judgment at first instance would take approximately one year. I accept his evidence on this issue, which Mr Bezen conceded as being “realistic”.
As regards the cost of enforcement, it was accepted between the parties that:
In order to commence an enforcement claim, the Bank would have to pay a court fee of 1.485% of the amount claimed. That fee would be recoverable from the losing party. A further 4.55% of the amount claimed would be charged to the losing party directly by the court.
In order to bring an appeal, the appellant would have to pay a further court fee of 1.485% of the amount claimed. That fee would be recoverable from the losing party. A further 4.55% of the amount claimed would be charged to the losing party directly by the court.
Mr Bezen estimates the cost of his firm enforcing an English judgment at first instance would be approximately US$14,250. Mr Verdi’s opinion is that this is not an unreasonable estimate.
Mr Bezen estimates the cost of his firm dealing with enforcement of an English judgment on appeal at US$21,000. Again, Mr Verdi’s opinion is that this is not an unreasonable estimate.
The losing party (at first instance or on appeal) would also have to pay the other party’s lawyers a fixed sum of US$39,074 under the minimum attorney fees.
I accept that the Turkish litigation costs which would relate to the Bank’s failure at first instance in Turkey, and its costs on appeal, are irrelevant to the court’s exercise of its discretion. In particular:
Neither Mr Bezen nor the Bank have identified any realistic basis on which Mr Dumrul could challenge a costs order of the English court in this case, either at first instance or on appeal.
In those circumstances, there is no reason to assume that the Bank would fail in its enforcement claim, at first instance or on appeal.
There is also no reason to assume that the Bank would incur any delay in execution associated with an appeal. In circumstances where any such appeal would be groundless, it is Mr Bezen’s own evidence that execution of the Bank’s costs order would not be stayed pending appeal. Accordingly, the time for enforcement of the Bank’s costs order in Turkey would be effectively limited to 1 year.
There is also no reason to consider that the Bank is likely to incur additional attorney’s costs on appeal. In circumstances where an appeal (a) would be very likely to fail, (b) would be very unlikely to bring about a stay of execution, and (c) would involve Mr Dumrul incurring additional court fees of 5.94% of the amount claimed, it would be unlikely that Mr Dumrul would bring such an appeal.
I therefore accept that it is the estimated costs of enforcement at first instance which are the relevant figures. On that basis the relevant figures are:
Approximately 1 year for enforcement in Turkey, after which time the Bank would secure an order for payment within 7 days.
Court fees for beginning enforcement proceedings of 1.485% of the costs order which it sought to enforce which costs the Bank have estimated as £1,738,056.22.
Unrecoverable lawyers’ fees for enforcement of US$14,250 (£9,140).
The £15,000 which the Bank says it would incur by reason of Clifford Chance ‘assisting’ with the process of enforcement and execution.
However, many of these costs would not actually be incurred by the Bank’s enforcement of a costs order. The co-extensive nature of the parties’ claims in this case means that the Bank would be enforcing a judgment for its close out claim as well as for its costs, and would not incur any additional lawyers’ fees as a result in enforcing the costs element of that judgment. Specifically:
If the Bank obtains a cost order in its favour it will almost inevitably have obtained judgment on its counterclaim and would be enforcing a judgment on its own claim at the same time as any order for costs in this case.
Both those judgments could be enforced in the same action, and the time required and lawyers costs incurred would be unaffected by the addition of the costs order to the sum to be enforced. At Verdi 1 §44 and §48, Mr Verdi says:
“I do not consider that enforcement of an English judgment for damages and costs would take any longer to enforce than a judgment for damages only. The process is the same.
“These lawyers’ fees would be substantially the same whether the Bank were attempting to enforce (a) a judgment for damages only, (b) a judgment for costs only, or (c) a judgment for damages and costs. The process for enforcing the judgment would be the same in each case, and so the fees should not be significantly affected. If the Bank were seeking to enforce a judgment for damages of US$20 million and costs of US$900,000, for example, the lawyers’ fees would remain substantially unchanged from those identified by Mr Bezen. Certainly, the fees for enforcing (a) damages of US$20 million, or (b) damages of US$20 million together with costs of US$900,000 would almost certainly be identical.”
This is not seriously contradicted by Mr Bezen. At Bezen 2 §34, the highest that Mr Bezen can put the point is to say that: “it would not be wrong to say that [enforcement of a costs order in addition to a judgment for damages] mightactually take longer” and therefore lead to higher costs.
In all the circumstances, I accept that it would not be appropriate to allocate to the Bank’s claim more than half of the costs in respect of its lawyers’ fees in Turkey.
Further, no explanation has been provided as to why Clifford Chance’s costs of ‘assisting’ with the process of enforcement and execution could reach £15,000 or as to the breakdown between them. Enforcement in Turkey is an administrative process for which only provision of the English court’s judgment in required. Moreover, these costs would be incurred in any event in enforcing the Bank’s much larger close out claim. In all the circumstances I do not consider that more than £4,000 should be allowed in respect of these costs, which makes a total of £8,570 in respect of lawyers’ fees.
In addition there would be the court fees relating to the costs element of any judgment against Mr Dumrul in Turkey. Bearing in mind that the enforceable costs order would be assessed costs this would be less than those claimed and I consider that the appropriate figure to be £1,250,000. On that basis the fee would be around £18,500.
The total figure of £26,070 is to be compared with whatever the cost would be of enforcing a costs order in a Brussels or Lugano state. There is no evidence as to that but it is clear that some allowance should be made. Against that is to be set the fact that enforcement is likely to take longer in Turkey. In all the circumstances in the exercise of my discretion I consider that the appropriate amount of security to be ordered to reflect the extra burdens of enforcement to be £25,000.
Conclusion on enforcement
The maximum security which should be ordered on the basis of obstacles/burdens of enforcement is £25,000.
Obstacles to/burdens in execution
The Bank also seeks security on the basis that it will suffer obstacles to compulsory execution of its judgment in Turkey, in particular by attachment of Mr Dumrul’s assets or by bringing about his bankruptcy. For reasons already stated, in my judgment the Nasser approach does not apply to difficulties and costs of execution and therefore no security should be ordered on this basis. In case that conclusion is wrong I shall briefly state my conclusions on the evidence.
On the Nasser approach the relevant comparison for assessment of the efficacy of the Turkish execution procedures is the execution procedures available in Lugano and Brussels states. There is no evidence as to that. Indeed it is not clear that satisfactory evidence could be given as to those procedures given the likely disparity between the procedures of different states. Even if it could be, for the purpose of comparison does one seek to identify common features or does one use the least effective procedures in evidence? These imponderables highlight how impractical and unsatisfactory it is to seek to apply the Nasser approach to issues of execution. It can only lead, as in this case, to the incurring of significant costs in an attempt to prove a matter which is not easily capable of proof.
Obstacles to execution
In relation to obstacles to execution, the experts agreed that public attachment of assets is the more usual way of satisfying a judgment debt.
The Bank’s main complaint in relation to this procedure was that there may be difficulties identifying a debtor’s assets.
However, as regards the process of disclosure in Turkey, it is not in dispute that:
7 days after receipt of a demand from the execution office, a Turkish judgment debtor is required to make a declaration of all his assets.
Failure to make a declaration or the giving of an incomplete declaration at that time is a criminal offence which carries a penalty of a monetary fine and up to 3 months in prison.
The execution office will conduct its own investigations into various classes of assets, including real property, bank credits with Turkish banks, and motor vehicles, and will enforce against those assets directly if they are discovered.
It is also possible to use enquiry agents (as they are used in the United Kingdom) to identify further assets.
The main substantive objection which Mr Bezen identifies to the investigation of assets in Turkey is the prospect that a debtor could transfer assets to a third party and then refuse to disclose the existence of those assets. However, Mr Verdi confirms that making such a transfer with the intention of making recovery by creditors more difficult is itself a criminal offence. That offence carries a significantly higher penalty than misstatement on the declaration of assets, imprisonment for a period of 6 months to 3 years. I agree with Mr Dumrul that there are no grounds for making an order for security which is premised on the assumption that Mr Dumrul would commit a criminal offence and risk criminal sanctions in order to defeat the Bank’s costs order.
Further, public attachment proceedings also present further substantial disadvantages to the debtor which act as a spur to payment:
These include, in particular, proceedings for the attachment of movable property of the debtor; such that for as long as attachment proceedings are ongoing bailiffs may attend at any address occupied by the debtor in order to seize movable property. The creditor can inform the bailiffs of addresses at which it wishes them to attend for this purpose. This is not in dispute.
A debtor who was refusing to meet a judgment debt would also not be able to (for example) have any property, a car or a bank account in Turkey. These would be attached and realised.
Extreme lengths need to be taken for the judgment creditor to be left without a remedy under the public attachment procedure. As Mr Verdi explains [Verdi 1 §59],:
“…if a judgment debtor is willing to go to criminal lengths by lying on the compulsory disclosure of assets required by the court, and can ensure that he had no assets which could be discovered by investigation (a) of any land register, company register, vehicle register or equivalent, (b) of any Turkish bank, or (c) at his or her home or other address, then it will inevitably be difficult to identify the debtor’s assets. At this stage, private investigations by the judgment creditor would be required.”
However, the debtor would still be at risk that assets would be discovered by an enquiry agent, and therefore at risk of criminal sanctions.
Considering the evidence as a whole I am not satisfied that any significant shortcoming in the Turkish attachment procedure has been established. Even if it had been, it has not been shown that it makes execution in Turkey significantly less effective than the procedures in Brussels/Lugano states, as to which there is no evidence.
A further suggested obstacle lay in alleged shortcomings in Turkish bankruptcy procedures. However, in the light of the availability of the attachment procedure, the consequences of bankruptcy and the fact that it is common ground that Mr Dumrul is a person of means, I am not satisfied that it is likely that there would be bankruptcy proceedings. This highlights another difficulty in seeking to apply the Nasser approach to execution. There will be a variety of execution procedures which are available in any particular country. Does one consider the obstacles/burdens of all of them or some of them and, if the latter, which ones?
In particular, given that what is contemplated is the use of bankruptcy proceedings to force payment from a debtor who would be in a position to meet the claim, I agree with Mr Dumrul that the efficacy of bankruptcy proceedings to secure compliance is far more relevant than their efficiency in distributing the assets of a bankrupt:
Mr Verdi’s evidence is that “he would expect a debtor who had the assets to pay a judgment debt to do everything that he could to pay the debt before the announcement of a request for bankruptcy” [Verdi 1 §76] and that “any sensible debtor” would pay a judgment debt rather than be made bankrupt [Verdi 1 §78]. He refers to:
The fact that announcement of a request for bankruptcy is widely published and brought to the attention of other creditors;
The very substantial stigma attached to bankruptcy in Turkey;
The distribution of the bankrupt’s assets;
The inability to secure personal credit or purchase property during bankruptcy;
The fact that there are no provisions for discharge under Turkish bankruptcy law, such that a debtor will remain bankrupt indefinitely until he presents evidence that all his debts have been discharged; and
The need to secure discharge from the court even after all debts are paid.
In summary, to the extent that the Turkish bankruptcy regime is relevant to this application, the evidence shows that it is a functioning regime which would be effective in securing payment from a debtor with means to meet a judgment debt.
If, nevertheless it is relevant to consider the efficacy of Turkish bankruptcy procedure, the suggested “obstacle” is the Turkish law requirement that Bankruptcy proceedings will only lie against an individual judgment debtor who is also a ‘merchant’ within the meaning of Article 43 of the Code on Execution and Bankruptcy.
As long as an individual is registered as a merchant either (a) at the date that bankruptcy proceedings are commenced, or (b) less than 1 year prior to the commencement of bankruptcy proceedings, it will be possible to make him bankrupt.
Mr Dumrul is not currently a registered merchant. However, he has offered to undertake:
“…to register as a merchant as soon as possible; to notify the Bank immediately that his registration is completed; and not to remove his registration until a final judgment in these proceedings in the English courts and thereafter unless and until no costs order is outstanding to the Bank.”
It is not in dispute that for as long as Mr Dumrul is registered as a merchant, and for one year after, the Bank will be able to bring bankruptcy proceedings against him in respect of any costs order in this action.
The Bank suggests that Mr Dumrul might be able to defeat the intention behind this undertaking because:
The undertaking to the English court would not be enforceable in Turkey;
Mr Dumrul would only be liable to bankruptcy for 1 year after de-registration;
Bankruptcy could only be commenced once enforcement had taken place (on this point, Mr Bezen says that “Bankruptcy proceedings cannot be commenced until there is an ‘unpaid debt’ (i.e. until enforcement has taken place)”); and
Enforcement of a judgment in Turkey could take 2-3 years (on Mr Bezen’s account).
However, although it is possible that Mr Dumrul, if he was so minded, could render his undertaking ineffective I am not satisfied that it is likely that he will so act, or, if he sought to do so, that he would do so effectively for the various reasons given by Mr Verdi in his evidence. Further, even if I accept Mr Bezen’s evidence that a costs order would not be an unpaid debt, the Bank should be able to initiate bankruptcy proceedings timeously in respect of its claim for the close out debt and thereby protect its position.
I am not therefore satisfied that any particular “obstacle” in Turkish bankruptcy procedure has been established. Even if it had, there is no evidence before the Court which would enable it to make the comparison which the Nasser approach requires.
Burdens in execution
Mr Bezen only identifies legal costs in relation to a full bankruptcy procedure in Turkey, which he estimates at US$138,000. Mr Verdi estimates this figure at US$90,000. I consider the appropriate figure to be US$100,000 (£64,180). However, the US$138,000 or US$90,000 lawyers’ costs would not be incurred as a result of the Bank’s enforcement of a costs order. For substantially the same reasons as are discussed in relation to enforcement the Bank’s legal costs would be incurred in any event for execution of its close out claim and in those circumstances it would not be appropriate to allocate more than half of the costs to the claim. However, for reasons already stated, the relevant costs would be those relating to attachment proceedings, but those costs have not been separately identified or evidenced and I find them not be proven.
As to Turkish court fees, the amount of those fees is not in dispute. They are:
For public attachment, 2% of the sums actually recovered by the execution office.
For bankruptcy proceedings, the same court fees as are levied in an enforcement claim. As with the enforcement claim, the only relevant fee for this hearing would be the initial court fees to commence the bankruptcy claim, being 1.485% of the sum claimed.
Conclusion on execution
For the reasons set out above, it is inappropriate that there should be any order for security for costs in relation to the availability or costs of execution proceedings in Turkey.
However, if such an order were to be made, it should be limited to the actual costs of executing through public attachment the costs element of any judgment against Mr Dumrul in Turkey, namely 2% of the appropriate estimate of the Bank’s assessed costs (£1,250,000) which would be £25,000, less the costs of execution in a Brussels or Lugano state, as to which there is no evidence.
CONCLUSION
For the reasons set out above, the maximum security which should be provided is £25,000, but that should only be ordered if the Bank is prepared to undertake to consent to the dismissal of the counterclaim in the event of the Claimant’s claims being dismissed for failure to put up security.