Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB

This judgment deals with one outstanding issue following the judgment which I handed down in this matter on 15 March 2012 ([2012] EWHC 584 (Comm)). That judgment gave the reasons for my dismissal of Euroption’s claim. I use the same definitions as those used in my earlier judgment.

At the handing down of the judgment, I heard argument in relation to various consequential matters. These included: the basis for the assessment of SEB’s costs; whether there should be a deduction of 15% in relation to SEB’s costs; the quantum of any order for an interim payment on account; and Euroption’s application for permission to appeal.

There was no dispute on that occasion that Euroption should pay SEB’s costs and interest thereon: what was in dispute in relation to costs was whether:

there should be a deduction from SEB’s costs of some 15%;

whether SEB’s costs should be assessed on the standard or indemnity basis; and

the quantum of any order for an interim payment.

For the reasons which I gave orally at the hearing, I decided that, contrary to Euroption’s submission, it was not appropriate that there should be any deduction from SEB’s costs to reflect the fact that it had chosen not to mediate Euroption’s claim.

I took the view that, in circumstances where SEB had, by its letter dated 30 April 2010, which was marked “without prejudice save as to costs”, made its position perfectly clear (namely, that it saw no merit in the claim but was prepared to forego its substantial costs to date if the claim was dismissed), and where, as I have found, there was indeed no merit in Euroption’s claim, there was no reason why SEB should have incurred the additional costs of mediation. I doubt very much whether Euroption would have accepted a mediated outcome on the basis of each side bearing its own costs, or anything similar. It was clear from the correspondence that it was seeking to secure a substantial sum in an amount of many millions of Euros for its agreement not to pursue its claim. I see no reason why SEB should have been required to engage in a mediation process in circumstances where it was, rightly, in the event, maintaining that Euroption’s claim for €135 million was without foundation. For reputational and other reasons, there was no reason whatsoever for SEB to pay Euroption anything for the certainty of removing the threat of Euroption’s claim. There was nothing unreasonable in SEB not acceding to Euroption’s request to mediate that would justify a reduction in SEB’s entitlement to costs.

It was common ground that an interim payment should be made. However, there was a dispute as to the quantum of such interim payment. Euroption contended that the figure should be merely £750,000; SEB contended that it should be £1.25 million, representing approximately 50% of SEB’s total costs, including an element for irrecoverable VAT. In relation to this last matter, I received letters from SEB’s solicitors, Clifford Chance, clearly explaining the basis for the calculation of the VAT figures that were put forward in SEB’s schedule of costs. In an email to the parties sent by my clerk on 19 March 2012, I indicated that, in the exercise of my discretion, 50% of SEB’s claimed costs, namely, the sum of £1.25 million, was the appropriate figure to require Euroption to pay on account, even on the assumption that SEB’s costs were only to be assessed on the standard basis. Looking at SEB’s costs schedule, I consider that it is highly improbable that SEB’s costs will be assessed at less than this sum.

At the hearing on 15 March, I also refused Euroption’s application for permission to appeal. Euroption has no reasonable prospect of success. Even if, despite the Court of Appeal decision in Socimer International Bank Ltd (in Liquidation) v Standard Bank London Ltd (No 2)[2008] 1 Lloyd’s Rep 558, it could be argued that SEB owed Euroption a duty to take reasonable care in the conduct of the close out, as opposed to merely a duty to act rationally, Euroption’s case is hopeless on the facts. It would not succeed in establishing a breach of any duty to take reasonable care.

Accordingly, the issue which remains for determination is the basis upon which SEB’s costs should be assessed. SEB contends that Euroption should pay SEB’s costs of the action, to be the subject of a detailed assessment, on the indemnity basis. Whilst Euroption did not ask for any order for costs in its favour, it contends that SEB’s costs should only be assessed on the standard basis.

The starting point is section 51 of the Senior Courts Act 1981, which provides that costs are in the discretion of the court, subject to the rules of the court.

The relevant provisions of the CPR are those contained in rules 44.3, 44.4 and 44.5. As rules 44.4 and 44.5 make clear, there are two differences between the two bases of assessment. The first difference is as to the party who bears the relevant burden of persuasion in a case of doubt as to whether costs were reasonably incurred or reasonable in amount. On the standard basis of assessment, the burden of proof is on the receiving party: see rule 44.4(2)(b). On the indemnity basis, the burden of proof is on the paying party: see rule 44.4(3). The second difference is that, on the standard basis of assessment, the paying party has the benefit of the limitation contained in rule 44.4(2)(a), namely, that only costs which are proportionate to the matters in issue are recoverable.

There was virtually common ground between the parties as to the principles to be applied by the court in making its choice between the two bases of assessment. The principles are well-known and have been exhaustively rehearsed in the relevant authorities. The following is no more than a headline summary.

First, on either basis, the receiving party is only entitled to recover costs which it has actually incurred, and, further, is only entitled to receive costs which were reasonably incurred and were reasonable in amount. Second, the standard basis is the normal basis of assessment: see Reed Minty v Taylor[2002] 1 WLR 2800 at [28]; Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspden & Johnson[2002] EWCA (Civ) 879 at [19]. This means that there has to be something in the conduct of the action, or about the circumstances of the case in question, which takes it out of the norm in a way which justifies an order for indemnity costs: see Excelsior (supra) and Noorani v Calver[2009] EWHC 592 (QB) at [9], per Coulson J. Third, cases vary very considerably, and the Court of Appeal has declined to lay down guidelines on the subject: see Excelsior (supra) at [32]. It is obvious from a reading of the authorities that each case is highly fact-dependent.

Fourth, to demonstrate that a case has gone outside the norm of behaviour, it is not necessary to show that the paying party’s conduct lacked moral probity or deserved moral condemnation in order to attract recovery of costs on an indemnity basis: see Balmoral Group Ltd v Borealis (UK) Ltd[2006] EWHC 2531 (Comm) at [1], where Christopher Clarke J said:

However, as Mr. Shivji emphasised, by reference to paragraph 8 of the decision in Noorani (supra), conduct must be unreasonable “to a high degree” to attract indemnity costs. “Unreasonable” in this context does not mean merely wrong or misguided in hindsight: see per Simon Brown LJ (as he then was) in Kiam v MGN Limited (No 2)[2002] 1 WLR 2810. In each case, it is a fact dependent question as to whether or not the paying party’s conduct has been unreasonable to a high degree.

One example of a case of unreasonable conduct in the conduct of proceedings was Digicel (St Lucia) Ltd v Cable & Wireless plc[2010] EWHC 888 (Ch) at [68] - [69]. The claimant had shown no interest in proportionality by casting its claim disproportionately wide, and requiring the defendant to meet such a claim. In such circumstances, Morgan J held there was no injustice in denying the claimant the benefit or an assessment on a proportionate basis, given that, in such circumstances, the claimant had forfeited its right to the benefit of the doubt on reasonableness: at [68] - [69]. Another relevant example of conduct of the paying party which took the case outside the norm was Re Continental Assurance Co of London plc (in liquidation) (unreported) 13 June 2001, where Park J approached the question of indemnity costs on the grounds that the liquidators had pursued all issues at full length and right to the end of trial, with the result that the amount of costs incurred was enormous. It was appropriate that the costs of the successful respondents should be assessed on the indemnity basis so that they, and not the liquidators, received the benefit of any doubt as to whether incurring the cost was reasonable.

Mr. Shivji, on behalf of Euroption, argued that this was not a case where Euroption’s conduct of the proceedings was such as to attract an order for indemnity costs. He submitted that, although with the benefit of hindsight the claim might be characterised as wrong or misguided, that was not sufficient to take the case outside the norm. He further submitted that the principal factual issue which fell to be determined was whether the close-out had begun on 9 or 10 October 2008, and Euroption could not be criticised for raising that factual dispute for determination. He said that Euroption’s case, both on the date of the close out and the breach of duty, had been supported by the evidence of Mr. Beagles. Mr. Shivji pointed out that the court had not decided the consequential loss of profits on the balance of probabilities, and would have needed to determine the arguments before it could conclude that the claim was unarguable. He went through a further detailed analysis of Euroption’s claims, in an attempt to persuade me that there was a significant body of expert evidence which favoured Euroption’s approach in relation to Claim 1; namely that having begun the close out on 9 October, SEB delayed in the close out in breach of its duty to act rationally and of its duty to act competently. He said that, as far as Claim 2 was concerned, that was purely a case of construction of the terms of the Mandate, and there had been nothing unreasonable in Euroption’s conduct in putting the claim forward. He said that this was not a claim that SEB was negligent per se in executing combination trades, but was focused solely on authority. In relation to Claim 3, as an alternative to Claim 1, Mr. Shivji submitted that there was a realistic evidential basis for supporting Euroption’s case, supported by Mr. Beagles, as well as a legal basis. Mr. Shivji also submitted that the fact that David Steel and Blair JJ in the Fluxo-Cane case had proceeded on the basis that a duty to take reasonable care indeed existed, was sufficient to support the reasonableness of Euroption bringing its claim and its conduct of the action.

In my judgment, for the purposes of the exercise of my discretion, it is necessary to stand back and look at the nature of Euroption’s claim as a whole, rather than conduct a micro-analysis of particular aspects of particular claims. As Mr. Toledano submitted, and I accept, on any basis, this was a highly speculative claim for in excess of €135 million, brought in circumstances where Euroption itself had failed, over a number of days, to comply with its contractual obligations to provide substantial margin payments to SEB. In its claim, Euroption was effectively criticising SEB for its conduct of the close out, in circumstances where, as Socimer and the other cases demonstrate, SEB was entitled to have regard to its own interests, given that it was effectively exposed to the entire downside risk of the portfolio, and given its own margin obligations to the relevant exchanges. Moreover, SEB was doing so in some of the most difficult and volatile trading conditions that had been experienced in recent years.

In my judgment, this claim was:

a speculative claim involving a high risk of failure, not just because of the previous legal cases which had addressed the obligations of bankers/brokers closing out positions in such circumstances, but also because of the expert views expressed by Dr. Fitzgerald, and, indeed, Mr. Beagles;

a grossly exaggerated claim, not only because of the number, detail and nature of the criticisms and complaints levelled at SEB, but also in the quantum, and in the remoteness of the consequential claim for loss of profit;

an opportunistic claim, given Euroption’s own responsibility for the trading position in which it found itself on 9 and 10 October, and its failure to provide margin cover;

a claim that was conducted in a manner that displayed very little regard to proportionality or reasonableness, giving rise to the incurring of substantial costs on both sides;

a claim that pursued all issues at full length to the end of the trial.

I reject Mr. Shivji’s argument that Euroption’s claim was centred on the principal factual issue whether the close out began on 9 or 10 October, and that this was a reasonable case for Euroption to run. First of all, although that point was clearly in issue, it was merely the first factual hurdle which Euroption had to surmount to get to first base in its principal Claim 1. Second, as I found, Mr. Scattolon himself knew that SEB had not started the close out on 9 October, and, of course, whilst what he thought was not, as Mr. Shivji pointed out, determinative of Euroption’s claim on this issue, in circumstances where Mr. Scattolon was the person having direct responsibility to trade the portfolio, it did not lie well in Euroption’s mouth to distance itself from what its own trader viewed as the position.

Moreover, all three claims involved a meticulous and detailed criticism of SEB’s conduct of the close out of the portfolio, allegedly on 9 October, and on 10, 13 and 14 October, and the cherry-picking of the trades which suited Euroption’s financial interests to complain of, whilst leaving to one side those trades conducted by SEB which operated to Euroption’s benefit. As I said in my judgment, Euroption’s approach was effectively to subject SEB’s conduct to a minute analysis of every single trading decision, measured against every available alternative. The allegations of flawed decision-making during the relevant period were extensive, and explored at considerable length, and persisted in at trial despite the difficulties to which the expert evidence gave rise. Effectively, the court was invited to re-run the entire close out (or alleged close out) from 9 - 13 October, by reference to suggested alternate trading strategies and assorted market considerations. Euroption’s case relied upon a hindsight forensic comparison between various trading options which, as Dr. Fitzgerald opined, ignored the practical reality of close out trading being conducted in the interests of the closing broker who is financially exposed.

In addition, as I found in my judgment, a number of Euroption’s claims were contrary to, or inconsistent with, the knowledge of Mr. Scattolon, or Euroption’s expert, Mr. Beagles. As I have held, Mr. Scattolon knew, in relation to Claim 2, that he had given instructions for one of the combination trades and expressly authorised the other. Mr. Beagles, whilst on the one hand criticising SEB for having ignored the upside risk, and having failed to close the out of the money calls on 10 October, himself acknowledged that it was reasonable to focus on the puts until the directional exposure switched to the upside. But both he and Mr. Scattolon acknowledged that the directional exposure had not, in fact, switched to the upside until 13 October. In those circumstances, it was very difficult to see that there was any sound evidential foundation for Claim 3. Moreover, Euroption’s assertion of a duty on the part of the closing out broker to take reasonable care was inconsistent with the Court of Appeal authority of Socimer, and received scant, if any, support from the Fluxo-Cane cases.

Apart from attacking the actual trading strategies adopted by SEB, and the trades themselves which comprised the close out, Euroption also targeted every aspect of SEB’s decision-making, including the decision to appoint Mr. Martin to conduct the close out and his ability to do so. Mr. Martin was cross-examined at unnecessary length about his memorandum dated 22 October 2008, and it was wrongly suggested to him that it was a self-serving document designed to cover his back against the wrath of his superiors. I held there was no evidence to support this allegation.

Whilst both sides made criticisms of the other in relation to inadequate disclosure, there is no doubt that pages and pages of correspondence were disproportionately devoted to this issue. I find it difficult to see, whatever may have been the inadequacies of SEB’s disclosure prior to trial, why the point had to be persisted with in Euroption’s opening. Mr. Shivji submitted that such inadequacies made the task faced by the court in identifying when SEB began closing out Euroption’s portfolio considerably more difficult. But, as Mr. Toledano submitted at the beginning of the trial, the reality was that SEB had disclosed very full records, in particular emails, transcripts of telephone calls and trading records, from which, together with the vast amount of material disclosed by Euroption, the court was well able to determine the critical issue as to when SEB started the close out. As I said at trial (see [66] of the judgment), I did not accept Euroption’s complaint about the alleged failures on the part of SEB to make adequate disclosure, and I accepted Clifford Chance’s explanation as to the manner in which disclosure had been provided.

Furthermore, the correspondence which I saw only after I had given judgment (which was without prejudice save as to costs) also gave me the strong impression that Euroption was aggressively pressing for some sort of substantial payment to drop the claim. I accept Mr. Toledano’s submission that it would not be inappropriate to characterise Euroption’s claim as a ransom claim. Whatever SEB’s views about the claim, it was necessarily one that it had to take extremely seriously, given the amount at stake, and the reputational issues it raised. This, no doubt, involved the incurring of substantial costs and the spending of considerable time in dealing with the claim.

I have no doubt that, in all the circumstances, it is appropriate to characterise this claim as one that, looked at overall, goes outside the norm. I see no injustice in denying Euroption the benefit of an assessment subject to a “proportionate” limitation in circumstances where it has approached this claim in the way that it has.

For all the above reasons, I have decided to award SEB its costs on the indemnity basis.