Phaestos Ltd & Anor v Ho & Ors

This judgment relates to 2 related applications arising out of a consent order made by the Court on 14 March 2012 requiring the Claimants to provide Further Information by 5 April 2012. The Claimants accept that they have not complied with the order in certain respects relating to quantum. The Defendants apply for an "unless" order whereby if the Claimants do not comply the whole of their claims would be struck out whilst the Claimants seek an extension of time albeit they accept that they have no intention of complying with the order.

The background to the claim and counterclaim in these proceedings is that the Defendants, Dr Ho and Dr Gover, were retained from about 1994 by Phaestos Ltd, Mindimaxnox LLP and/or IKOS CIF Limited, who are all part of or have provided services to a hedge fund known as the IKOS Fund. On the same day, just before Christmas 2008, Dr Gover and Dr Ho were dismissed, one for redundancy and one for breaches of contract; that is as alleged by the parties in the pleadings. There has been a long history of various claims being started, with the Defendants initially instituting proceedings in the employment tribunal in this country, these being later stayed, and CIF commencing proceedings against Dr Gover in Cyprus, these being later stayed, dismissed or discontinued. Proceedings against Dr Ho were commenced here in 2009 by a number of the Claimants and proceedings were started here against Dr Gover in April 2011. Those proceedings were in effect consolidated and consolidated Particulars of Claim were prepared by the Claimants and served in June 2011 to be responded to in August 2011 by a consolidated Defence and Counterclaim and a consolidated Reply and Defence to Counterclaim in September 2011.

The background to the Defendants’ application is that the Defendants served their original Request for Further Information (“the RFI”) on 17 August 2011.  On 4 October 2011, the Claimants’ solicitors (then Bird & Bird) wrote that their clients were investigating the issues raised in the RFI and that they would provide answers in good time; they wrote on 21 October 2011 that they were continuing their work on the RFI. On 8 December 2011, Ramsey J. ordered the Claimants to provide their responses no later than 3 February 2012. On 3 February 2012, the Claimants applied for further time in which to respond to the RFI. The Court made a final order on 17 February 2012 that responses were to be provided by 2 March 2012. The Claimants provided initial responses to the RFI on 2 March 2012. Many of the Responses were inadequate (including the responses to RFIs numbered 41, 76.c, 154.c, 155.a and 156.a), as a result of which the Defendants applied for an Order that they should be answered. Discussions between Counsel resulted in the consent order of 14 March 2012. However on 8 March 2012, the Court had ordered (as a final order) that certain specific requests relating to quantum should be provided by 27 March 2012 because the answers provided were simply unacceptably vague and incomplete.

In another judgment given on 14 March 2012, the Court refused an application by the Claimants to extend the time for complying with the order of 8 March 2012. In so doing, the Court made it clear that the Claimants had to articulate their quantum case, which they simply had not done to date. The Court said at Paragraph 23 that the Claimants "just simply, in the vernacular, must get their act together."

On 27 March 2012, the Claimants provided further responses pursuant to the Court’s order of 8 March 2012. On 5 April 2012, the Claimants provided the further responses which were the subject matter of the consent order of 14 March 2012 which were incorporated into a Consolidated Further Response to the RFI. On the same day the Claimants’ new solicitors (Herbert Smith, who had come on the record on 15 March 2012) wrote to the Defendants’ solicitors as follows:

“Upon considering the position in the context of the Defendants’ admitted willingness to download and retain confidential information to which they are not entitled (and the failure to admit to such actions until required to do so upon application to the Court) and the background set out more fully in the Amended Particulars of Claim and the RFI Response, the Claimants and IKOS AM believe that the terms of the Order as currently drafted (i.e. that the answers are to remain confidential to the parties and their legal advisers and are not to be referred to in open Court without the prior permission of the Claimants or the Court), do not provide adequate protection to safeguard IKOS against the Defendants’ future direct or indirect use of that information (in particular, their potentially contacting individual clients who would not otherwise be exposed to an approach by Altiq).

The Claimants and IKOS AM have very serious concerns that any information provided about the identities of investors will be used by the Defendants for their own benefit and/or for the benefit of Altiq and/or for the benefit, directly or indirectly, of Martin Coward and in any event to the detriment of the Claimants and IKOS AM.

We will be applying to vary the Order, such that investor names are not provided and that all other information is provided on an anonymous basis.”

On 11 April 2012, as he has said in a witness statement lodged at the last moment, Mr Constantinides of IKOS CIF Ltd attended a board meeting of the overall IKOS Fund and it came to his attention that the provision of investor names by the Claimants could amount to a criminal act under Cayman Island law. The IKOS Fund, he says, is a Cayman Island entity as is IKOS AM which is the investment manager of the IKOS Fund. IKOS CIF (a Cypriot company) was, he says, appointed by IKOS AM as the sub-investment manager. Attorneys, called Appleby, in the Cayman Islands were retained on 13 April 2012 to provide advice about this and did so on about 18 April 2012. He says that this advice was under "active consideration from then on until 15 May 2012 when Appleby informed IKOS CIF that it was unable to provide a witness statement”.

Meanwhile on 24 April 2012 the Defendants issued their application for an order that, unless within seven days the Claimants provided further information against the questions numbered 41, 76.c, 154.c, 155.a and 156.a in the RFI, the Claimants’ claims were to be struck out.

On 9 May 2012, the Claimants instructed an independent quantum expert, NERA. Up to that moment, the Claimants had not retained any quantum experts although their claims are very substantial involving at least eight figure sums. The Claimants, as Mr Constantinides has said, wanted to consider whether they could advance a claim which would not require them to rely on the loss of specific investors either redeeming their investments in the IKOS funds or not investing further or at all.

It was only on 14 May 2012 that Herbert Smith wrote to the Defendants’ solicitors saying that the provision of the information requested raised "complex issues of Cayman Islands law" and that it had been necessary to obtain advice on this. They sought an adjournment of this hearing which had been fixed for some time. The Defendants’ solicitors wrote back the following day opposing any adjournment.

On 16 May 2012, Herbert Smith wrote providing detailed further information in relation to the question numbered 41 in the RFI. It is accepted that this was an adequate response.

On the afternoon of 17 May 2012, the Claimants issued their own application which seeks an extension of time until 15 June 2012 in relation to the consent order of 14 March 2012 relating to the RFI. Alternatively, permission to re-amend the Amended Consolidated Particulars of Claim and the Consolidated Further Response to the RFI is sought if there was to be an unless order which could lead to the striking out of the whole claim. This was supported by the witness statement of Mr Constantinides. He attaches advice from other Cayman Islands attorneys, Solomon Harris, which is by way of a letter dated 16 May 2012. That letter sets out various statutory references under the Confidential Relationships (Preservation) Law (2009 Revision) of the Cayman Islands which he says establishes that "confidential information", including the names of investors, should not be disclosed and it is said to be an offence to divulge such information without the permission in effect of the relevant investors. There is provision whereby, particularly in relation to disclosure in any court proceedings (anywhere in the world), the person intending to disclose should apply to the Cayman Islands Court for directions. An authority provided suggests that the Court in those circumstances has discretion and could refuse for instance if the documents sought were "a fishing expedition".

Unsurprisingly, the Defendants did not have time to put in any evidence in response but have nonetheless been prepared to proceed.

The Further Information which remains the subject matter of the Defendants’ application arises out of an allegation made in Paragraph 30 of the Amended Consolidated Particulars of Claim. Paragraphs 25 to 28 set out extensive breaches of contract pleaded against Dr Ho and Dr Gover in relation to their operation of or involvement with the sophisticated computer systems used by the Claimants. Paragraph 29 pleads that the results of these breaches were that the system crashed on four occasions in 2007 and 2008 and a de-leveraging process failed to work properly in July 2007. Paragraph 30 goes on to plead:

Requests 154 to 156 sought particulars of these allegations effectively seeking details of the investors referred to and why they had pulled out or not proceeded. The answer given in each case initially was:

“Not entitled. This is a request for evidence. Notwithstanding that see the table of redemptions attached hereto.”

The attached did not provide much useful information. This was amended on 5 April 2012 by deleting the above and adding the following:

“As to request [154, 155 and 156], please see the letter of 5 April 2012 from Herbert Smith”.

This needs to be considered in the light of the damages claimed for the breaches set out in Paragraphs 25 to 33, which had been blandly pleaded at Paragraph 34:

“By consequence of the above, the Claimants have suffered loss and damage, to be assessed.”

Further Information on this was supplied pursuant to the Order of 8 March 2012 at Answer 165. The loss is now identified under five heads: Loss of fees paid per investor due to redemptions, Loss of fees due to potential investors not investing, Wasted management time and in-house resources, Expert and forensic costs and Damages as a result of use of confidential information and the Code. The first of these heads is predicated on the basis of 90 investors redeeming their investments in IKOS in full leading to a loss of fees of some $11.5m and the second head on a loss of fees (some $8.9m) in respect of investors who would have invested but did not, this being based on the estimated number of investors (266) as at 31 December 2011.

It is accepted unconditionally by the Claimants that in relation to the Order of 14 March 2012 they have not complied in relation to the Requests at 76.c and 154 to 156. The issue therefore arises as to whether the Court can and if so should extend time for compliance with a consent order. Ultimately, there was little between Counsel.

CPR 3.1(7) provides that “A power of the Court under these Rules to make an order includes a power to vary or revoke the order.” In S v S [2002] EWHC 223 (Fam); [2003] Fam. 1, Bracewell J. said at Paragraph 4 that the grounds for setting aside a consent order fell into two categories, cases in which there was at the date of the order an erroneous basis of fact and those in which there had been a material or unforeseen change in circumstances after the order so as to undermine or invalidate the terms of the order. Neither of those grounds applies here.

In Hudson v New Media Holding Co LLC [2011] EWHC 3068 (QB) Eady J. obiter at Paragraphs 16 to 18 described as persuasive an argument that the proposition that the power to vary a consent order as a result of a material or unforeseen change in circumstances only applied to matrimonial proceedings. In Weston v Dayman [2006] EWCA Civ 1165 the Court of Appeal was asked to consider whether there was power under CPR 3.1(7) to vary a consent order. In the event they decided the case without deciding the point (see Paragraphs 24 and 25), but Arden LJ said:

“I will proceed on the basis (without deciding the point) that CPR 3.1(7) applies to paragraph 10 of the order of 23 January 2003. I would accept that the court should accede to an application for variation where it is just to do so, but in my judgment one of the aspects of justice is that a bargain freely made should be upheld. Mr Weston clearly obtained benefits under the order of 23 January 2003. It may well be that those benefits are not as great as he thought, but that is not a matter for this court. In those circumstances I do not consider it would be right for this court to exercise its discretion to vary the order as sought. …”

In Pannone LLP v Aardvark Digital Limited [2011] EWCA Civ 803 the Court of Appeal held that the court had power under CPR r.3.1(2)(a) to extend the time for compliance with a court order and power under r.3.8 to grant relief from sanctions, even where an order had been made by consent. In giving judgment Tomlinson LJ said at Paragraph 33:

“In my view the weight to be given to the consideration that an order is agreed will vary according to the nature of the order and thus the agreement. Where the agreement is the compromise of a substantive dispute or the settlement of proceedings, that factor will have very great and perhaps ordinarily decisive weight, as it did in Weston v Dayman, which was not in any event concerned with an application to extend time. Where however the agreement is no more than a procedural accommodation in relation to case management, the weight to be accorded to the fact of the parties' agreement as to the consequences of non-compliance whilst still real and substantial will nonetheless ordinarily be correspondingly less, and rarely decisive. Everything must depend on the circumstances, and CPR 3.9(1) prescribes that on an application for relief from a sanction for a failure to comply with a court order the court will consider all the circumstances, including those enumerated in the following sub-paragraphs. Beyond noting that where an order is made by consent, that is one of the circumstances which the court will take into account, it is not I think necessary to impose any further gloss on the Rules, which are already adequately drafted so as to ensure that all proper considerations must be taken into account.”

Essentially, because the Court has made the order, even though it was by consent, it has the power and the right to vary it. The overriding objective applies to the Court’s exercise of its discretion in deciding whether and if so to what extent to vary the consent order. The fact that the order was agreed to by the parties and as part of what was in effect a process of “give and take” between the parties can and should be taken into account as can any supervening events or circumstances which were not foreseen by either party. The Court needs to look at all the circumstances including the impact on cost and on the timetable and whether the breach of the consent order was deliberate and whether there is any prospect of the order being complied with at all.

So far as the efficacy of unless orders is concerned, the Court of Appeal’s decision in Marcan Shipping (London) Ltd v Kefalas [2007] EWCA Civ 463, Lord Justice Moore-Bick provided some helpful assistance:

“34.

In my view it should now be clearly recognised that the sanction embodied in an "unless" order in traditional form takes effect without the need for any further order if the party to whom it is addressed fails to comply with it in any material respect. This has a number of consequences, to three of which I think it is worth drawing particular attention. The first is that it is unnecessary, and indeed inappropriate, for a party who seeks to rely on non-compliance with an order of that kind to make an application to the court for the sanction to be imposed or, as the judge put it, "activated". The sanction prescribed by the order takes effect automatically as a result of the failure to comply with its terms. If an application to enter judgment is made under rule 3.5(5), the court's function is limited to deciding what order should properly be made to reflect the sanction which has already taken effect. Unless the party in default has applied for relief, or the court itself decides for some exceptional reason that it should act of its own initiative, the question whether the sanction ought to apply does not arise. It must be assumed that at the time of making the order the court considered all the relevant factors and reached the decision that the sanction should take effect in the event of default. If it is thought that the court should not have made an order in those terms in the first place, the right course is to challenge it on appeal, but it may often be better to make all reasonable efforts to comply and to seek relief in the event of default”.

35.

The second consequence, which follows from the first, is that the party in default must apply for relief from the sanction under rule 3.8 if he wishes to escape its consequences. Although the court can act of its own motion, it is under no duty to do so and the party in default cannot complain if he fails to take appropriate steps to protect his own interests. Any application of this kind must deal with the matters which the court is required by rule 3.9 to consider.

36.

The third consequence is that before making conditional orders, particularly orders for the striking out of statements of case or the dismissal of claims or counterclaims, the judge should consider carefully whether the sanction being imposed is appropriate in all the circumstances of the case. Of course, it is impossible to foresee the nature and effect of every possible breach and the party in default can always apply for relief, but a conditional order striking out a statement of case or dismissing the claim or counterclaim is one of the most powerful weapons in the court's case management armoury and should not be deployed unless its consequences can be justified. I find it difficult to imagine circumstances in which such an order could properly be made for what were described in Keen Phillips v Field as "good housekeeping purposes".

In considering each of these two applications, the Court needs to consider not only what has happened but what is likely to happen in the future in relation to the provision of the Further Information still outstanding. So far as what has happened, there is little if anything to excuse the Claimants’ admitted failure to comply with the Court’s order of 14 March in relation to Requests 154 to 156 let alone the delay in responding to the Defendants’ application or in making their own application. My reasons for concluding this are:

I then turn to consider whether to accede to the Claimants’ application that “time for compliance with the Order of Mr Justice Akenhead…dated 14 March 2012 is extended until 4pm on 15 June 2012”. When first seeing this application one might imagine that this extra time was needed to comply with that order. However, that is not what Mr Constantinides says. He says that, although IKOS CIF could apply to the Cayman courts for an order permitting it to comply with an order effectively for disclosure of investors’ names, it is not willing to do this as they judged that this would be “highly detrimental to the IKOS investment structure, including IKOS CIF’s business”. The Claimants want the additional time until 15 June 2012 to see if NERA can come up with an alternative quantum basis which will not require the disclosure of investors’ names and, if they can, then apply to amend their quantum. It will take, he says, until the week commencing 21 May 2012 for NERA to report and the further time will then be needed to consider that report, prepare draft amendments, issue an appropriate application and secure a hearing date.

Mr Goulding QC advanced on analysis two reasons for this, the desirability and wish of the Claimants not to continue to be in breach of an order of the Court whilst they carry out these exercises and a concern that, if their quantum claims were struck out as a result of non-compliance with an unless order, that would itself prejudice their possible application to amend in June 2012. The first of these reasons is unsound. The Claimants have made it clear that they are simply not willing for commercial reasons to comply with the 14 March 2012 order and identify any investors which they would need to do to establish their loss of investors’ claims. They are not going to comply unless they have a change of mind, which (based on what Mr Constantinides has said) is not going to happen. The second reason is simply wrong. The Claimants will not be prejudiced as such by dropping their loss of investors’ claims now or having those claims struck out. They will of course have to establish on any application to re-amend their quantum claim that the Court should exercise its discretion to allow the amendment and factors such as the timing of the application and its impact on the trial timetable may well be material. Put another way, the refusal of the Court to give the Claimants extra time to comply with an order (of 14 March 2012), which on their current evidence they have no intention of complying with, will not prejudice their application to re-amend in June 2012.

The Claimants’ application is therefore dismissed. There is no point in extending time for the Claimants to do something which they have told the Court they have no intention of doing.

I then turn to the Defendants’ application. It is now rightly accepted by the Defendants that it would be disproportionate to make the sanction for non-compliance with the proposed "unless" order striking out of the whole of the Claimants’ claim. In my judgement, it is appropriate, sensible and proportionate to make an "unless" order to the effect that if the order is not complied with those parts of the Amended Particulars of Claim and the Further Information thereto to which the order relates (together with the inevitably related parts) should be struck out. My reasons are as follows:

In one sense, the Court could proceed forthwith to strike out claims which in effect a party has indicated it intends no longer to pursue and in respect of which it is in substantial breach of a court order. However, the Defendants have sought a seven day order and it is theoretically possible that the Claimants might have a change of heart. I propose to allow in fact until Monday 28 May (4pm) to enable the Claimants to have some time to consider the views to be expressed by their new expert, before a final decision needs to be made by them.

The parts of the Amended Particulars of Claim which should be struck out in the event of non-compliance are primarily those to which the continuing default expressly relates. That will be Paragraph 30 to which Requests 154 to 156 relate and that part of Paragraph 26.10 to which Request 76 relates, namely the words "losses of fees in subsequent years due to investor redemptions made during 2008" (together with the related Further Information given by the Claimants against Request 76). There was some debate about whether a larger part of Paragraph 26.10 should be struck also; it reads currently:

Mr Tozzi QC argued that the whole of the sentence beginning "This resulted…” should be struck out on the basis that it was all dependent upon the loss of investors. There was a debate between Counsel as to whether this was necessarily the case. As this had not been fully presaged in the skeleton arguments, I declined to order that the whole sentence should be struck out if there is a continued default. However, I raised with Mr Goulding QC the need for him to take instructions as to whether, if his clients are reluctant to disclose the identity of investors, there will be a need through disclosure to identify investors who are the subject matter of this plea in Paragraph 26.10; if it remains a material fact for instance that there has been a "continued loss of investor confidence", that arguably may give rise to the need to disclose at least amongst which specific investors there has been such a loss of confidence; similarly if there has been a loss of management and performance fees and if such fees are related to the loss of investors or withdrawal of investments by specific investors, it may well then be necessary through disclosure if nothing else for such investors to be identified. I also left open to the Defendants the right to apply in relation to the remainder of this sentence.

It will also follow from above that the Further Information in Answer 165 relating to "loss of fees paid per investor due to redemptions" and "loss of fees due to potential investors not investing" would fall to be struck out if the default continues. Similarly, the words in Answer 77 in the Further Information (in the second paragraph: “That in turn…detail in Response 165 below”) would fall to be struck out as would the last sentence in Answer 77 (6).

The Claimants’ application is dismissed. The Defendants’ application is granted to the extent that the Claimants are required to provide the Further Information requested under Paragraphs 76.c and 154 to 156 of the RFI by no later than 4pm on 28 May 2012, failing which Paragraphs 26.10 (the words "loss of fees in subsequent years due to investor redemptions made during 2008") and 30 of the Amended Consolidated Particulars of Claim shall be struck out together with those passages identified above in the Answers to the RFI numbered 76, 77, 77(6), 154, 155, 156 and 165(1) and (2).. Having indicated broadly what my decision was at the oral hearing, I made an order that the Claimants should pay £28,000 by way of costs to the Defendants; that should be payable within 14 days of 18 May 2012.