VEDATECH CORPORATION v CRYSTAL DECISIONS (UK) LTD & ANR [2002] EWCA Civ 356

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Mr Justice Evans-Lombe)
[2002] EWCA Civ 356Case No A3/2002/0141Venue Royal Courts of Justice, Strand, London WC2, Monday, 28th January 2002
Between
VEDATECH CORPORATIONClaimant/AppellantCRYSTAL DECISIONS (UK) LTD & ANR(formerly known as SEAGATE SOFTWARE IMG LTD)Defendant/Respondent
Before
Lord Justice WardLord Justice SedleyLord Justice LongmoreThe Appellant appeared in person.MR R HILDYARD QC and MR H NORBURY (Instructed by Freshfields, 65 Fleet Street, London, EC4Y 1HS)appeared on behalf of the Respondent.Date 28 January 2002
[1]Monday, 19th January 2002 LORD JUSTICE WARD: This is an appeal brought by Vedatech Corporation, a Japanese corporation which is owned in turn by an American holding company, against the order of Mr Justice Evans-Lombe made on 21st January of this year that the claimant company provides security for costs in the total sum of £350,000, £200,000 of which was ordered to be paid by 1st February, failing which the claim would be struck out, and the balance to be paid by 11th February.[2]There is a very long history to this case, to which I will not do full justice having regard to the fact it is nearly 4.25 and I still have other applications and other judgments to deal with in this case.[3]Very shortly, the position is this. The claim is brought against an English company, Crystal Decisions (UK) Ltd. It was brought initially for breach of contract, the contract alleged being - putting this very broadly - that the defendant company engaged the claimant to provide all the expertise to assist it in translating some American software into Japanese software and to facilitate the defendant's entry by itself or by a subsidiary about to be incorporated to gain a market advantage in Japan. The claim has since been amended to incorporate, among other things, claims on a quantum meruit and for unjust enrichment. The claim has been further expanded by joining the now incorporated Japanese subsidiary against whom similar claims are made, I think, for breach of contract and for quantum meruit. All of this went wrong because, it is said, in breach of contract, the original quasi partnership, if I can loosely describe it as such, was repudiated by the defendants. It is said they poached the employees of the claimant who were working on the scheme. It is suggested they walked off unfairly with the profits. I hope that is not an inadequate or unfair summary of the claim.[4]There have been orders for security for costs. On 23rd April (the first application), an order was made by the Master giving security for £58,000. On 22nd August, the Master ordered a further £80,000, subsequently reduced to £60,000. Then, in May of last year, Lightman J made further orders in which he directed that in default of payment of the £60,000 as ordered by Master Moncaster and as varied, by 31st May, a date then some three weeks hence, the claim would be dismissed. He made a further order for security to be paid into court in four tranches.[5]There was a successful appeal to this court in which, through the unhappy vagaries of listing, I was a member, and we allowed the appeal against that order. It was known that by then there were further applications for permission to appeal, and Aldous LJ, being the other member of the court, pulled all the rank that seniority entitles him to pull and directed that I deal with those further applications, and when I have finished this judgment, I will carry on with more of them.[6]It was said at that appeal that nothing in our judgment could stop the defendant making a further application if they thought they could justify it. That is what happened. They applied for further security by notice given on 18th December. That matter eventually came before Mr Justice Evans-Lombe and his judgment, as I have said, was given on 21st January.[7]The application before Mr Justice Evans-Lombe was brought on two bases of the Civil Procedure Rules Part 25, rule 13. One was under 13(2)(b), namely that the claimant was a company or other incorporated body ordinarily resident outside the jurisdiction and not a body against whom the claim can be enforced under the Brussels Conventions and the Lagano Convention. The second basis was under sub-paragraph (c), that the claimant was a company or other body, whether incorporated inside or outside Great Britain, and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so. Mr Justice Evans-Lombe had regard to the recent decisions of this court Nasser v United Bank of Kuwait , decided on 11th April 2001 but not well reported even now, and the further decision De Beer v Kanaar , decided on 9th August 2001. The judge said that the difficulty now with the sub-paragraph (b) application was that there was an issue as to whether it was proved that there would be difficulty in enforcing the order in Japan, and so he concluded on page five of his judgment, line 3:
"I do not need to decide whether this is a case which can properly be brought under subrule (2)(b). Suffice it to say that there has been no objection along these lines raised in previous applications in this case for security for costs where that was the only basis upon which security was sought. It seems to me clear that, on the material before me, the case falls under subrule (2)(c) on the basis that the defendants have established that there is reason to believe that the claimants will not be able to pay any order for costs that may be made against them in the event of their failing in the proceedings."
[8](There had indeed been no objection to the earlier applications. But it may be the reason for that was that the Court of Appeal in Nasser had not yet pronounced on the matter and fully spelt out the effect of the European Human Rights Convention on applications for security for costs under that sub-paragraph.)[9]The judge correctly addressed himself to the burden of proving impecuniosity initially falling on the defendant, and he was satisfied from the evidence before him that that was so. We have not allowed any challenge to that finding.[10]He then recorded in paragraph 12 of his judgment on page 5:
"No attempt has been made on behalf of the claimants to adduce any evidence of their current financial state. A last minute application was mentioned to me that such evidence might be available if it could be heard in camera. However, I have to deal with the matter as it is before me. I have no evidence from the claimants as to their ability to pay any order for costs. It seems to me, therefore, that the court's jurisdiction to award security is established. Accordingly, I have the discretion, conferred by subrule (1), to make such an order."
[11]No grounds appeared to me when I considered the matter on paper to interfere with the judge's finding that the discretionary threshold had been surmounted and that he was not correct to say that subparagraph (c) was not satisfied. He therefore went on to consider the exercise of his discretion. He said this:
"I have come to the conclusion that clearly I should do so. [That is make an order.] It is clear that substantial further costs, over and above those which the Court of Appeal was considering, have been incurred and will have to be incurred in this case up to and including the trial of the action which has, in my judgment, reasonably been assessed as likely to last for 20 days. It is clear that, taking the existing security which the defendants held, and the equivalent of security which the Court of Appeal has said they must be treating as holding, nonetheless the defendants are unprotected as to those costs in the event of their success in due course. The question therefore becomes: how much further security should be ordered?"
[12]A word of explanation about that. The matter before us and before Lightman J was also judged upon the basis that there had been a Part 36 order the effect of which gave them, whichever way one looked at it, the added security at a maximum of £300,000, but otherwise of £125,000 or £175,000 - certainly a sum in six figures - in addition to the £118,000 ordered to be paid and actually paid under the Master's orders.

Mr Justice Evans-Lombe said this:

"The question therefore becomes: how much further security should be ordered?"
[14]I will return to that observation in a moment. He decided that it should be £350,000, and he said this on page 7:
"Inevitably at this stage this court, which has little knowledge of the merits of the claims on either side, must paint with a broad brush in ordering such security, and should err on the side of keeping the security well within any sum which it would be reasonable to assume the defendants would recover after on assessment, having successfully defended the proceedings."
[15]It seems to me that the learned judge approached this balancing exercise incorrectly. The question that he had to answer was not simply: how much further security should be ordered? But, in the particular circumstances of this case: should security be ordered at all, given the stage at which the application was made (18th December of last year), the date when the application was decided by him (21st January), and the impending date for this trial fixed for 20 days on 11th February? The 11th February, on my calculations, was three weeks in advance of that judgment. Judgment was given on Monday of last week, this judgment is given on Monday of this week and the trial will start on Monday in a fortnight. He further erred in the application of this broad brush in looking only to whether it would be reasonable to assume that the defendants would recover the money which he was fixing well within any sum that was likely to be recoverable at the end of the day. He did not ask whether the effect of the order would stifle the claim.[16]On that basis, we were prepared to give permission to appeal, and Mr Hildyard, for whose submissions I am grateful, has mounted a spirited defence of the judgment. I hope to do no injustice to the eloquence or the erudition of the submission by summarising it in this way.[17]Firstly, he submitted to us that it was vitally important for us to acknowledge that the ordinary rule is that it is for the defendant to establish the company's impecuniosity. But it is for the claimant, nonetheless, to satisfy the court by evidence that there is no other way in which the secured sum could be provided, whether from shareholders, holding companies, other backers or supporters or howsoever. For that submission he relied on the judgment (referred to for this purpose in the White Book) of NV Yorke Motors (A Firm) v Edwards [1982] 1 WLR 444, and the passage at page 449 where Lord Diplock, albeit dealing with an Order 14 case, nonetheless accepted as correct a concession that, where a defendant seeks to avoid or limit a financial condition by reason of his own impecuniosity, the onus is on the defendant to put sufficient and proper evidence before the court. He submitted that it could not be right if the threshold of impecuniosity were immediately to lead to no order being made on the ground that the very same impecuniosity then led to the stifling of the action. He submitted that the correct approach should be that this is a two-stage process in which the defendant is to prove the initial impecuniosity, and then the claimant is to put in evidence that would justify the inference to be made that an order would shut him off from progressing further at all and so stifle the claim.[18]For this purpose Mr Hildyard relied on Keary Developments Ltd v Tarmac Construction Ltd & Anr [1995] 2 BCLC 395. The passage appears in the report at page 403 in the judgment of Peter Gibson LJ. Peter Gibson LJ, politely and in veiled terms, criticised certain observations of Nourse LJ in the matter of Trident International Freight Services v Manchester Ship Canal Company [1990] BCLC 263. In the copy of the report placed before us there may be a misdescription of plaintiff and defendant in this passage. Peter Gibson LJ says:
"With all respect to him [Nourse LJ], it seems to me that there are two quite separate questions which are relevant. One is whether the condition for the application of s 726 is satisfied. That requires the court to look ahead to the conclusion of the case to see whether the plaintiff would be able to meet an order for costs. On that the defendant [I think he must be meaning plaintiff], accepting the applicability of the section, need put in no evidence. The other question which is relevant, given that an application for security is made at a stage when the trial will not have occurred, is whether the plaintiff company will be prevented from pursuing its litigation if an order for security is made against it. On this, evidence from the defendant [again I think that should be plaintiff] may be needed. The considerations affecting those two questions seem to me to be rather different. For example, a backer might well be prepared to put up money to assist a company to pursue a case when the trial has not yet occurred, but the same backer would be extremely unlikely to put up money after the trial has been unsuccessfully concluded against the company. However, as I have indicated, the Trident case establishes that in certain circumstances it will be proper to draw inferences, even without direct evidence, that a company would probably be prevented from pursuing its claim by an order for security. But, in my judgment, such a case is likely to be a far rarer one than those cases in which the court will require evidence from the plaintiff to make good any assertion that the claim would probably be stifled by an order for security for costs."
[19]Mr Hildyard submits that the claimant in this case had ample warnings from Lightman J in May that he, Lightman J, would have expected evidence to be put in of the difficulties the claimant would have in meeting an order for security for costs. He submits that since none has been put in, there is nothing before us which entitles us to draw the inference. Since section 726 of the Companies Act is a long established justification for the power given by the rules as expressed in subparagraph (c), we should be slow to say that the defendant both wins and loses by proving impecuniosity.[20]There is a great deal of force in the submissions advanced to us, and I do not do them full justice. But I am satisfied that, when the judge came to exercise his discretion, he did not bear in mind what seems to me to be the crucial distinguishing fact in this case, that is the judge gave his judgment three weeks before a 20-day trial was listed for hearing. The claimant already had put up security in actual money, and was to be deemed to have put up further security through the operation of the Part 36 offers. That is one point. Secondly, because the trial is three weeks away, the order of security could not sensibly be made on the usual terms that the trial of the action be stayed. There was little option, following the judge's logic, but to dismiss it. Therein lies, in my judgment, the crucial mistake. To dismiss the claim for the want of putting up £200,000 is in my judgment so oppressive that, whether or not Mr Hildyard is right in his submissions to us that there is a real want of evidence entitling us to draw any inference from this case, even so, I would find that this order is oppressive. To require £200,000 to be found in 10 days otherwise the action is to be struck out goes beyond the proportionality which underpins any exercise of discretion, including this one.[21]I have not dwelt at length upon the effect of Article 6 of the Convention. It is clear that the jurisprudence permits security for costs applications as being within the margin of appreciation of the different states, and so the jurisdiction, as such, is unassailable. But the exercise of jurisdiction still requires proportionality, and in this case it seems to me that it would be quite unjust to shut this claimant out at this late stage.[22]I would therefore conclude that the learned judge erred in principle in failing to have regard to those questions. That entitles this court to exercise its own discretion, and in my judgment, for the reasons I have given, it would be oppressive to order a further security for costs at this late stage.[23]I would allow the appeal and dismiss the order made by Mr Justice Evans-Lombe in that regard.

LORD JUSTICE SEDLEY: I agree.

LORD JUSTICE LONGMORE: What has gone wrong here, in my judgment, is that the judge has made his order without specifically addressing the lateness of the application and the inevitable consequence of such lateness, namely that any order would have to be an unless order if the trial was not to be further adjourned. Any further adjournment now would, of course, be quite impossible. This consequence was not adverted to until seven pages of argument had taken place after the conclusion of the judge's substantial judgment, when Mr Hildyard submitted that the form of order for the first tranche of the £350,000 ordered by way of security should be an unless order. With all respect to the judge, this is a highly material matter, since if the new amount of security cannot be raised, the claimant's case might never be heard and the security already furnished in the not inconsiderable sum of in effect £300,000 will be forfeited. Mr Hildyard is correct to say that the onus is normally on a defendant to show that a claim will be stifled. But the nearer the trial date an application is made, the less important that may be. The immediacy of the trial may well be an equally important consideration. I, for my part, do not read Keary Development v Tarmac Construction Ltd & Anr [1995] 2 BCLC 395 as in any way contrary to this approach.

[26]The balancing exercise that I have indicated was not undertaken by the judge, and it falls to this court to do so. I agree with my Lords that the order made is too oppressive, £200,000 having to be found within 10 days. That is too oppressive from the claimant's point of view and, like my Lords, I would allow this appeal.

Order

Appeal allowed. Paragraphs 4 and 5 of the order ordering security set aside. We allow the claimant the costs of the appeal and the costs of the application for security for costs as made in the court below.

Cited in 3 later judgments