Kynixa Ltd v Hynes & Ors

On 30 June 2008 I handed down my judgment on the issue of liability in a claim brought by the Claimant against each Defendant for breach of contract and against the First and Second Defendants for breach of fiduciary duty. In summary I found that each Defendant was in breach of contract and the First and Second Defendants were in breach of fiduciary duty. Following the handing down of my judgment I was asked to adjudicate upon a number of issues which this judgment now addresses.

Mr Duggan, on behalf of the Claimant, applies for an order that the Defendants should pay the Claimant’s costs of and incidental to its claim in relation to the issue of liability to be taxed on the standard basis if not agreed. Mr Bacon, for the Defendants, resists the making of that order and puts forward a number of possible alternatives.

One common thread appears in the submissions made to me. Counsels agree that it is necessary for me to address the position of the Claimant as against each Defendant individually and separately. Mr Duggan accepts, as a matter of principle, that an individual Defendant in this case should be liable only for costs in respect of issues with which he or she is concerned. Obviously, many of the issues litigated concern all three Defendants. To that extent any order for costs against a Defendant will impose a joint and several liability with any other Defendant who is found liable in respect of the costs generally or in respect of the costs of an issue where more than one Defendant was found liable. To some extent, however, issues were raised which are discrete to a particular Defendant. It is accepted by Mr Duggan that an individual Defendant should not be liable to the Claimant in costs in respect of an issue with which he or she is not concerned at all.

At the outset I should also make this general observation. In reaching my decision on the issue of costs I have had regard to the provisions contained within CPR 44.3, the commentary on that part of the CPR in the current White Book and the authorities upon which Mr Bacon relies in his Skeleton Argument and orally.

With these introductory remarks I turn to the position of each Defendant vis-à-vis the Claimant separately.

On any sensible basis, in my judgment, the Claimant is the successful party as against the First Defendant. As between these parties the major issues were:-

On all these issues the Claimant succeeded.

Mr Bacon points out that the First Defendant was not found to be in breach of his fiduciary duty and/or implied duty of fidelity in each and every respect which the Claimant alleged in the voluminous pleadings in this case. That of course is true. However there was, in my judgment, a core allegation of breach of duty as against the First Defendant. That is dealt with in paragraphs 256 to 270 of my judgment. On that issue the Claimant was wholly successful. A careful reading of my judgment shows that the First Defendant succeeded as against the Claimant only upon issues which were totally peripheral (e.g. the incorporation of Flexsure) or which were of comparatively marginal significance in the scale of the claim against him looked at in the round.

As between the Claimant and First Defendant I can discern no proper basis upon which it would be appropriate for me to make an order that the Claimant should recover its costs in respect of those issues upon which it succeeded but that the First Defendant should recover his costs in respect of the issues upon which he was successful. The reality is that the First Defendant’s successes as against the Claimant pale into insignificance when one considers the Claimant’s successes against him.

To repeat, therefore, I regard the Claimant as the successful party and, unhesitatingly so, in respect of its claim against the First Defendant.

Mr Bacon points out that I have been concerned solely with the issue of liability. He submits that despite the findings of breach, the Claimant will be unable to establish any meaningful claim to damages against the First Defendant. Accordingly he submits that I should make no Order for costs at this stage but reserve the costs of the liability trial so as to await the outcome of the trial on quantum.

In some circumstances I have no doubt that it is an appropriate course to take. I do not think it appropriate, however, in this case. I say that for the following reasons. Throughout the proceedings and throughout the trial the First Defendant has denied liability completely. Yet, in my judgment, some aspects of his liability are really beyond any sensible argument. For example, the First Defendant denied being in breach of fiduciary duty in the respects which I have identified. Yet, in my judgment, many of the facts which were uncontested meant that such a finding was virtually inevitable. Another example is the First Defendant’s stance in relation to whether Human Focus/ RTW Plus were competitors of the Claimant and whether or not he was “working” for them.

It is also of significance, of course, that when this action commenced damages were, by no means, the only important remedy. The Claimant sought and obtained interim injunctive relief against the First Defendant. It has been very important to establish whether or not the Claimant can establish liability since, of course, if it could not the First Defendant would have a remedy upon the undertaking in damages given by the Claimant.

The plain fact is that a split trial was ordered at a comparatively early stage of these proceedings and, as it seems to me, justice now demands that the costs of the proceedings which relate to the issue of liability should now be determined. If, in due course, the Claimant pursues the First Defendant for damages and is unsuccessful no doubt it will be the subject of an adverse costs order.

In reaching my conclusion about the costs as between the Claimant and the First Defendant I have also specifically considered the First Defendant’s conduct. In this context it is now well established that the conduct which provokes the proceedings (in this case the breaches of contract and fiduciary duty) can properly be taken into account in arriving at the appropriate costs order. I agree with Mr. Duggan that the way in which the First Defendant misled the Claimant and the nature of the breaches found against him are factors which support his submission that the First Defendant should pay the Claimant’s costs.

I have also had regard to the fact that the First Defendant made offers in settlement to the Claimant. On 31 August 2007 the First Defendant (and the Second Defendant), in effect, offered to comply with the terms of the Injunctive relief which had been granted to the Claimant for 1 year after the termination of his employment with the Claimant but suggested that each party should bear its/his own costs. The Claimant has done substantially better than that in relation to the First Defendant. By letter dated 8 January 2008 the First Defendant (in conjunction with the Second Defendant) offered in addition to pay the sum of 200,000 in satisfaction of all the Claimant’s claims to damages and costs. The likelihood is that this sum was less than the costs then incurred by the Claimant in relation to these two Defendants. That means of course that it made no provision for even a modest award of damages in favour of the Claimant. It does not seem to me that these offers are such that I should be deflected from my view as to the appropriate order for costs.

Having considered the submissions of Mr Duggan and Mr Bacon (both written and oral) and in the light of the factors I have highlighted above I have reached the clear conclusion that the appropriate order as between the Claimant and First Defendant is that the First Defendant should pay to the Claimant the costs of and incidental to the issue of liability. I repeat that this order is not intended to make the First Defendant liable for costs incurred by the Claimant which do not relate to an issue with which he was concerned.

The Second Defendant always admitted that she was bound by the shareholder agreement. Like the First Defendant, however, she argued that some of its provisions were unenforceable. I decided that issue against her. I also decided that she was in breach of Clause 7.1.1 of the shareholder agreement.

I found the Second Defendant to be in breach of her fiduciary duty/implied duty of fidelity in the respects which are identified in paragraph 271 to 276 of my judgment.

The Second Defendant succeeded on the following issues. She succeeded in establishing that she was not bound by the covenants in a contract of employment which she had signed on 13 February 2002. She also successfully resisted claims that she was in breach of her fiduciary duty in respects which I have identified in my judgment.

Mr Bacon’s submissions about the position of the First Defendant can be summarised in this way. He asks me to consider the possibility that I should reserve costs in relation to liability until quantum has been resolved. Alternatively he submits that both the Claimant and the Second Defendant have succeeded on issues and that my Order for costs should, in effect, be that each party should have its costs upon the issues upon which it/she succeeded.

Essentially for similar reasons given in relation to the First Defendant I do not think it appropriate to defer making an order for costs until after quantum has been resolved.

I turn, therefore, to consider whether it is appropriate to regard either the Claimant or the Second Defendant as the successful party overall in this litigation to date. In my judgment the reality is that the Claimant succeeded. The Claimant set out to establish that the injunctive relief which it sought and obtained against the Second Defendant was justified and it set out to show that the Second Defendant had committed breaches of contract/duty which were capable of sounding in damages. In this the Claimant has succeeded. All that the Second Defendant has done, in reality, is persuade me that some of the breaches of duty alleged against her are not made out.

Notwithstanding my view that the Claimant is the successful party overall, however, it does seem to me that my order should reflect the fact that the Second Defendant succeeded in relation to aspects of the case which did involve a significant amount of preparation and did involve a significant amount of time in court. I refer to those aspects of the case which are discussed at paragraphs 322 to 354 of my judgment.

It seems to me that the just order as between the Claimant and Second Defendant is that the Second Defendant should pay to the Claimant the costs of and incidental to the issue of liability except for those costs which are referable to the issues discussed and determined in paragraphs 322 to 354 of my judgment. I direct that the Claimant should pay to the Second Defendant the costs of and incidental those issues. No doubt that means that the Claimant will recover more by way of costs than the Second Defendant. I direct that following assessment of the costs (or agreement) the costs awarded to the Second Defendant should be set-off against the costs awarded to the Claimant.

In reaching my decision I have taken into account the Second Defendant’s conduct towards the Claimant (as to which see my judgment) and, the offers in settlement made on behalf of the First and Second Defendant (as to which see above). I have also considered whether it would be practicable and just to make an order that the Second Defendant should pay a proportion of the Claimant’s costs so as to avoid the need for separate assessments. On the information put before me, however, that is simply not possible.

Unless it be thought to be an oversight I should explain why I make no order in favour of the Second Defendant in respect of the issue of whether or not the contract of 13 February 2002 continued to bind her after the coming into being of later contractual documents. The plain fact is that success on this issue was entirely academic given that the Second Defendant was bound by the shareholder agreement. Further or alternatively, as between the Claimant and the Second Defendant the issue can properly be regarded as wholly peripheral.

Both Mr Duggan and Mr Bacon submit that their respective client is the successful party.

The Claimant succeeded as against the Third Defendant in establishing a breach of her duty of fidelity in the respects which I have identified in my judgment at paragraphs 277 to 284 and paragraphs 355 to 359. The Third Defendant successfully argued that she was not bound by the contract of employment which she signed on 12 August 2004 and, that being so, she was also able to defeat the claim that she was subject to express contractual terms which prevented her working for a competitor after the termination of her employment with the Claimant. In her case I also found that she had not misused information belonging to the Claimant during her employment with Scion.

As anyone who has cause to read the transcripts of the trial will readily discern the position of the Third Defendant in these proceedings was very much secondary to the position of the First and Second Defendants. Nonetheless, I have found one of the central allegations in this case proved against her – see paragraph 277 to 283.

Overall I regard the Claimant as having succeeded against the Third Defendant. It also seems to me to be just to reflect in my order for costs the Third Defendant’s conduct towards the Claimant. However, it also seems to me that the appropriate order for costs should reflect her undoubted successes on discrete issues and, to some extent, the Claimant’s own intransigence in pursuing the proposition that the Third Defendant was bound by her August 2004 contract. This was a significant issue as between the Claimant and Third Defendant. This contract was the only means by which the Claimant was able to argue that the Third Defendant was restrained from working for a competitor. The Claimant persisted in such an argument to the bitter end. However, the argument was always bound to fail. In my judgment this was conduct on the part of the Claimant during the course of the litigation which should be reflected in my order for costs.

It is also relevant that in its letter of 8 January 2008 the solicitors acting for the Defendants invited the Claimant to discontinue the claim against the Third Defendant. No offer of compromise was made in her case.

In the case of the Third Defendant I do not think it appropriate to make orders for costs which relate to discrete issues. Rather I think the appropriate course is to start from the basis that the Claimant is the overall victor in the proceedings but then award the Claimant only a proportion of its costs. In so doing I am, I hope, reflecting the guidance contained within CPR 44.3(6) and (7).

In my judgment the just proportion of the Claimant’s costs which the Third Defendant should have to bear is 33%.

Mr Duggan applies for such an Order against all three Defendants. He tells me that the Claimant’s costs, in total, are just in excess of £1m. There is included within that sum an insurance premium of £285,000 which, I as understand it, Mr. Bacon accepts is recoverable as a matter of principle.

It is now generally accepted that the principles which should be applied in determining an application for a payment on account are those which are set out in the judgment of Jacob J (as he then was) in Mars UK Limited v Tech Knowledge Limited (Costs) [1991] 2 Costs L R 44.

The principles are conveniently summarised in the current edition of the White Book. In general an Interim Order for payment of costs prior to assessment should be made, but the court has to take into account all the circumstances in the particular case including the unsuccessful party’s wish to appeal, the relative financial position of each party and the court’s overriding objective to deal with cases justly.

I am conscious, of course, that each of the Defendants has sought my permission to appeal. I also have regard to the information put before me by the Defendants as to their means. In the case of the Second Defendant I have regard to the fact that she has not been ordered to pay the whole of the Claimant’s costs and, indeed, she will benefit from a set off in respect of those costs which she is entitled to recover under my order. In respect the Third Defendant I take into account that she has been ordered to pay a comparatively modest proportion of the Claimant’s costs.

The First Defendant must make a payment on account of costs in the sum of £250,000. I reach that figure in the following manner. A conservative estimate of the costs as between the Claimant and First Defendant is £500,000. I say that since it is reasonable to assume that a significant percentage of the bill of £1m would not be allowed on a taxation on the standard basis and of the sum which would remain some further amount would not be attributable to the First Defendant at all. An interim award is rarely more than 50% of the likely taxed bill hence my figure of £250,000. It is usual to order this sum to be paid within 28 days. In this case however, I direct that the sum should be paid by 4 pm 12 September 2008. I make that order so that the First Defendant has a reasonable period of time to raise the money. It may also be that by that date any application he may make to the Court of Appeal for permission to appeal against my judgment will be dealt with and, of course, any application for permission to appeal in relation to my costs order or any application for a stay in relation to the payment on account.

The Second Defendant must make a payment on account of costs in the sum of £100,000 by the same time and date. I give her the extended period for the same reasons as I afforded the First Defendant an extended period. I reach the figure of £100,000 as follows. A conservative estimate of the Claimant’s costs as against the Second Defendant (even allowing for the taxation process) probably exceeds £600,000. However some of those costs are not recoverable. Further, the Claimant has an obligation to pay the Second Defendant some of her costs (see paragraph 25 supra). There is no real means of knowing what those are from the information before me. Accordingly I err on the side of caution in fixing an amount on account at £100,000.

Given the nature of the costs order against the Third Defendant and the complete lack any reliable information about the totality of the costs attributable to the dispute between the Claimant and her I decline to make an order for a payment on account against her.

As is customary, I sent out my judgment in draft. By letter dated 20 June 2008 the Claimant’s Solicitors invited me to make three findings which were additional to those dealt with in the draft judgment.

I made no revisions to the draft judgment as a consequence of this request. Essentially the judgment which I handed down was the judgment sent out in draft but with the typographical corrections suggested by the parties. However at the hearing at which I handed down my judgment both Mr Duggan and Mr Bacon made submissions about the request that I make findings.

Mr Duggan, after some debate, does not pursue the application in respect of two of the issues raised in the letter of 20 June 2008. He does, however, pursue an application that I should make a further finding in respect of one of the issues identified in that letter.

The issue upon which I am asked to make an additional ruling is expressed thus in the letter of 20 June 2008: -

“His Lordship has found that the First and Second Defendants were in breach of their fiduciary duties to the Claimant between January 2007 and the dates they each left the Claimant’s employment.

During the course of the trial evidence was heard that a meeting took place in February 2007 between the First and Second Defendants and Mr Stock as to the funding of a MBO. In evidence Mr Stock stated that sums in the region of £3 million were being considered (see paragraphs 8.26 – 8.29 of Mr Duggan’s written Closing Submissions).

His Lordship is asked to make findings as to:

•

whether on the evidence as presented the First and Second Defendants, on the balance of probabilities, failed to inform the Claimant of the fact that the Second Defendant was interested in a MBO and/or there was a potential investor in the light of their discussions with Mr Stock.

•

whether any such non-disclosure was in breach of the fiduciary duties owed by the First and Second Defendants to the Claimant during that period.”

It is to be observed at the outset that neither the Particulars of Claim nor the Voluntary Particulars plead the allegation now under consideration. Mr. Bacon submits that this is a sufficient reason to decline to make any findings as I am invited to do on behalf of the Claimant. He points out, with some force, that the First and Second Defendants have been afforded no opportunity to plead a Defence to this allegation and, in those circumstances, he submits that it would be unjust for findings to be made or conclusions to be reached about the alleged breach of duty.

Mr Bacon also takes issue with Mr Duggan’s contention that the evidence relating to this alleged breach of duty only “crystallised” (Mr Duggan’s word) after the cross-examination of Mr Stock. He is right, at least, to this extent. I have a note of the cross-examination of the Second Defendant, for example, which clearly shows that she was asked questions about this issue. She frankly admitted that she did not report her conversation with Mr Stock to MB and EB.

The other side of the coin is that this evidence was all adduced without objection from Mr Bacon. Further the alleged breach was clearly identified in Mr Duggan’s closing submissions and no submission was advanced to me orally by Mr Bacon to the effect that I should make no finding about the First and Second Defendant’s apparent failure to report their discussions with Mr Stock to MB and EB.

In deciding what should be done, now, it seems to me that I should adopt the same approach as I would have done had the issue been raised squarely and discussed fully by Mr Duggan and Mr Bacon in Closing Submissions. The probability is that even at that stage I would have granted permission to the Claimant to amend its Particulars of Claim. I would have reached that conclusion, essentially, because much relevant evidence had been given on the issue and there was, apparently little or no dispute about it. However I would certainly not have prevented the First and Second Defendants from calling further evidence upon the issue if they thought that to be appropriate. Such a course would not have been unjust or disproportionate. The evidence might have been available there and then – from the First and Second Defendants. If it had not been available, I would have proceeded on the basis that this issue could be dealt with both as to liability and quantum during the trial on quantum.

Accordingly it seems to me that the appropriate course is to decline to make findings as suggested by the Claimant but, rather, to permit the Claimant to amend its Particulars of Claim. I make it clear that this permission is granted only so as to plead an allegation the substance which is contained within the letter of 20 June 2008. The issue so pleaded can then be determined both as to liability and quantum at the trial on quantum which will take place in due course.

I am conscious of the fact that this permission will be granted after my judgment has been handed down. However it is now well established that the Court does have power to permit an amendment which is sought after judgment has been given but before an Order recording that judgment has been drawn up and sealed. Before permitting such an amendment, of course, the Court must first decide whether there are exceptional circumstances or strong reasons for taking an unusual course. (see Stewart v Engel(Permission to Amend) [2000] 1 WLR 2268)

I am satisfied that the history of how this allegation has unfolded does constitute an exceptional circumstance or a sufficiently strong circumstance to justify the grant of permission.

As a matter of form I direct that the Claimant should include its pleading on this issue in the Statement of Case on quantum. It seems a wholly unnecessary waste of paper to amend the existing Particulars of Claim. The First and Second Defendant can then respond appropriately when they serve Defences.

The costs of and incidental to this amendment are reserved for consideration after the trial on quantum.

In his Skeleton Submissions Mr Bacon identifies a number of points upon which he submits an appeal is likely to succeed. In the case of the Third Defendant he wishes to attack the primary finding against her. In relation to the other Defendants he identifies individual points with which he takes issue.

I do not consider there is a realistic prospect that the Court of Appeal will interfere with my conclusions on the facts. In my view that will make the Third Defendant’s chances of a successful appeal slim. While, of course, I acknowledge that a Court of Appeal might take a different view about the enforceability of the shareholder agreement and whether the First Defendant was bound by it I consider the prospects of success to be far less than the prospects of failure on those points. The issue of whether the First Defendant was in breach of duty in early as opposed to late January is of peripheral importance in the context of the case against him as a whole.

Accordingly I refuse permission to appeal.

I will hand down this judgment in the absence of the parties on Tuesday 15 July 2008 at 10.15am at the Cardiff Crown Court. For the avoidance of any doubt I will issue an order which reflects my judgment on liability and this judgment. I refuse permission to any party who wishes to appeal my decision on costs on the basis that I have considered all the relevant factors and exercised my discretion in accordance with the appropriate principles.