Newman (t/a "Newman Associates) v Wenden Properties Ltd & Anor

This is the hearing of the Claimant/Part 20 Defendant’s application for security of costs in respect of the Defendant/Part 20 Claimant's counterclaim. The sum sought is £200,000 in respect of the costs of defending the counterclaim up to the final disposition of the action; alternatively, £75,000 up to the exchange of witness statements, or £45,000 up to the end of any preliminary issue hearing to determine the extent of the Claimant's contractual obligations to the Defendant. I set out below a short summary of the litigation, before going on to identify the principles of law relevant to an application of this kind. I then set out the factors that I consider are material to the exercise of my discretion.

The Claimant’s claim is for £23,819.75 for unpaid fees incurred in connection with the professional services he provided to the Defendant. These services were rendered in respect of the refurbishment of a property known as 56, Eversley Crescent, Isleworth, hereafter referred to as ‘the Property'. The amount sought is calculated by reference to the RIBA work stages, and is thus a percentage of the cost of that refurbishment work. It appears that the Defendant is an SPV set up in the 1990’s by Dr. Simon Iddenten and his wife, for the purpose of purchasing and refurbishing properties that are then let out for rent. However, the property in Isleworth is owned not by the Defendant, but by Dr. Iddenten and his wife, who also own another three properties, two in Isleworth and one in Australia.

The Defendant company, in its defence and counterclaim, pursues an extensive claim for professional negligence against the Claimant. The counterclaim is said to be worth in the region of £690,000. The counterclaim is put in two distinct ways. The Defendant's primary claim is based on the assertion that the Claimant was in breach of contract and/or negligent in respect of the costs of the refurbishment work carried out at the property. It is said that, instead of costing around £682,000, the works actually cost £1.1 million. On behalf of the Defendant, Dr. Iddenten maintains that, if he knew then what he knows now as to the amount of those costs, he would not have gone ahead with the refurbishment. This is known in the papers as the ‘non-transaction case’.

It is an important element of this part of the pleaded case that, in order to fund the refurbishment, the Defendant borrowed a total of £1.42 million odd, whilst, so it is said, the property was not worth more than £1.180 million. In my judgment the non-transaction case hinges on this valuation figure of £1.180 million because if, contrary to the Defendant’s pleaded case, the property was in truth worth more at the end of the refurbishment than the total of the Defendant's borrowings, then it would be difficult to see - even assuming liability on the part of the Claimant - what the Defendant's loss could be.

The Defendant's secondary case is that, even if it were found that the refurbishment project would have gone ahead, the Defendant company suffered losses because numerous items of work were carried out as variations, in circumstances where it is said that they should have been allowed for at the outset, and/or at lower cost. In the alternative, it is suggested that, if proper costing advice had been given by the Claimant, the Defendant would not have gone ahead with certain variations in any event. There is another claim that the Claimant certified practical completion too early and deprived the Defendant of the ability to claim liquidated damages against the contractor. It is important to note that this secondary way in which the counterclaim is put is worth considerably less than the primary case.

A common feature of both the Defendant's primary and secondary way of putting the counterclaim, as presently pleaded, is the Defendant's reliance upon the alleged failure on the part of the Claimant to give proper cost advice. There is a major dispute between the parties as to the Claimant's contractual responsibility for the giving of such advice in the first place, particularly given the agreed fact that the Defendant had other consultants working in connection with this project, including one who was described in the documents as "the [Defendant's] costs advisor". This is a potentially important matter. Prior to the hearing of this application and the extensive evidence which it has generated, I had considered that this issue - that is to say, the question of the Defendant's contractual obligation to give cost advice - should be dealt with by way of a preliminary issue. For the reasons which I touch on below, I am now not so sure about that proposal.

The application relies on Section 726(1) of the Companies Act 1985, which provides as follows:

“Where, in England and Wales, a limited company is Plaintiff [Claimant] in an action, or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the Defendant's costs if successful in his defence, will require sufficient security to be given for those costs and may stay all proceedings until the security is given.”

The court has a wide discretion as to whether or not to order security if the test in Section 726 is made out. The factors relevant to the exercise of that discretion were famously listed by Lord Denning, M.R. in Sir Lindsay Parkinson -v- Triplan [1973] QB, 609, Court of Appeal. They included:

It is often argued that the application for security for costs, if allowed, would stifle a genuine claim. In consequence, the courts have refined this element of the discretion under CPR Part 25. It seems to me that the following principles are relevant to the present application:

It is necessary, when considering an application for security for costs on a counterclaim, to decide whether the counterclaim is a separate claim, or merely the substantive defence to the claim brought by the claimant. If there is a close link between claim and cross-claim, then it is common for security to be refused (see Thistle Hotels Ltd. -v- Gamma Four Ltd. [2004] EWHC 322 and B.J. Crabtree (Insulation) -v- GPT Communications Systems, 59 BLR, 43, Court of Appeal). In Hutchinson Telephone (UK) Ltd. -v- Ultimate Response Ltd. [1993] BCLC, 307, this point was put by Bingham LJ (as he then was) in this way:

“The trend of authority makes it plain that, even though a counterclaiming defendant may technically be ordered to give security for the costs of a plaintiff against whom he counterclaims, such an order should not ordinarily be made if all the defendant is doing in substance is to defend himself. Such an approach is consistent with the general rule that security may not be ordered against a defendant. So, the question may arise, as a question of substance, not formality or pleading: 'Is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?’”

There is no dispute that there is credible testimony to the effect that the Defendant company would be unable to pay the Claimant's costs of the counterclaim if the counterclaim failed. Accordingly, the test under Section 726(1) of the Companies Act is made out. The real issue is the exercise of the court's discretion. I consider the exercise of my discretion by reference to the principles identified in paragraphs 8 to 10 above.

In my judgment, it could not be said that, by way of its counterclaim, "all the Defendant is doing in substance is to defend itself". Indeed, one looks in vain in the Defendant's pleading for any specific response to the simple fee instalment claim originally made by the Claimant. The counterclaim is an entirely separate cross-claim and, although it arises out of the same transaction as the simple fee claim, it plainly has an independent vitality of its own It raises a whole host of issues which have nothing whatsoever to do with the claim, or the Defendant company’s defence to it. In those circumstances, on an application of the test in Hutchinson, I have no doubt that it must be treated as a separate claim, in respect of which an order for security for costs may be made.

Further support for that, were it necessary, can be found in an analysis of all the matters which would have to be investigated as part of a consideration of the counterclaim, but which are simply irrelevant to the Claimant’s claim. Those include:

The next question is whether the counterclaim is bona fide and has a reasonable prospect of success. For the reasons set out below, it seems to me appropriate to answer that question by reference, separately, to the two individual ways in which the counterclaim is put.

I take the non-transaction case first. I am troubled about the basis of that claim as presently pleaded, and its current prospects of success. As I have indicated, the damages element of that claim turns on the assertion that the property is worth less than the cost of its acquisition and refurbishment. However, both Dr. Iddenten's statement and the documents recently disclosed by the Defendant (which should have been provided some time ago) reveal that, as recently as December 2006, the property itself was valued at £1,630,000. That is about £180,000 more than the figure given for the total of the Defendant's borrowings in respect of the property. In other words, on the face of it, one of the central assumptions in the counterclaim looks to be wrong. It may therefore be difficult to say that the primary way in which the counterclaim is put has a reasonable prospect of success.

Mr. Letman argued that, even if the £1.63 million figure was substituted for the pleaded £1.180 million figure, there was still a loss, albeit in a much smaller amount. This argument involved deducting from the current valuation the figure for the value of the property prior to refurbishment of £390,000, on the basis that an asset worth that figure was owned by the Defendant to start with. However, it seems to me that this was not a legitimate exercise. First, the asset was not owned by the Defendant, but by Dr and Mrs Iddenten. Secondly, the £1.4 million borrowed by the Defendant apparently included that £390,000. Therefore, as Mr. Brannigan submitted, from the Defendant's perspective - which is all that I can be concerned with when assessing the question of likely loss in this case - their total borrowings (£1.4 million) were less than the realisable value of the property (£1.6 million). I acknowledge, as Mr Brannigan did, that the position of Dr. and Mrs. Iddenten may be different, but, they, of course, are not the parties mounting the counterclaim.

As to the alternative and lesser way in which the counterclaim is put, I also have some reservations. At present, the pleaded case gives the impression that, in some way, the Defendant expected the Claimant to guarantee that the contract sum would not be exceeded. That, of course, is not a legitimate basis for a negligence claim against a professional man. It seems to me that this alternative claim may have a reasonable prospect of success, if it were demonstrated that the Claimant had contractual obligations in respect of the giving of cost advice, or, as the project unfolded, had either actually given cost advice, or could be criticised on the particular facts for not so doing. In all the circumstances, it might be right to say that this was an issue which would have to be decided in the Defendant's favour before I could consider that the alternative claim had a reasonable prospect of success.

As to the other points concerning the nature and validity of the counterclaim, Mr. Brannigan complains that the Defendant's disclosure has been undertaken in a dilatory and very unsatisfactory manner, with boxes of documents being provided only in the last few days. He says this reflects badly on the bona fides and reasonable prospects of the counterclaim. Whilst I think Mr. Brannigan is quite right to draw the court's attention to the Defendant's failings in respect of disclosure, I do not regard that as a factor which I should take (or have taken) into account in reaching the conclusion that, on the evidence, the counterclaim may not have a reasonable prospect of success. There may be a number of reasons for the failings in relation to disclosure, and I do not, certainly at this stage, hold those failings against the Defendant.

However, for the reasons which I have previously noted, I am not persuaded that, as things presently stand, the counterclaim could be said to have a reasonable prospect of success. Things may change in the near future, because of the changing nature of some of the evidence, and in particular the documents which have just been disclosed by the Defendant. That is a point to which I revert later.

It is said that the Defendant is unable to provide security because it has no assets of its own, and a liability to the Bank of Scotland in the sum of £1.4 million odd. As Mr. Brannigan correctly points out, that is simply a reflection of the way in which the Defendant company was originally set up. It was always intended that the Defendant company would have no assets. The suggestion on the Defendant's side appears to be that, because of the lack of assets, the court should assume that a genuine claim is being stifled. I find myself unable to accept that submission.

The authorities summarised at paragraph 9 above make it clear that the party resisting the application for security on the grounds that a genuine claim would be stifled must demonstrate how and why other sources of funding are not available. I am entirely confident that the Defendant has not done that here. Indeed, on one view of the very recent evidence, it might be said that there are a number of obvious ways in which such financing could be provided, in particular:

For all those reasons I am satisfied on the evidence that a genuine claim will not be stifled if security is ordered on the counterclaim. Indeed, on the evidence that I presently have, I am confident that Dr. and Mrs. Iddenten can provide security on the Defendant's behalf, if they choose to do so.

The final point taken by the Defendant is that its financial position is entirely due to the Claimant's default, and that therefore discretion should not be exercised in favour of the application for security. I reject that submission for two linked reasons.

First, although the Defendant has no assets, it was never intended that it would have any such assets. Thus, its financial position could be said to be entirely unconnected to the success or otherwise of the development. It would have always owed money to the Bank of Scotland. Secondly, as I have pointed out, there is the question of the equity of £180,000 in the property itself. If the Defendant owned the property, it would have an asset worth more than its borrowings, and it would not be impecunious. It is the choice of Dr. and Mrs. Iddenten that the equity belongs to them personally, and not to the Defendant. That is nothing to do with the Claimant. Thus, it seems to me it would be wrong to conclude that the Defendant's financial position was the responsibility of the Claimant.

Taking into account all the factors set out above, I consider that it is appropriate to order security against the Defendant on its entirely separate counterclaim.

As I have indicated, the sum of £45,000 is sought up to the conclusion of any hearing on the preliminary issue as to the contractual terms. That is said to be made up of a sum of £25,000 which has already been incurred and £20,000 to be incurred up to the end of the preliminary issue hearing. The Defendant says that from now until the end of the preliminary issue hearing about £37,000 will be spent on its side. In the alternative, as I have indicated, the Claimant seeks a figure of £200,000 up until the conclusion of the entire litigation, or £75,000 up to the finalisation of witness statements.

As I made clear in argument, I do not propose at this stage to award security for the entire counterclaim. It seems to me that that would be entirely inappropriate. I had at one stage considered ordering security up to the end of a hearing of the preliminary issue. However, I am not at this stage going to order such a hearing, because of the impact of the recent documentation. It seems to me that that documentation will require a careful re-visitation of this case by the Defendant's legal team. They will need to have a long hard look at the new documents, and consider the impact of those documents on the Defendant’s pleaded case. It seems to me that, until that review has been completed, and the (possibly extensive) amendments have been made in consequence of that review, it would not be appropriate to order any preliminary issue hearing.

On that point, I should also say that it seems to me that the debate about the Claimant’s contractual obligations, although still potentially important, may now have less impact on the case as a whole. I say that for these reasons. As to the non-transaction case, the real issue will be the sorting out of the relevant figures to see whether or not the Defendant - as opposed to Dr. and Mrs. Iddenten - has actually suffered any sort of loss at all. It is perfectly possible that the Defendant will conclude that the non-transaction case, although from their perspective still legitimate from a liability point of view, will avail them nothing because the loss is either negligible or non-existent. As to the alternative way in which the counterclaim is put, the contractual basis of the Claimant's retainer may be a good indication as to his duties in respect of cost advice, but it does seem to me that Mr Brannigan was right to warn that there was a risk, even if I concluded that the Claimant had no such obligations, that the negligence case would still require the court to consider his actual response in each of the circumstances in which it is said, as the work progressed, that he should have given financial advice. Thus, the hearing of a preliminary issue on the terms of the Claimant’s contract at the outset of the work may not be determinative of very much. Furthermore, if the value of the counterclaim is considerably reduced following amendment, then it may be that, in accordance with the overriding objective, the right course would be to have one relatively quick, snappy trial at which all the remaining issues between the parties can be addressed. For all those reasons, therefore, I am not presently minded to order the hearing of a preliminary issue, although that is something that can be re-visited once the Defendant has had the opportunity to consider the effect on its case of the documents referred to above.

In all those circumstances, therefore, the right course for me to adopt today is to order security up to the exchange of witness statements, on the assumption that there will be no preliminary issue hearing. If there is such a hearing, then obviously the question of the amount of security can be re-visited. As I have said, the figure sought up to the exchange of witness statements by the Claimant is £75,000. There is no breakdown of that figure, and in all the circumstances of this case I consider it to be excessive. That would be particularly so if the non-transaction case was modified or reduced.

Doing my best, therefore, with the general figures with which I have been provided, and on my understanding that the Claimant's costs are presently at about £25,000, I have concluded that a reasonable figure for the Claimant's costs up to the end of the witness statements, assuming no preliminary issue hearing, is £45,000. That will therefore be the amount of security that the Defendant will have to provide. The precise form of that security will, I hope, be capable of being agreed between the parties, although, if it is not, that is a matter with which I will deal at a later date.