Bend Weld Engineering Sdn Bhd v FMC Technologies Limited

The application before the Court is the Defendant’s application for security for costs.

The Claimant (“BWE”) is a fabricator and supplier of metal components based in Malaysia.

The Defendant (“FMC”) is a company specialising in industrial manufacturing including constructing and/or managing the construction of the metal structures required for offshore petroleum and natural gas extraction.

Between April 2019 and July 2020, the parties entered into a series of contracts under which BWE was engaged by FMC to fabricate and supply metal structures for use in its offshore oil and gas projects.

It is BWE’s case that by a letter dated 22 July 2020 FMC wrongfully terminated all open purchase orders. It is also BWE’s case that there were a number of unpaid invoices.

The unpaid invoices amount to US $85,958. The larger part of the claim relates to sums said to be payable in respect of purchase orders wrongfully cancelled or terminated on 22 July 2020. This part of the claim is in the sum of US $1,496,459.33. There is a further claim for US $144,000 in respect of storage charges for the cancelled items.

These proceedings were issued on 15 June 2023.

The issue of proceedings triggered an almost immediate response on behalf of FMC. On 19 June 2023 Burness Paull LLP, FMC’s solicitors, wrote seeking security for costs:

On 22 June Freeths LLP, solicitors for BWE, responded:

On 26 June Burness Paull wrote:

On 30 June 2023 Freeths responded. I do not set out the letter in full. It made two major points: first that the assumption should be that costs should be assessed on a standard basis, suggesting taking 65% of FMC’s Precedent H costs. Second, that because it appeared that FMC was intending to put forward a counterclaim, allowance should be made for those costs attributable to the counterclaim. On those bases it was said:

On 5 July Burness Paull made a counterproposal:

In response, on 10 July Freeths declined to confirm BWE’s incurred and estimated costs, and made the following proposal in respect of security up to the CMC stage of proceedings:

Thus the parties’ positions were defined and remained the same before me save that before me Ms. Adams on behalf of BWE challenged FMC’s entitlement on the evidence before the Court to any order for security for costs at all.

CPR 25.12 provides:

CPR 25.13 provides:

In support of his application, Mr. Lixenberg relied upon a decision of Mr Peter MacDonald Eggers KC in Explosive Learning Solutions Ltd v Landmarc Support Services Ltd [2023] EWHC 1263 (Comm) in which he said:

I accept that those principles are applicable in this case.

FMC’s application was accompanied by a witness statement from Jody Stephen Crockett. In respect of entitlement under CPR 25.13, Mr. Crockett referred to the correspondence and set out his understanding that BWE accepted that it should provide security at this point, but that there were issues as to the amount of that security.

In response, BWE’s solicitor, Alex Johnson, filed a witness statement which drew attention to the requirements of CPR 25.12 and 25.13 and asserted that FMC had not filed any evidence showing that the requirements of those provisions had been satisfied. Mr Johnson referred to Burness Paull’s first letter and then said:

In reply FMC filed a second witness statement from Mr. Crockett in which he said:

Ms Adams argues that FMC has not complied with CPR 25.12(2) in that FMC did not provide evidence with its application showing that either CPR 25.13(a) or (c) was satisfied.

This is strictly correct, but I accept the reason given by Mr. Crockett in both his witness statements for this omission, namely that he believed that there was no dispute that the grounds for the application were agreed, but that there were issues as to the basis upon which the amount of security should be calculated and as to the amount of security.

Be that as it may, the position is that I do have evidence which satisfies me on the information presently available that BWE would be unlikely to be able to satisfy an order for costs in the Defendant’s favour at the end of the proceedings. It appears from Mr. Johnson’s statement that BWE does not itself have the funds to pay its own costs, being reliant upon a loan from its holding company, that as at 30 June 2022 it did not have assets sufficient to satisfy such an order, and that the position now is, if anything, worse than it was in June 2022.

It is to be noted that BWE has not put in evidence either its annual accounts to 30 June 2023 or up to date management accounts in order to show a picture different from that summarised in Burness Paull’s letter of 30 June 2023.

Accordingly, on the evidence before me I am satisfied that the gateway provision in CPR 25.13(2)(c) is satisfied.

Whilst no Defence or Defence and Counterclaim has yet been served, in Mr Crockett’s first witness statement he set out the nature of the case which FMC intends to put forward.

Generally it is FMC’s case that BWE’s welding work was defective. This gives rise to a counterclaim totalling about US $2m (paragraph 19 of Mr Crockett’s first witness statement). He exhibits two schedules setting out how that figure is calculated and justified.

Conceptually there are a group of items arising out of the purchase orders and invoices upon which BWE bases its claim, and a balance relating to costs alleged to arise out of defective work carried out by BWE under other purchase orders.

It is FMC’s case in short that the legal work done to establish the defects in BWE’s works has been and will be carried out in order to defend the claim brought by BWE.

BWE contends that the work done to create the counterclaim goes far beyond that necessary to defend the claim brought by it. It suggests that this should be dealt with by the court apportioning FMC’s costs estimate attributing one third to the defence and two thirds to the counterclaim.

Mr Lixenberg relies heavily upon the decision in the Commercial Court of Mr Peter MacDonald Eggers KC in Explosive Learning Solutions Ltd v Landmarc Support Services Ltd to which I have already referred. Ms Adams suggests the principles set out in that case in respect of the consequence of a counterclaim being brought need to be treated with a little caution when applied to cases in this Court, but in my judgment the principles set out in that case are well established and apply in the TCC as well as in the Commercial Court. In that case Mr MacDonald Eggers said in respect of the counterclaim issue:

Later in the judgment he said:

In the present application, the costs which are sought to be secured are (1) the costs of the proceedings from their commencement to the CMC; and (2) FMC’s costs incurred before proceedings were started.

Insofar as the first category of costs is concerned, it seems to me that this case raises similar issues to the Explosive Learning case: I accept that, absent the proffered undertaking, this would be a case where the costs of FMC preparing its defence overlap substantially with the costs of preparing the counterclaim, and therefore security would not be ordered (see paragraph 21 and the first sentence of paragraph 39 of the judgment in Explosive Learning). Thus the starting point is that security for costs should not be ordered.

However, as that case makes clear, if a counterclaim is being deployed for all practical purposes solely as a defence whether by way of abatement or by legal or equitable set-off, and an undertaking in Dumrul terms (see paragraph 24 of Mr MacDonald Eggers’s judgment) is proffered, then an order for security for costs is likely to be appropriate. Here such an undertaking has been proffered.

At present I have not seen a draft Defence and Counterclaim, still less a Defence and Counterclaim finalised and served. When such a document is served, it may evince an intention on FMC’s part to put forward its defects case as more than simply a defence. At present, I understand the position to be that it will be deployed purely defensively.

On that basis is seems to me appropriate to order security for FMC’s costs in this action up to the date of the CMC: I deal with the amount below.

The second category of costs seems to me more troublesome.

There is authority binding on me that security for costs can be ordered to include “incurred” costs in the language used for preparing a “Precedent H” for cost budgeting purposes: see, in particular, paragraphs [41] to [53] of the judgment of Sales LJ in Sarpd Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120.

However, that case was considering “incurred” in contrast to “estimated” costs in an approved costs budget. By the time that a case comes before the Court to consider approval of costs budgets, there will be two categories of “incurred” costs – those before the proceedings have started and those after they have started up to and including the CMC.

At this point I am considering principally costs incurred before proceedings were commenced.

From the Claimant’s perspective, there is no reason to differentiate between the pre- and post- proceedings costs. They will be costs which the Claimant contends that in due course the Defendant will pay when the Claimant succeeds. Those costs, the Claimant will say, include the costs of investigation and getting its claim together before the proceedings were commenced and those incurred after the proceedings have been instituted.

From the Defendant’s perspective, the position is somewhat different. Once the proceedings have started, the costs are likely to be mainly incurred in respect of the claim brought, but there may be other issues to be dealt with by way of counterclaim which can be differentiated.

However, before proceedings are commenced that defendant’s concerns may be differently focussed, and the costs incurred may not be clearly directed to the claimant’s claim rather than to the defendant’s counterclaim.

This case seems to me to illustrate the dilemma. The starting point may be (depending upon each party’s perspective) FMC’s decision to terminate various purchase orders. That was a positive action on the part of FMC which might well in due course involve close examination of FMC’s motives and the legal basis underlying that decision.

Usually, but not always, a decision to terminate places a real time burden upon the terminator to justify its actions (I am not commenting upon where the legal burden lies), laying the ground to be able to defend that decision if later challenged by the other party.

At that point the Defendant justifying termination becomes, in real terms, the party putting forward a positive case. Thus, in this case, an evidential, but not a legal burden, may move to FMC to justify the termination.

As to the defects case, there can be no doubt that in practical terms it is for FMC to establish that BWE’s works were defective.

At the stage before proceedings are commenced, the terminating defendant is likely to be principally concerned with whether it has the evidence available to justify termination.

With those thoughts, I return to the judgment of Mr MacDonald Eggers in Explosive Learning. He was not concerned, as I am at this point, with costs mainly incurred before proceedings were commenced.

Unlike him, I have the benefit of correspondence between the parties. I have before me FMC’s solicitor’s letter of 23 July 2021 (Footnote: ¹) which appears to me to very clearly put forward a counterclaim intended not only to defend BWE’s claim (which had been intimated in correspondence), but also to assert an entitlement on FMC’s part to receive monies from BWE. Thus the contemporaneous correspondence appears to show FMC incurring costs not merely defensively (although that was part of what was happening) but also in putting together a positive case.

Thus, in respect of the time before proceedings were commenced, it seems to me difficult to reach a conclusion that costs were being incurred substantially by FMC by way of defence, rather than by way of (1) defence and also (2) counterclaim.

Thus, there is, firstly, a problem on why the costs were incurred: were they incurred defensively (in which case the fact that a counterclaim is later formulated may be of minimal significance in respect of an application for security for costs) or offensively, thus enabling an application for security for costs to be resisted?

There is, as it seems to me, a second problem. In the Explosive Learning case, the learned deputy judge explained the rationale for a security for costs order as follows (emphasis added):

I accept that reasoning, which causes me to question, what is the basis for a court to order security in respect of costs already incurred by the defendant before proceedings have been started?

It seems to me that in the context of a case where the defendant is itself considering bringing a claim against the claimant, before the claimant brings proceedings, then those pre-actions costs of the defendant should fall outside the remit of a security for costs order, which is fundamentally concerned with the costs which the defendant will incur as a result of the claimant bringing proceedings.

A separate way of considering these costs is to recognise that before the claimant starts proceedings, the defendant’s costs which had already been incurred were “sunk” costs, in respect of which an order for security only becomes available because the claimant has proceeded to start proceedings. Had the claimant not chosen to do so, no legal mechanism for recovery of the defendant’s costs exists, unless the defendant had chosen to commence proceedings. Thus these costs were not costs of defending the proceedings: it is not, to use the expression highlighted above, a case where “the Defendant would otherwise be required to defend the proceedings and incur substantial costs in doing so without any assurance that it will be unable to recover its reasonable costs from the Claimant should the claim not succeed.”

For the above reasons I decline to order security for costs in respect of FMC’s costs incurred before proceedings were commenced. This does not mean that FMC may not be able to recover these costs on assessment in the event that its defence of these proceedings is successful.

In respect of the costs of these proceedings after commencement, FMC relies upon the Precedent H form to which I have already referred. This estimates costs under the heading “Issue/statements of case” in the sum of £45,250, and under the heading “CMC” in the sum of £25,550, a total of £70,800.

On behalf of BWE, Ms Adams points out that at this stage the cost budget has not been approved. She submits that there should be reductions firstly to reflect the fact (as BWE submits) that the greater part of these costs are attributable to the counterclaim and secondly to allow for the fact that on assessment the costs estimated may well be significantly reduced.

As to the first point, I have given my reasons above for rejecting it.

As to the second point, the costs estimated do not seem to me to be unrealistic given the complicated issues which will arise in pleading the defence and counterclaim and in preparing for the CMC. It is to be noted that the cost schedules for this hearing amount to £50,512.59 for BWE and £48,870.41 for FMC. Those substantial sums give me some comfort that the Precedent H estimates are of the right order.

It is also noteworthy that at this stage BWE has not assisted me by providing its own estimates of the costs it will incur in those two phases of the proceedings.

For the above reasons I order that BWE should provide security for FMC’s costs up to the conclusion of the CMC in the sum of £70,800.

I invite the parties’ submissions as to the terms of the consequent order.