R G Spiller Ltd v Derhalli & Anor

This is an application following the almost final disposal by agreement of matters said to have been in issue, with the claimant applying for its costs of and occasioned by the proceedings.

The background briefly is this. The claimant, R G Spiller Ltd. ('Spiller'), were employed under a standard form contract by Mr. and Mrs. Derhalli in relation to a building project at a house owned by the defendants. The contract price was over £4million and one of the terms of the contract required Spiller to procure an on demand bond. I have to say that it is not common in domestic projects for there to be an on demand bond. There are often conditional bonds. But that is what the parties agreed. Spiller procured such a bond from the National Westminster Bank and the original was, as is usual, provided to the defendants.

There is an immaterial issue as to whether Mr. and Mrs. Derhalli had the original or had a copy. It seems likely that one or other of them had a copy, at least at some material stage, but it does not really matter. It seems that the original was held by Hills, who were one of the consultant quantity surveyors retained by Mr. and Mrs. Derhalli for this project.

As it not uncommon, there were some delays on the project. The project was apparently eventually completed in about June 2012, which was a number of months later than the original date for completion. There was discussion, particularly it seems between Mrs. Derhalli and Spiller, in relation to certain further or additional works to be done. Discussions took place between about July 2011 until October or November, possibly later. I am not making any findings in this ruling which should be considered as giving rise to an issue estoppel. I am simply recording such matters as appear in the written evidence before me. In about July 2011 Spiller received a bill of quantities for the additional work package and there were discussions and negotiations. As Mr Legg of Spiller says in his witness statement, prepared for the purpose of the injunction (which I will come back to later), oral agreement was reached in about October 2011 between Mrs. Derhalli and him, and at a meeting attended also by Mr. Churchill. One of the things that was set out in the agreement, which he recorded in an email on 18^th October 2011, was:

It is said that this gives rise to a binding agreement and that was part of the case that was sought to be presented. As I said, it seems to be common ground that, although there may have been some partial possession beforehand of parts of the works, the final part of the works was practically complete in July 2012. If the agreement to which Mr. Legg refers was binding, then the bond needed to be returned at that time or within a reasonable time thereafter. But that was not to happen. There appears to have been continuing discussion about that, although not I think immediately.

In an extensive witness statement, running to 32 pages supported by some 200 or 300 pages of exhibits, Mr. Howard, who is the managing director of Spillers, sets out the story. As to practical completion, he says that the property was handed over in stages, with the first floor on 29^th May and the ground floor on 6^th June 2012, with practical completion being achieved on 20^th July 2012. He says at para.43 that he believed that the parties had entered into the agreement on 18^th October 2011 to the effect that the defendants would give up their bond once practical completion had been achieved. He says he raised the issue of the return of the bond at or shortly after practical completion. He refers to emails that he wrote in August 2012 seeking the return of the bond and that, at this stage, seemed to have gone nowhere other than Mr. Derhalli emailing, in November 2012, saying that there was no agreement regarding the early release of the bond.

There were further discussions and, so far as the return of the bond is concerned, the documentation with which the court has been provided shows that on 20^th February 2013 Mr. Howard wrote a letter to Mr. Derhalli about the release of the performance bond. He wrote as follows:

There was a letter from the architect on 8^th April 2013 that said:

That prompted Mr. Howard, a few weeks later, on 2^nd May, to email Mr. Derhalli referring to a meeting he had had with the architect, saying this:

Mr. Derhalli responded four days later, on 6^th May, by email saying:

Mr. Howard, in his witness statement, says this:

There is no dispute, and indeed Mr. Howard expressly says, that Hills returned the original bond document to Spiller. I infer from the location at which that statement is to be found, para.76 of Mr. Howard's statement, that that occurred in May 2013. But thereafter Mr. Howard raised with Mr. Derhalli a requirement from the bank that provided the bond for 'a side-letter confirming that it is no longer being relied upon'. That was in an email dated 7^th May 2013. He referred to an email from the bank which appears to suggest that.

Thereafter it is fair to say that there was no further, and I do not think it is suggested that there was a further, concluded agreement between the parties. On 17^th May 2013 Mr. Derhalli wrote by email:

That provoked (perhaps justifiably, perhaps not, I do not know and I do not need to decide) a fairly firm response from Mr. Howard by email on 20^th May 2013. What he disagreed about was not the reference to the surrendering of the bond and return of the bond, or even the letter required from the bank, but the other matters relating to preliminaries and liquidated damages. What Mr. Howard said, with regard to the letter, was:

It is clear that the parties never agreed in terms to items 3 and 4 of the draft agreement which Mr. Derhalli signed and which Mr. Howard, for reasons which he doubtless thought were good, considered were not justified, but that was clearly, it seems to me, some sort of package that was being offered.

Disputes began to arise between the parties, because this was during the defects liability period, and in 2014 Mr. Howard, indeed, says broadly out of the blue, that Mr. Poston, the architect, on 7^th April 2014 raised a large number of defects which Mr. Howard believes most, if not all, had never really been raised before and, while there were a few, relatively minor, items which he was prepared to address, he says that that was an exaggerated and broadly unjustified request for substantial further remedial works to be carried out. Indeed it was responded to in some detail by him on 14^th April 2014. A further letter was sent to Mr. and Mrs. Derhalli on 24^th April 2014.

It seems, from Mr. Howard's witness statement, that in April 2014 he instructed solicitors and had under consideration an application for an injunction to restrain any call being made on the bond. It is unclear when all the evidence that was eventually put before the judge who dealt with the injunction was prepared, albeit that it was eventually signed in the third or fourth week in June 2014. But Mr. and Mrs. Derhalli instructed solicitors, Howard Kennedy, either by late April or early May, and it is not unfair to say that in none of this correspondence is there any hint or suggestion that the bond, the original of which had been handed back to Spiller, was going to be called. But some arguably odd things happened. Whether they are odd may be determined in an adjudication or arbitration, but, notwithstanding the fact that no certificate of making good defects was concerned, a document purporting to be a final certificate was proffered by the architect. I say it is odd because, at least on one reading of the contract (possibly the only reading of the contract but certainly on one reading) the final certificate cannot be issued unless and until the certificate of making good defects was issued. But there may be an explanation or justification for that which has not been argued in front of me. But that started, it is said, alarm bells ringing. There was also a notification that the defendants, Mr. and Mrs. Derhalli, were proposing to claim liquidated damages. Much of this occurred towards the end of May 2014.

There appears to have been continuing concern within the claimant's camp that the bond might still be called. It appears that in late May Spiller's solicitors wrote to the bank (I do not think I have a copy of the letter that they wrote to the bank but I have a copy of NatWest's reply on 12^th June 2104) in effect saying that NatWest could not cancel the guarantee until they had received a certified as correct copy of the architect's certificate of making good or they had the beneficiaries, that is Mr. and Mrs. Derhalli's, written confirmation to NatWest that NatWest is released from all liability under the guarantee. The writer referred to the concern that the architect was declining to issue an appropriate certificate of making good defects and was looking to issue a final certificate instead, and saying:

It is not clear, or sufficiently clear, on the evidence before me that it was made clear at that time at least, by way of reminder or by way of first information, to the bank that the original of the bond had been handed back apparently without condition to the contractor.

Thus it was that, feeling that alarm bells were ringing, the claimant prepared extensive evidence; as I said, Mr. Howard's statement running to 32 pages -- two other witness statements, one from Mr. Legg and one from the claimant's then solicitor were prepared. How long it took is not clear but certainly nothing seems to have happened following that letter from the bank which would have had alarm bells ringing any more than they were by the end of May 2014. Thus it was that the claimant, Spiller, issued proceedings on 20^th June 2014, in effect seeking an injunction to restrain a call on the bond, and indeed to seek a mandatory order that they wrote to the National Westminster Bank saying that they would place no further reliance on the bond.

An application was made ex parte to Mr. Justice Stuart-Smith in the TCC. He was persuaded that it was an appropriate case in which to order a limited injunction, in effect preventing the defendants from making any call, demand or other claim on the bond.

There then followed some correspondence between the claimant's solicitors and the defendants. Howard Kennedy, (I do not have the whole copy of the letter but I am able to piece it together from the response) said by letter on 26^th June 2014:

A draft order was sent and it is unclear the extent to which it was negotiated, but the form of the order, which was eventually and promptly lodged with Mr. Justice Stuart-Smith on or by 27^th June, and he signed it, was in terms:

It is extremely unfortunate that this matter could not be agreed and that the parties have felt it necessary to argue, and assert, at some length that their different versions of events are correct. Essentially what Mr. Mort QC, for the Spiller, argues is that the effect of the consent order is that there is judgment for the claimant in respect of the claims that were referred. It broadly got exactly what it claimed and that means, therefore, it has been successful in these proceedings and therefore that the usual order on costs should follow as set out in CPR 44.2(2):

I am told, and have no reason to doubt, that the claimant had spent tens of thousands of pounds on its application for an injunction. I am not surprised that it is that figure because of the wide-ranging but detailed scope of the evidence put before Mr. Justice Stuart-Smith. But the parties have then thought it necessary to canvass all those matters with the court and to instruct leading counsel to argue the issue of costs; I have no doubt that thousands more pounds’ worth of costs have been spent on this application as to costs. I am very conscious of remarks that have been commonly made by judges that where costs are left to be determined by the court, and I quote from Lord Justice Stanley Burnton in his concurring judgment in the case of M v The London Borough of Croydon [2012] EWCA Civ. 595 at para.77:

It is important to consider what the claim actually was pleaded as. It was pleaded in para.6:

There was clear evidence, and I make no findings on it, which shows that an agreement was reached in October 2011 and/or varied by an agreement made in or about mid-May 2013, as I have described. But both of those simply talked in terms of surrendering and returning the bond. It seems clear, on any account, that the physical and original bond was returned to Spillers.

There has been a discussion as to the extent to which the judgment acts as some sort of issue estoppel in relation to the matters which are the subject of the claim form. True it is that the parties agreed finally the order that was made. That was by consent. The court makes an administrative decision, unless there was something extraordinary appearing on the face of the consent order, in approving, signing and stamping the consent order.

In the M case, the Master of the Rolls said this at para.47:

The parties have referred me to a decision of Mr. Justice Roth in the Chancery Division, South Somerset District Council v Tonstate Global Leisure Ltd. [2009] EWHC 3308 Ch., in which he considered the impact of a consent order obtained on completely different facts to the current case. He refers in paras.26 to 27 to the case of In re South American and Mexican Company [1895] 1 Ch. 37, in which the bank in that case reached a settlement and judgment was entered by consent in favour of the bank against the company which later went into liquidation. At para.27 Mr. Justice Roth says:

It is clear from the background to the consent agreement that the decision to settle and to agree to the injunction, in its final form, was a pragmatic one on the part of Mr. and Mrs. Derhalli and those advising them and that they were not accepting everything that was said, in particular in Mr. Howard's witness statement; this is not inconsistent with the position that they would never have called the bond having surrendered the original as such. Who knows, however, whether they might have been tempted to do so. But certainly it is at least one not unreasonable inference to draw that they would not have done.

I have formed the view that the appropriate order here is no order as to costs. The background before the application for the ex parte injunction was made is that, although there had been an issue about the bond and its return, the original had in fact been returned to Spillers in mid-May 2013. It is true that no further agreement was confirmed or sent out after that time, but certainly Mr. Howard appears honestly to have believed that there was an agreement which required the bond to be surrendered. It is also the case that for at least two months before the application was made the claimant was under the apprehension that there was a risk that the bond might be called, notwithstanding that the original had been delivered back to it. This stemmed from what the bank was telling it but it is wholly unclear on the evidence whether the bank was told, or at least reminded at that time, that the original had unconditionally been returned to Spillers. It is also an odd state of affairs because, although Spillers believed that Mr. and Mrs. Derhalli were gearing up, properly or, as they think, improperly, in conjunction (or in cahoots possibly) with the architect to generate what might be unjustified claims for defects and liquidated damages for delay, nonetheless there was no hint or suggestion that the bond was going to be called by them.

I have to say that I am not satisfied that it was reasonable to seek the injunction without giving at least a very short timeframe of opportunity to Mr. and Mrs. Derhalli to confirm that, whatever else they were going to do with their claims which had been intimated by late May 2014, that they were not intending to call the bond. That could have been coupled with a letter to the bank at the same time expressly referring to the fact that the original bond had been released unconditionally by Mr. and Mrs. Derhalli, and that it would have been Spillers' belief on advice that any call made on the bond would be a fraudulent one if it was ever made. I suggested in argument to Mr. Mort QC that it would have been appropriate to give 24 hours or possibly even only a few hours' notice so that one thing that in practice could not happen is either for a demand to be made or for the bank to pay out without the claimant being in a position to come urgently to court to prevent it.

I am concerned in this context that, although the alarm bells were, on Mr. Howard's evidence, ringing in April 2014 about a call on the bond, it still took two months to bring this matter to an ex parte without notice hearing for an injunction. It took 10 days after the bank had indicated that it might feel it necessary to pay out on the bond if an appropriate demand was made, and it occurred more than 3 weeks after the latest intimations had been received expressly from or on behalf of Mr. and Mrs. Derhalli that claims for defects, claims for liquidated damages, and a claim that a net balance was due to them from the final certification; they then waited over 3 weeks to come to court on the basis of an urgent application, which could only be issued without notice.

Mr. Mort QC has explained, and I understand the dilemma, I hasten to say, that of course if one makes an application on notice that, of course, then gives the opportunity to a possibly unscrupulous defendant nonetheless to make a call on the bond. As Mr. Howard has, doubtless legitimately, explained, there was a very real concern that if the bond was called there were serious financial and commercial disadvantages, and indeed I think he goes as far to say that it might well have brought about the demise of his company's business, and I do very much understand those concerns. The dilemma always is on these bond injunction cases that, if one gives notice, what you are trying to ensure does not happen then can happen. But it does seem to me in this case that that concern was one which would have been allayed by giving at least a few hours' notice and to seek an undertaking, in effect, that there would be no call under the bond.

So I am not satisfied, as I have said, that it was reasonable as such or not so reasonable as to justify a costs order today. Therefore the order I propose to make is no order as to costs.

I think the usual order should apply here. The claimant took the risk of making a specific application for its costs and, in those circumstances, it lost. There are no particular extenuating circumstances. The fact that I have been somewhat critical of both parties in terms of what happened in the period leading up to the dispute is beside the point. This is a disputed application and it does seem to me that it is appropriate and fair to order that the claimant should pay the defendants' costs of and occasioned by the application dated 1^st July 2014. It should be on the standard basis because it was certainly not unreasonable for the claimant to argue as it did.

I would also want to say this. I am by no means satisfied, delightful though it has been to have leading counsel, that this was a case in which it was appropriate for either party to instruct leading counsel in circumstances where I cannot believe that the original costs of the injunction application were more than £20,000 or £30,000. To instruct leading counsel, although they have each done an extremely good job, is, in my view, disproportionate. That is not a criticism of either party, who by instructing leading counsel may have been immensely helped by leading counsel, but it is just that given what was at stake I cannot see that reasonable middle-standing juniors could not have done an adequate job, though possibly not as eloquently as both the leading counsel have done in this case. Although the costs assessment will need to be referred to a cost judge, I hope that the solicitors will be able to agree the costs since I cannot think that it would be proportionate to proceed to a costs assessment, but I will make the order for costs to be assessed in the usual way.