Fairstar Heavy Transport NV v Adkins

On 1 November 2012 I handed down my judgment on an agreed preliminary issue, which was as follows:

“Does Fairstar have an enforceable proprietary claim to the content of the e-mails held by Mr Adkins (and/or Claranet) insofar as they were received or sent by Mr Adkins acting on behalf of Fairstar?"

The background to that hearing is set out in my judgment, [2012] EWHC 2952 (TCC), and so I will not repeat it here. In the light of that judgment I now have to deal with questions of costs. Those questions related not only to the hearing of the issue, but also to the earlier hearings before Coulson and Eder JJ on 7, 11 and 14 September 2012. The costs of those hearings have been reserved. It seems to me that there can be no argument about that Fairstar should pay the costs of the hearing before me on 17 October 2012 because it lost. I did not understand Mr Peter Susman QC, who appeared for Fairstar, to make any serious submission to the contrary.

Accordingly, the real battleground is the hearings before Coulson and Eder JJ. Mr Richard Spearman QC, who appeared for the first Defendant, Mr Adkins, submits that Fairstar had no justification for making its application on a without notice basis, that it misled the court about the underlying facts and, finally, failed to ask the court to fix a return date.

I should say at once that I consider that there is nothing in the last point. Having read the transcript, I am quite satisfied that the question of a return date (being a date on which the Defendants would have an opportunity of being present) was clearly canvassed with Coulson J.

The application to Coulson J was for an order requiring Mr Adkins to preserve e-mails and to provide his own solicitors with a mirror image of the e-mail data held by him. It was supported by a witness statement from a Mr N A Gibbons, a partner in Ince & Co, Fairstar's solicitors, and a brief six paragraph skeleton argument from Mr Susman.

In his witness statement, Mr Gibbons explained the background to the application and the relevance of the e-mails. There was then a section entitled "Disclosure by Fairstar". In this section, Mr Gibbons explained that the services agreement between Fairstar and Cadenza (the company that employed Mr Adkins had contracted with Fairstar to provide his services) was governed by Dutch law and contained a clause giving exclusive jurisdiction to the Dutch courts. He mentioned also a written Settlement Agreement between Fairstar and Cadenza arising out of the termination of the services of Mr Adkins. Finally, Mr Gibbons referred to a draft written Director’s Agreement between Fairstar and Mr Adkins which was never signed.

In his summary of the background of the dispute Mr Gibbons mentioned the takeover of Fairstar by those controlling one of its competitors, a company to whom I shall refer as Dockwise. Paragraphs 2.5-2.9 of this witness statement are important and were as follows:

“2.5

On the success of the takeover bid, the existing management resigned and were replaced by a new interim management, which almost immediately discovered a written Shipbuilding Contract which Fairstar had signed on 3 May 2011 . . . by which the Chinese Shipbuilders had agreed to construct for Fairstar eight 50,000 DWT semi-submersible heavy lift vessel (later named "MV Fathom") for a price of US$110 million ("the Fathom Shipbuilding Contract"). It was also discovered that Fairstar had defaulted on paying the first and second instalments totalling over US $31 million, by which by amendment to the Fathom Shipbuilding Contract were due in June 2012, exposing Fairstar to the risk of having to pay the Chinese Shipbuilders a penalty of US $37.5 million and the risk of the Fathom Shipbuilding Contract being cancelled.

[There was no paragraph 2.6]

2.7

Philip Adkins has at various times contended that what I am calling the Fathom Shipbuilding Contract was either (a) a mere option granted to Fairstar or (b) a contract subject to conditions precedent that were never fulfilled. Neither of these contentions appears tenable, as appears from Exhibit NAG1 to this Witness Statement comprising copies of . . .

2.8

The existence of the Fathom Shipbuilding Contract and of Fairstar's liabilities under it had until 15 July 2012 been concealed. For example, they were not mentioned in Fairstar's Annual Report for 2011 . . . That Annual Report had been signed by Philip Adkins on 12 April 2012. It mentions other shipbuilding contracts entered into by Fairstar with the same Chinese Shipbuilders, but nowhere mentions the Fathom Shipbuilding Contract. The financial statement contained in the Annual Report was expressed by Fairstar's auditors KPMG Accountants NV to give a true and fair view of the financial position of Fairstar as at the end of 2011, but did not mention liabilities under the Fathom Shipbuilding Contract, so that it appears that they had also been concealed from those auditors.

2.9

The Fathom Shipbuilding Contract and Fairstar's liabilities under it must also have been concealed from the financial advisers appointed by Fairstar to defend against the hostile takeover bid, since those advisers valued the assets of Fairstar without any reference to Fairstar's liabilities under the Fathom Shipbuilding contract, or the risk of default in payment of the instalment due in June 2012."

Mr Gibbons also exhibited copies of letters dated 13 and 16 August 2012 from Fairstar's Dutch lawyers to Schillings, the London solicitors acting for Mr Adkins, together with the reply from Schillings dated 17 August 2012. The latter said this:

“Our client is increasingly concerned at the adversarial nature in which your client is seeking to deal with the issue. Indeed your demands and accusations demonstrate that your client is not dealing with our client in good faith. It needs to be noted that he has been assisting KPMG to explain why it is wrong to claim that there was an unconditional commitment to pay USD 110 million in relation to the Fathom in 2011. As such there was no need to state such commitment in the 2011 accounts. Our client is liaising with KPMG in this regard and has agreed to meet with them next week to discuss these issues.

. . .

Ince have overlooked the fact that [the shipbuilders] failed to comply with the conditions precedent stipulated in the document that would have created a payment obligation for Fairstar in 2011. The shipbuilding contract imposed certain conditions on both parties which were necessary to complete the agreement. These conditions were not met in 2011 by either [the shipbuilders] or Fairstar. Our client will address these issues with KPMG and we do not intend to debate these issues in correspondence. As stated above we hope that this can be done in a cooperative manner as the ability of our client to assist KPMG will be seriously compromised should review be conducted in an adversarial and inquisitorial manner.

Finally in relation to the emails forwarded to our client’s Cadenza account, this was done in normal course of business by the Fairstar IT team in order to ensure that our client received emails. Our client provided services to Fairstar via Cadenza and this was entirely a routine matter. Our client does not know why emails are not available on the Fairstar server. This is a matter for Fairstar and its IT team to review. Any suggestion that our client has deleted email from the Fairstar server is untrue and is offensive. Your request for emails in the circumstances is unreasonable.”

In addition to this reply from Schillings, Dutch lawyers instructed by Mr Adkins also replied to Fairstar's Dutch lawyers by a letter dated 27 August 2012. This letter noted that it had been suggested that Fairstar and the public at large were not aware of Fairstar's commitments in relation to the building of the Fathom. It said that this was not correct. It said that it was clear that KPMG knew that in 2011 Fairstar had the opportunity to have the Fathom built. It said that this was an option, and at no time in 2011 was Fairstar liable for any unconditional payment obligations. It said also that Dockwise was very aware that the Fathom had been ordered by Fairstar prior to making its offer to acquire Fairstar. The letter went on to make the point that Dockwise had had every opportunity to question Fairstar's management about the status of the Fathom, and in fact had made critical comments about this at the EGM held on 1 June 2012.

In short, this letter refuted the suggestions that Mr Adkins had concealed the existence of the Fathom contract from Dockwise or other members of Fairstar’s management. Mr Spearman was very critical of the fact that the letter had not been exhibited by Mr Gibbons.

Coulson J seems to have been under the impression that the existence of the Fathom shipbuilding contract had not been referred to during the takeover - he said as much in his judgment (at paragraph 5) (Footnote: ¹).

Whilst it was a central theme of Mr Gibbons that Mr Adkins had consistently concealed the existence of the Fathom shipbuilding contract, or at least the liabilities that it imposed on Fairstar, he said nothing in his witness statement about any risk that the e-mails in Mr Adkins possession might be destroyed.

Mr Spearman was very critical of this. He relied on observations made by Lord Hoffmann in two cases. The first was In Re First Express Ltd [1991] BCC 782, where he (as Hoffmann J) said, at 785D-G:

“I am firmly of the view that it was wrong for the application to be made ex parte. It is a basic principle of justice that an order should not be made against a party without giving him an opportunity to be heard. The only exception is when two conditions are satisfied. First, that giving him such an opportunity appears likely to cause injustice to the applicant, by reason either of the delay involved or the action which it appears likely that the respondent or others would take before the order can be made. Secondly, when the court is satisfied that any damage which the respondent may suffer through having to comply with the order is compensatable under the cross-undertaking or that the risk of uncompensatable loss is clearly outweighed by the risk of injustice to the applicant if the order is not made.

There is, I think, a tendency among applicants to think that a calculation of the balance of advantage and disadvantage in accordance with the second condition is sufficient to justify an ex parte order. In my view, this attitude should be discouraged. One does not reach any balancing of advantage and disadvantage unless the first condition has been satisfied. The principle audi alteram partem does not yield to a mere utilitarian calculation. It can be displaced only by invoking the overriding principle of justice which enables the court to act at once when it appears likely that otherwise injustice will be caused.”

The second was in National Commercial Bank Jamaica Ltd v Olint Corpn Ltd [2009] 1 WLR 1405, where he said at [13]:

“Their Lordships therefore consider that a judge should not entertain an application of which no notice has been given unless either giving notice would enable the defendant to take steps to defeat the purpose of the injunction (as in the case of a Mareva or Anton Piller order) or there has been literally no time to give notice before the injunction is required to prevent the threatened wrongful act. … Their Lordships would expect cases in the latter category to be rare, because even in cases in which there was no time to give the period of notice required by the rules, there will usually be no reason why the applicant should not have given shorter notice or even made a telephone call. Any notice is better than none.”

In his witness statement Mr Gibbons set out the background to the application, why Fairstar needed to see the e-mails held by Mr Adkins and, as I have mentioned, identified various matters that he felt should be disclosed. However, he did not say either that there had been no time to notify Mr Adkins of the application or that such notification might give Mr Adkins the opportunity (which it was feared he might take) to take action to destroy the e-mails in question.

Since no explanation had been given for the delay between the receipt of Schillings’ letter dated 17 August 2012 and the making of the application on 7 September 2012, it is hard to see how Mr Gibbons could have justified a without notice application on the ground of exceptional urgency. This leaves only the other ground on which the application could properly be made without notice, namely the risk of deletion of the relevant e-mails.

Mr Spearman submitted that Fairstar should have addressed this point. However, Mr Susman retorted forcefully that this was self-evident from the fact that Mr Adkins had taken persistent steps to conceal the Fathom shipbuilding contract or, at least, to conceal its financial implications. Whilst I consider that Mr Spearman's criticism is justified, from a practical point of view I have some sympathy with Mr Susman's submissions. Indeed, Mr Susman submitted that to have given Mr Adkins notice of the application might have been a step which Fairstar’s advisers might have had difficulty justifying to their client. I have no doubt that if the judge had asked, Fairstar would undoubtedly have submitted that the facts as they had set them out justified - without more - the inference that there was a risk that Mr Adkins might destroy the e-mails. I think that if I was in Coulson J’s shoes I might have accepted that submission.

Nevertheless, in circumstances where Fairstar was asserting an urgent need to see these e-mails, it is surprising that no attempt was made to explain why there was a delay of some 2-3 weeks between Schillings letter of 17 August 2012 and the making of the application. In my judgment, that called for explanation.

There is no question but that a party making an application for any form of interim injunction without notice is under a high duty to make full and fair disclosure to the judge of all the relevant facts and, in particular, of any particular aspects of the situation that might militate against giving the relief being sought (see Memory Corporation v Sidhu [2000] 1 WLR 1443, per Mummery LJ at 1459).

Mr Spearman essentially made two broad submissions in support of his client’s complaint that in this case the disclosure made to Coulson J was neither accurate nor complete. First, he submitted that it was not correct to say that there had been concealment by Mr Adkins of the Fathom shipbuilding contract. Second, he submitted that it was quite wrong of Fairstar not to put before the judge the whole of Mr Adkins’s side of the story - in particular, the fact that he denied emphatically the lack of disclosure to Dockwise of the Fathom shipbuilding contract.

Although in his witness statement Mr Gibbons referred both to the concealment of the contract and to concealment of the liabilities under the contract, it seems to me that the overall impression given to Coulson J was that the existence of the Fathom shipbuilding contract had been concealed from Fairstar's new owners prior to the takeover on 14 July 2012. If that is the impression with which Coulson J was left, and I think it was, it was not a correct impression. It is clear that, at the very least, Dockwise knew that Fairstar had entered into some commitment with the Chinese shipbuilders, even if the precise nature and extent of that commitment was unclear. This much is evident from the written note that Dockwise had prepared before the EGM on 1 June 2012. In that document it said:

“● The proposed authorisation for an equity issue for another fleet addition should be assessed on the basis of adequate information, such as the company's financial position, the price of the vessel, and its’ expected and contracted business, the company's financing possibilities, including the need for any further capital injections and the terms and conditions thereof.

. . .

● Fairstar did not provide sufficient clarity on the status of the fifth vessel, whether or not ordered by Fairstar and, if ordered, on the extent of Fairstar's actual and potential related financial obligations, nor sufficient and timely information regarding other aspects of the business rationale for such a fifth vessel."

What Mr Adkins said at that meeting was this:

“It looks clear to us that our fleet is pretty fully booked and as a result of what we consider to be our anticipation to book our fleet in the last 6 months, we had entered into discussions with [the Chinese shipbuilders] to build an additional vessel and last year we signed a contract with them and paid an option fee for a third vessel for a purchase price of $110m and at the end of the first quarter this year we then entered into discussions with our current shareholders, as well as a group of new investors, and had decided to move forward with the investment and purchase of a third 50,000 net weight tonne.

. . .

We now have an opportunity to revisit the matter and my strong recommendation is, given the demand in the market place, for these high value services with the shortage of suitable vessels, we will have an opportunity to invest in a third vessel on very favourable terms but in order to move forward with that contract we’re going to have to make a payment to the yard by the end of June and if we do not make that payment there may well be significant cost penalties that we will need to discuss with the yard if we in fact want to walk away from that contract.”

(My emphasis)

Three things are apparent from this statement. First, that a contract in relation to a third vessel had been signed. Second, that a sum of money had already been paid to the Chinese shipbuilders in the form of an "option fee". Third, that if a further payment was not made by the end of June 2012 (in other words if the option was not exercised), there may well be significant cost penalties. It was after this statement had been made by Mr Adkins that the statement prepared on behalf of Dockwise was read out to the meeting.

However, all this material has to be read in the context of the fact that Fairstar’s Annual Report 2011 made no mention whatever of the Fathom shipbuilding contract. Although I have heard no evidence from Mr Adkins, and so I cannot rule out that he may have a good explanation for this, on the face of it the absence of any reference to the Fathom shipbuilding contract in the 2011 Annual Report is very surprising. The documents before the court (and Mr Adkins has now had plenty of opportunity to put forward any other relevant documents that might be in his possession) show unequivocally that by the end of 2011 Fairstar had entered into a serious financial commitment in respect of Fathom. Prior to the end of 2011 it had become contingently liable to pay some US$20 million in respect of the second instalment on three days notice. Whilst I accept that Mr Adkins has maintained that this liability had, by means of a collateral contract, been put into suspension or was subject to the fulfilment of certain conditions precedent, it is remarkable that he has given no details of precisely how and when this agreement was entered into, let alone provided any document that supports it.

It must be remembered also that this was a hostile takeover. To say that there was ill feeling between Mr Adkins and the directors of Dockwise would be an understatement. Mr Adkins maintains that he has been shabbily treated. The new owners of Fairstar, by contrast, say that he misled them. But the fact that this was a hostile takeover meant, in practice, that Dockwise went ahead without being able to perform a proper due diligence exercise (as I think is accepted). Given that they had themselves drawn attention to the uncertainties in relation to the Fathom order, they knew that they probably did not have sufficient answers to their questions by the time of the takeover. This is not to excuse any conduct by Mr Adkins, if he was guilty of concealing information from the regulatory authorities or the market: it is simply a statement of fact.

When considering the question of non-disclosure on applications for interim relief, it needs to be remembered that the fact that the same order might still have been made if there had been proper disclosure is not an answer to a criticism of non-disclosure. In Fitzgerald v Williams [1996] QB 657, Sir Thomas Bingham MR said, at 667:

“In seeking ex parte relief an applicant must disclose to the judge any fact known to him which might affect the judge's decision whether to grant relief or what relief to grant. It is no answer for an applicant who falls down on his duty to show that his breach of duty was committed in good faith and inadvertently, or to show that the relief would have been granted even if he had complied with his duty. The courts have traditionally insisted on strict compliance with this rule, as affording essential protection to an absent defendant, and as applications for ex parte relief have multiplied so the importance of complying with this duty has grown."

The Master of the Rolls went on to say that the law did not require a judge to whom an application was made to discharge an injunction to grant that relief simply on proof that there was material that should have been, but was not, disclosed to the original judge. It is always a matter of judgment.

Having heard Mr Susman, I do not believe that he thought that he might not be giving Coulson J a fair picture of the position. Whilst I consider that Mr Susman might have put his case a little higher than others might have thought justified, that is not the same as culpable non-disclosure. However, in my view Coulson J should probably have been given a rather more balanced picture of the overall position. But, that said, I am quite satisfied that neither Mr Gibbons nor Mr Susman had any conscious intention to mislead Coulson J, to the extent that they may have done so.

Turning to Mr Spearman's second main head of criticism, namely the failure to put the other side of the story fairly before the judge, I consider that there is force in this point also. Having exhibited the two letters from Fairstar's Dutch lawyers, it was in my view wrong not to disclose the letter in reply from the Dutch lawyers instructed by Mr Adkins (there has been no suggestion that this document was not supplied to Ince & Co). Similarly, I consider that rather more emphasis might have been placed on what was said at the EGM on 1 June 2012. I have little doubt that had Mr Spearman been representing Mr Adkins at the hearing on 7 September 2012 the judge would have been presented with a rather different picture: but whether or not the picture would have been sufficiently different to alter the outcome is a matter of speculation (and as I have already shown, irrelevant).

Drawing these threads together, I can summarise my conclusions as follows:

But in my judgment this is not one of those cases where the applicant intended to mislead the court or where the conduct of the applicant was such as to attract some special sanction, such as an award of costs on an indemnity basis.

Mr Susman's position was that the costs of this inquiry into what was or was not said to Coulson J, or whether the application was properly made on a without notice basis, should be paid by Mr Adkins on the grounds that his complaints, made through Mr Spearman, were without foundation. I unhesitatingly reject this submission.

Looking at the position overall, the fact is that Fairstar's claim to a proprietary right in the content of the e-mails held by Mr Adkins has failed. The applications before Coulson and Eder JJ proceeded on the footing that Fairstar had such a right. It did not, and so the applications (as made) were misconceived as a matter of law. That is not to say that the application would not have been justified if Mr Susman had been able to invoke all the remedies available under English law, but he was not.

It follows, in my judgment, that unless Mr Susman can show that Mr Spearman's complaints about the process were unreasonably made, the costs of those applications and of this hearing must follow the event. For the reasons I have given, Mr Susman has not succeeded in doing this. Whilst I have not resolved every point in favour of Mr Adkins, I consider that there was merit in several of the points made by Mr Spearman and, more relevantly, there is no way in which his submissions could have been described as unreasonable.

On the other hand, whilst I have been in some respects critical of the manner in which Fairstar went about making the application to Coulson J, I do not consider that there was any want of good faith or that either Mr Susman or those instructing him acted in any way improperly. Whilst I have identified certain shortcomings in the manner in which the application was made, as I have already indicated I do not consider that those shortcomings are such as to merit an award of costs on the indemnity as opposed to the standard basis.

In these circumstances I consider that the proper order is that the costs of the applications to Coulson and Eder JJ should be paid by Fairstar on the standard basis, to be the subject of detailed assessment if not agreed. I have already concluded that the balance of the costs, including those of the hearing on 17 October 2012, should be paid by Fairstar also.