New Century Media Ltd v Makhlay

New Century Media Limited (“NCM”) is an independent communications consultancy. It acts mainly for corporate, city and political clients to achieve strategic communications and business objectives. It is owned by its chairman, Mr David Burnside.

In June 2012 NCM entered into a services contract with the Defendant, Mr Vladimir Makhlay (also sometimes referred to as Mr Vladimir Makhlai) (“Mr Makhlay”) (“the contract”). Mr Makhlay is a prominent and wealthy retired Russian businessman. His background is in chemical production businesses in Russia. He came to the United Kingdom in 2005 seeking asylum, and was granted an investor visa on the basis of having assets of at least £1m in the United Kingdom. He was concerned about media coverage of his affairs here and in Russia and engaged NCM to provide him with high level strategic advice, covering all areas of media relations and public affairs activities. He also wanted to achieve full British citizenship.

The relationship between the parties subsequently broke down, leading NCM to issue proceedings against Mr Makhlay for debt and/or damages, interest and costs. Judgment in default on liability was entered on 18^th April 2013, with quantum to be assessed (“the judgment”).

NCM has been represented by Mr Clive Wolman, and Mr Makhlay by Mr Paul Stanley QC. I am grateful to both counsel for their assistance.

On 20^th June 2012 Mr Burnside wrote to Mr Makhlay to confirm their “client consultancy relationship”. He stated that NCM would provide high level strategic advice “on an annual contract with immediate effect at £75,000 per month, invoice monthly to be paid on 20th of the month (first payment on 20^th June 2012)”. The letter asked Mr Makhlay to sign and return a copy of the enclosed letter.

The enclosed letter, also dated 20^th June 2012 and which Mr Makhlay duly signed, provided again for the provision of services “on an annual contract with immediate effect at £75,000 per month, invoiced on the first of every month and payable within 30 days. There will be a strategic review of activities in 6 months of contract commencement”.

NCM’s services were to include :

NCM assigned the following personnel to the contract :

Mr Makhlay duly paid the monthly invoices for June, July, August and September 2012, each time in the sum of £75,000. At a meeting at NCM’s offices on 18^th October 2012 NCM produced a three month action plan for management of Mr Makhlay’s global reputation, along with two additional documents, one headed “Proposed office sites for Vladimir Makhlay” and one on philanthropic proposals. Minutes of the meeting were taken with action points listed.

On the same day Mr Makhlay wrote a letter asking for progress reports against each area of service to be provided, as set out in the contract. He also suggested that he had been misled by NCM into changing his law firm. He said that he saw no need for philanthropic activity at that point.

The next invoice (dated 20th October 2012) went unpaid. On 22^nd October 2012 another meeting took place. NCM provided a progress report and a quarterly activity report. The accusations that Mr Makhlay had made were rejected in a covering letter handed to Mr Makhlay.

On 24^th October 2012 Mr Makhlay wrote to say that he carefully reviewed NCM’s documents. He had come to the conclusion that all of the themes in the documents had lost their relevance “for today”. He went on :

“In this regard, I propose to terminate and null the contract and issued power of attorneys between the New Century Media and myself, Vladimir Makhlay, from October 21^st 2012.”

He asked for return of all his documentation without transfer to any third party.

On the same day Mr Burnside asked Mr Makhlay to reconsider, expressing sadness at receipt of Mr Makhlay’s letter. He questioned the advice that Mr Makhlay was receiving from his previous advisers.

The November and December 2012 invoices went unpaid. In response to the November 2012 invoice Mr Makhlay’s representative stated that she had been informed that all work between the parties had “finished”. On 7^th December 2012 Mr Burnside chased Mr Makhlay for a response to his letter of 24^th October 2012. He stated that he wanted to continue advising him. He pointed to Mr Makhlay’s continued contact with those to whom he had been introduced by NCM, and other achievements reached. He asked to meet to discuss the way forward.

On 20^th December 2012 solicitors for NCM wrote seeking payment of the then outstanding £150,000. The January 2013 invoice went unpaid.

On 7^th February 2013 solicitors for NCM wrote to Mr Makhlay setting out the background, contending that it was not open to Mr Makhlay unilaterally to terminate the agreement before one year had elapsed, and stating :

“In the circumstances, your conduct, culminating in your unlawful purported termination of the Agreement and continuing failure to make payment to our client of sums due, clearly amounts to a repudiatory breach of contract. We hereby notify you that this repudiatory breach is accepted by our client, bringing the Agreement to an immediate end.”

The letter went on to claim loss and damage in the sum of £602,145.80, and requested payment within 14 days. I have not been shown any response to that letter.

Proceedings were commenced on 1^st March 2013. After an extension of time Particulars of Claim were filed and served on 21^st March 2013. The Particulars of Claim stated, amongst other things,:

No defence or acknowledgment of service having been served, on 5^th April 2013 NCM requested entry of a default judgment, which judgment was entered on 18^th April 2013, as set out above. No attempt has been made at any stage to set aside the default judgment under CPR r.13.3 or otherwise.

The result is that there is a final and conclusive judgment on liability in NCM’s favour on the basis of the Particulars of Claim.

NCM claimed the following :

There is evidence from NCM of additional losses, in the form of being unable to expand or invest as planned and, for example, from being unable to act for those with a conflict with Mr Makhlay, but no further financial claims have been formulated or advanced.

Mr Makhlay’s counter-schedule denied any liability to pay on the basis that he lawfully terminated the contract due to NCM’s failure to perform. He accepted liability for £560 in respect of IT services. Alternatively, he submitted that NCM “did not mitigate the losses following the termination of the contract as it [was] obliged to do. Among other things, [NCM] could have assigned the four individuals to new contracts or made them redundant….”

One unsatisfactory aspect of this hearing has been the fact that the scope of issues had not been agreed or determined in advance and was materially in dispute. Specifically, it is Mr Makhlay’s contention that, despite the judgment against him, it is open to him to advance the following arguments :

I invited the parties to make their submissions at the outset of the hearing, which they did, although in the event I deferred my ruling on the issues until now.

For Mr Makhlay it is said, by reference to the judgment form, that all that has been established by the judgment is that NCM is entitled to “an amount” of money from the Defendant. Thus Mr Makhlay cannot argue that NCM is not entitled to “an amount”, but he is otherwise unfettered in the arguments that he can raise on liability relevant to what that “amount” might be (save, for example, for contending that the contract was void or voidable for mistake or misrepresentation).

It is emphasised that judgment in default does not amount to an admission. Reference was also made to three authorities : New Brunswick Railway Company v British and French Trust Corp Ltd [1939] AC 1; Kok Hoong v Leon Cheong Kweng Mines Ltd [1964] AC 993 and Ozer Properties Ltd v Ghaydi [1998] 1 EGLR 91. From these Mr Stanley extracted the proposition that a judgment is only conclusive of what it directly decides. Only if something is necessarily and distinctly proved can an estoppel arise. That involves analysis of the pleadings and the judgment.

The cases referred to above are not directly apt without more, in the sense that they each only deal with the quite different situation where the question is what can and cannot be run in subsequent, not the same, proceedings. This distinction was emphasised in the opinion of Lord Maugham LC in New Brunswick (supra) at page 21:

“In my view not all estoppels are “odious”; but the adjective might well be applicable if a defendant, particularly if he is sued for a small sum in a country distant from his own, is held to be estopped not merely in respect of the actual judgment obtained against him, but from defending himself against a claim for a much larger sum on the ground that one of the issues in the first action (issues which he never saw, though they were doubtless filed) had decided as a matter of inference his only defence in the second action. My Lords, I think there is much to be urged in favour of the observation made by Wills J. in the case of Howlett v Tarte, though it may have been a little too widely expressed. He said : “It is quite right that a defendant should be estopped from setting up in the same action a defence which he might have pleaded but has chosen to let the proper time go by. But nobody ever heard of a defendant being precluded from setting up a defence in a second action because he did not avail himself of the opportunity of setting it up in the first action.” In my opinion we are at least justified in holding that an estoppel based on a default judgment must be very carefully limited. The true principle in such a case would seem to be that the defendant is estopped from setting up in a subsequent action a defence which was necessarily, and with complete precision, decided by the previous judgment.”

For NCM, Mr Wolman makes the point that there is “Judgment for the Claimant”. The wording of the order on the default judgment is in standard form. He relies on a doctrine of merger : NCM’s cause of action merged into the judgment such that it no longer has an independent existence. It is extinguished. The cause of action comprises all the necessary facts pleaded which, if proven, would entitle it to a legal remedy – see the classic definition of Lord Esher in Read v Brown (1888) 22 QBD 128 at 131. Thus a cause of action estoppel arises as explained by Lord Justice Diplock in Thoday v Thoday [1964] 2 WLR 371 at page 107. NCM agrees with Mr Makhlay that the task for the court involves analysis of the Particulars of Claim – see for example Goldrei, Foucard & Son v Sinclair and Russian Chamber of Commerce in London [1918] 1 KBD 180.

For the reasons set out below, I have reached the clear conclusion that Mr Makhlay’s position is misconceived and that it is not open to him now to raise the repudiation and early termination issues.

A default judgment on liability under CPR Part 12 is a final judgment that is conclusive on liability. The Particulars of Claim are, in effect, a proxy for the judgment, setting out the basis of liability. Once judgment is entered, it is not open to a defendant to go behind it. Damages of course still have to be proved, and a defendant can raise any issue which is not inconsistent with the judgment – see the White Book 2013 notes to CPR 12.4.4.

The decision of the Court of Appeal in Lunnun v Singh (Hajar) [1999] WL 477360 is on point. Mr Justice Jonathan Parker stated as follows :

“I turn first to the question whether it is open to the defendants, notwithstanding the default judgment to raise at the damages hearing the issue whether water damage from another source was responsible for damage to the claimant’s basement. In my judgment, the position in this respect is as follows. The default judgment is conclusive on the issue of liability of the defendants as pleaded in the Statement of Claim. The Statement of Claim pleads that an unspecified quantity of effluent escaped from the defendants’ sewer into the basement of the claimant’s property. In addition it is, Mr Exall accepts, inherent in the default judgment that the defendants must be liable for some damage resulting therefrom. But that, in my judgment, is the full extent of the issues which were concluded or settled by the default judgment. It follows, in my judgment, that in the instant case all questions going to quantification, including the question of causation in relation to the particular heads of loss claimed by the claimant, remain open to the defendants at the damages hearing. Direct support for this conclusion is, in my judgment, to be derived from the decision of this court in Turner v Toleman. Equally, the Vice- Chancellor’s decision in Maes Finance, as I read it, is entirely consistent… with that conclusion.

In my judgment, the underlying principle is that on an assessment of damages all issues are open to a defendant save to the extent that they are inconsistent with the earlier determination of the issue of liability, whether such determination takes the form of a judgment following a full hearing on the facts or a default judgment. In this case the judgment was a default judgment...”

Lord Justice Clarke agreed, stating that the defendants were not entitled to go behind the judgment, but in that case were not seeking to do so. Lord Justice Peter Gibson also agreeing, said this :

“In my judgment, the true principle is that on an assessment of damages any point which goes to quantification of the damage can be raised by the defendant, provided that it is not inconsistent with any issue settled by the judgment.” (emphasis added)

Lunnun (supra) was cited with approval by the Court of Appeal in Pugh v Cantor Fitzgerald International [2001] CP Rep 74. There (at paragraph 28) it was confirmed that the “true principle”, as enunciated by Lord Justice Peter Gibson, survived the introduction of the Civil Procedure Rules. Lord Justice Ward went on to say :

“28.

Thus the second question is what issues are determined by a judgment entered in default of defence. I accept the principle as it was expressed by Viscount Radcliffe in the Privy Council in Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] QC 993, 1012 :

“….default judgments, thought capable of giving rise to estoppels, must always be scrutinised with extreme particularity for the purpose of ascertaining the bare essence of what they must necessarily have decided and, to use the words of Lord Maugham LC (in New Brunswick Rail Co v British & French Trust Corporation Ltd [1939] AC 1, 21) they can estop only for what must “necessarily and with complete precision have been thereby determined.””

In Pugh (supra) the defendant was allowed to raise arguments in mitigation because the issue was “quite different” from the liability and the causation issues on which judgment had been obtained.

In my judgment, Mr Makhlay’s submissions on the repudiation and early termination submissions are inconsistent with the judgment. The judgment established conclusively, amongst other things, that :

Mr Makhlay had a full opportunity to defend the claim on liability. If he disagreed with an aspect of liability that was relevant to quantum, it was for him to challenge the claim at the liability stage. He chose not to do so. He has not sought to set the judgment aside. He cannot now “roam freely” across issues of liability as he wishes to do.

The question of repudiation and early termination were necessarily and distinctly pleaded and proved through the judgment. Who acted in repudiatory breach (Mr Makhlay) and who was entitled to accept that repudiation (NCM) and when that happened (7^th February 2013) were all matters that went to the heart of NCM’s claim on liability.

As for early termination, Mr Stanley argues that that was not a matter necessarily decided, since on any view Mr Makhlay terminated unlawfully. (On any view he failed to give reasonable notice.) This is in my judgment is to adopt an overly technical approach. Any fair and proper reading of the Particulars of Claim reveals that the allegation that was pleaded and which has been proved is a breach by Mr Makhlay in seeking to terminate a fixed term contract with no provision for early termination (as opposed to a contract with a right of early termination which was incorrectly executed).

Albeit in the context of considering factual estoppel, I note that the Court of Appeal in Pugh (supra) at paragraph 36 said that when ascertaining what facts had been determined by an earlier judgment, “the court will enquire broadly into the realities and not the technicalities of the decision upon which the estoppel depends.” A broad enquiry is not necessary for me to reach the conclusions that I have above, but this statement endorses the appropriateness of a realistic attitude to the analysis of the issues that have been decided previously.

Mr Makhlay’s approach is tantamount to an abuse of process by way of a back-door attempt to challenge the findings in the judgment. It offends not only a natural sense of justice, but also against the general rule that a party should not be allowed to litigate issues which have already been decided by a court of competent jurisdiction.

The consequences of Mr Makhlay’s position being correct would be startling : a defendant would benefit from failing to lodge a defence on liability and by simply submitting to a judgment in default, holding his powder dry until the quantum stage. He would then be able to mount, essentially unfettered, all and any arguments on liability at the quantum stage that he wished – probably, as has happened here, without any proper pleading or identification of the issues.

In this regard I have been taken to a footnote to section 8 of Zuckerman on Civil Procedure (2007). It is stated that judgment under CPR 12 “is more common than judgment on the merits…There were 310 judgments after trial given in the Queen’s Bench Division in 2004, whilst 657 sets of proceedings were determined by judgment in default…” More recent statistics suggest that there were 1,292 judgments in default in the Queen’s Bench Division in 2011, as against some 193 trials concluded in the months January to December 2011. It does not appear to me conducive to the administration of justice, or to the delivery of the overriding objective, for a claimant seeking to defend his position on quantum by reference to arguments on liability not to be required to raise those arguments at the appropriate stage, namely at the liability stage pre-judgment.

Accordingly, the issues properly open to Mr Makhlay are limited to :

However, because evidence was allowed and full argument heard on the repudiation and early termination issues, I address them below, but only for the sake of completeness.

For NCM, the following witnesses gave evidence :

Mr Makhlay did not in the event give evidence and no witnesses were called for the defence.

Given my finding that this issue does not properly arise, I address it only briefly. Mr Makhlay’s (unparticularised) position was that NCM so fundamentally failed to provide the “premium” service to which Mr Makhlay was entitled that by 24^th October 2012 NCM was in repudiatory breach of the contract, entitling Mr Makhlay to terminate on that date. A repudiatory breach is of course one that goes “to the root of the contract” see for example Davidson v Gwynne (1810) 12 East 381).

For Mr Makhlay, the witnesses for NCM were taken to each of the activities identified in the contract and it was suggested that either there had been no delivery, alternatively that what had been done was thin or minimal, irrelevant to Mr Makhlay’s needs or instructions, or contained only publicly available information.

I have reached the clear conclusion that, despite Mr Stanley’s valiant attempts with little or no material to support him, it has not been established that NCM was in repudiatory breach as at 24^th October 2012 :

I also bear in mind generally that Mr Makhlay’s failure to plead any particularised case on repudiatory breach will have hampered NCM’s ability to address in evidence each and every criticism that has not been made of it.

For these reasons, I would in any event have dismissed Mr Makhlay’s substantive submission on the repudiation issue.

Again, I deal with this issue only briefly. In my judgment there is no scope for implication of a term entitling Mr Makhlay to terminate the contract before the expiry of one year on reasonable notice. No such term arises as a matter of necessity or obviousness. It cannot be said, objectively, that the parties must have intended such a stipulation.

There is no material ambiguity in the wording of the contract. The term of the contract was one year. In general a contract which provides that it will continue for a fixed period is not terminable earlier – see Jani King (GB) Ltd v Pula Enterprises Ltd [1998] 1 All ER (Comm) 451 at paragraphs 60 and 61.

There is nothing in the surrounding circumstances here to displace that general rule. Indeed, the provision for a 6 month review is inconsistent with the implied term contended for. It assumes the existence of a contract of a year, marking the half-way mark of the fixed term of one year. A period of one year is also objectively consistent with the general factual matrix, including for example the fact that, according to Mr Nekrassov Senior, a lengthy period in this context is required before any results start to show. I do not accept Mr Makhlay’s submission that, in some way, the “open-textured” nature of the services or the requirement for monthly payments negate the logic of a fixed one year term or displace the clear wording of the contract.

For these reasons, I would in any event have dismissed Mr Makhlay’s substantive submission on the early termination issue.

It is accepted by Mr Makhlay that NCM’s claim on the October 2012 invoice is properly a claim in debt. However, what is said is that thereafter the claim is properly only one in damages. By the end of closings, NCM essentially accepted the proposition that the claim was properly one in damages at some stage before February 2013, and the dispute narrowed to one of timing.

Given this concession, I can take the matter shortly. Mr Makhlay relies on White and Carter (Councils) Ltd v McGregor [1962] AC 413, particularly at pages 428 to 431. At page 429 Lord Reid said :

“…Of course, if it had been necessary for the defender to do or accept anything before the contract could be completed by the pursuers, the pursuers could not and the court would have compelled the defender to act, the contract would not have been completed and the pursuers’ only remedy would have been damages. But that peculiarity in that case, as in the present case, as that the pursuers could completely fulfil the contract without any co-operation of the defender.”

Thus here it is said that from 24^th October 2012 NCM could not and did not perform the contract. Its entitlement to claim sums under the contract was dependent upon it being able to provide the consideration for which those sums were due. It is common ground that those services could not effectively be performed without Mr Makhlay’s co-operation which he was not willing to give. In the alternative it is said that NCM had no legitimate interest in continuing to perform and, in such exceptional circumstances, the court has a residual discretion as a matter of general equity not to allow the innocent party to rely on the strict letter of the contract (see also Clea Shipping Corp v Bulk Oil International Ltd/The Alaskan Trader (No 2) [1984] 1 All ER 129).

Whilst Mr Makhlay might have changed his mind after his letter of 24^th October 2012, and whilst the website was probably uploaded in the week commencing 22^nd October 2012 or a little later, by 20^th November 2012 Mr Makhlay remained unresponsive and wholly unco-operative. On 28^th November 2012 the November invoice had been rejected on the basis that Mr Makhlay’s representative, Anna Korjakina, stated that she had been informed that “we have finished all works between Mr Makhlay and [NCM].” Beyond the website, there is no evidence of any further activity after the end of October. In my judgment the claim from November 2012 onwards is therefore properly to be treated as a damages and not a debt claim.

Mr Makhlay accepts that he is liable for the sum of £560 in respect of IT services provided. The only contentious item was the cost of translation services provided at meetings with NCM on 11^th, 18^th and 20^th October 2012. The claim for that item has now been abandoned in the light of the evidence of Ms Marshall in cross-examination and I do not need to address it further.

By the end of the hearing, there was a very large measure of agreement between the parties on the question of savings. It is unfortunate that such agreement was not reached earlier.

Ms Marshall’s evidence on savings is to be found initially in her first witness statement at paragraphs 29 and 30 :

“29.

... NCM has to invest heavily in its network of contacts and business development. This means the business has high fixed costs, mainly comprising staff with specialist skills and experience. The savings [NCM] has been able to make and the expenditure it has avoided as a result of not performing the services Mr Makhlay retained us to provide, during the period 7^th February to 19^th June 2013 have inevitably been small.

30.

I would estimate that, had we acted for Mr Makhlay until the end of the one year term of the Agreement, we would have incurred administrative expenses of approximately £2,000 per month, which would have included charges for printing and translation services….The value of expenses avoided would total £8,838.71”

No positive case on savings was pleaded by Mr Makhlay but the reliability of the figure of £2,000 per month being advanced for NCM was explored in cross-examination. It was suggested that it was an understatement by reference to the likely cost of translation expenses, printing costs, travelling cost, website costs. In closing, Mr Stanley suggested that a monthly savings figure of “nearer £3,000” per month would be appropriate.

In the event, NCM now agrees that a monthly savings figure of £3,000 is appropriate, and I accept that figure. For the avoidance of doubt, I do not accept that that figure should be increased by reference to the cost of website maintenance. Such cost would have been minimal and is accounted for in the overall figure of £3,000.

Beyond monthly savings on expenses, the following potential savings were explored :

Mr Makhlay’s case on mitigation was, as set out above, unsatisfactorily particularised. However, in answer to questions from the Court in opening, Mr Stanley narrowed the scope of the issues, by indicating that his case on mitigation was limited :

In her first witness statement Ms Marshall stated as follows :

“28.

After the Agreement came to an end, the individuals assigned to Mr Makhlay’s matter could not be deployed to any new contracts. [NCM] has therefore not been able to recoup the lost income from Mr Makhlay’s matter in the relative short period – ie February to June 2013 – during which the Agreement should have, but was not, providing an income of £75,000 per month to [NCM]. The 4 individuals listed above [ie Mr Burnside, Mr Makrasov, Ms Kraft and Mr Samoylenko] have not been engaged in new work which would in any way replace the work on Mr Makhlay’s matter. Their spare capacity has been devoted to strategic company development, company administration and new business development. These activities are obviously with a view to growing [NCM]’s business, which includes continuing efforts to replace the work we have lost as a result of Mr Makhlay breaching the Agreement.”

In her second witness statement Ms Marshall expanded as follows :

“11.

At the time the contract was brought to an end, in February 2013, the expected revenue from the contract, the largest in terms of value that [NCM] had at the time, was approximately 25% of [NCM]’s monthly income in that sector of its business….the various individuals previously assigned to the contract could not be deployed on any new matters to replace the anticipated income under the contract, which should have run until 19 June 2013. During the 4 months period between 7 February to 19 June 2013 the spare capacity of the individuals previously assigned to the Makhlay account was used on existing accounts and on business development, investing in the growth of [NCM]’s business in the medium to long term. However, in such a short period, [NCM] was not in a position to obtain a comparable instruction from a new client, in terms of one that would match its specialist staff and expected level of revenue in a fairly narrow market.”

As to the first allegation of failure to mitigate, in closing NCM conceded a figure of £7,500 in respect of Mr Samoylenko’s salary, representing 4 months of his salary. This would broadly reflect Mr Samoylenko being made redundant in about February 2013. I accept this concession as reasonable.

As to a failure to mitigate by failing to benefit on other contracts, Mr Makhlay’s position in closing was not one of a failure to mitigate in this regard, but rather that NCM needed to give credit for the additional work obtained by NCM, as explained in the evidence of Mr Nekrassov Junior. Mr Nekrassov spoke of picking up small contracts – perhaps to the value of £5,000 or £10,000 (per month). He referred to December and January being notoriously slow months for new business, and explained that it took time, sometimes a long time to win new clients.

Doing the best that I can on the material before me, a fair assessment of the credit to be given in this regard is a figure of £5,000 for the first 3 months of 2013, and a figure of £10,000 for the second 3 months.

For the reasons set out above, I award NCM the following amounts :

By my calculations, that produces a total award of £495,936 before interest. I ask the parties to verify the precise arithmetical result of my conclusions in principle, and to agree the questions of interest and costs so far as possible. In the event of any outstanding disputes, such matters will have to come before me for ruling.