Aidiniantz v The Sherlock Holmes International Society Ltd [2016] EWHC 1392 (Ch)

[2016] EWHC 1392 (Ch)Petition No: 4695 of 2014
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT
IN THE MATTER OF THE SHERLOCK HOLMES INTERNATIONAL SOCIETY LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
On appeal from Registrar Derrett
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Date: 15/06/2016
Before
Mark Anderson QC
Between
Mr JOHN AIDINIANTZPetitionerTHE SHERLOCK HOLMES INTERNATIONAL SOCIETY LIMITEDRespondent
Mr Hugh Sims QC and Mr Christopher Brockman (instructed by Gordon Dadds LLP) for PetitionerMs Niamh O’Reilly (instructed by RPC LLP) for Pinder Reaux and AssociatesHearing Hearing dates: 9, 10 May 2016
JUDGMENTMark Anderson QC :
[1]The facts and the history of the litigation, and the identity of the participants, are dealt with in the principal judgment [2016] EWHC 1076 (Ch). I now have to deal with costs, including an application by Mr Aidiniantz that Messrs Pinder Reaux and Associates, who purported to act for the Company on the instructions of Ms Decoteau and Mr Riley, should be added as a party and ordered to pay Mr Aidiniantz’s costs.[2]I will use the same abbreviations, names and defined phrases as I used in the principal judgment without explaining them again here, but I will provide a brief synopsis of the litigation.[3]On 1 July 2014 Mr Aidiniantz presented a petition to wind up the Company on the insolvency ground. The persons in de facto control of the Company included Mr Riley and Ms Decoteau. In early July 2014 Ms Decoteau retained Pinder Reaux on behalf of the Company to resist the petition on the ground that the Company has a counterclaim against Mr Aidiniantz for some £1.8m. In October 2014 Pinder Reaux were instructed to bring proceedings to enforce it and a claim form was served. The proceedings were stayed when the winding up order was made.[4]In about July 2014 Ms Decoteau appointed Mr Riley as a director and then resigned, leaving him as the sole director. However she continued to involve herself in the affairs of the Company, which by this time were confined to resisting the petition and pursuing the October 2014 claim.[5]Mr Riley’s appointment as a director automatically expired on 31 December 2014 and the Company was left without a director, but no one noticed that that had occurred. Mr Riley and Ms Decoteau continued to give instructions to Pinder Reaux and the petition took its course to a hearing before Registrar Derrett in January 2015. In a judgment handed down in March she ordered that the Company be wound up. On instructions from Mr Riley and Ms Decoteau, Pinder Reaux launched an appeal for which Henderson J granted permission. The appeal was listed for 3 November 2015 before me.[6]On 16 October 2015 Gordon Dadds LLP, Mr Aidiniantz’s solicitors, wrote to Pinder Reaux to question Mr Riley’s status as a director on the ground that his original appointment had been invalid. On 27 October Gordon Dadds issued an application for a declaration on the same ground. The result was that the appeal did not proceed on 3 November but directions were given for a trial of the issue which had been raised. At that hearing, the expiry of Mr Riley’s appointment on 31 December 2014 was raised for the first time in the alternative to the contention that it had never been valid at all. It is that alternative ground of objection which has succeeded.[7]The matter came on for hearing on 11 January 2016. In the principal judgment, circulated in draft in early February, I declared that Mr Riley’s appointment had indeed expired on the date alleged, but rejected the argument that it had never been valid at all.[8]In light of my conclusion Pinder Reaux ceased to act for the Company. At the hearing which gives rise to this judgment the Company was unrepresented. Pinder Reaux were represented by Ms Niamh O’Reilly on instructions from RPC LLP and Mr Aidiniantz by Mr Hugh Sims QC and Mr Christopher Brockman on instructions from Gordon Dadds. Ms Decoteau and Mr Riley appeared before me without legal representation and Ms Decoteau spoke for both of them.[9]Mr Aidiniantz claims his costs from Pinder Reaux. He applies in the alternative for an order that his costs be paid by Ms Decoteau and Mr Riley, who have already been added as defendants for that purpose. At the hearing Ms Decoteau submitted that there should be no order as to costs. She subsequently made written submissions which I agreed to consider, arguing that Mr Aidiniantz or Pinder Reaux should meet the costs which have been paid to Pinder Reaux.

Mr Aidiniantz’s application against Pinder Reaux

[10]The ground for the application against Pinder Reaux is that they purported to act for the Company in bringing the appeal from 1 January 2015 onwards, without any authority to do so. It is a claim for breach of warranty of authority. No application has been made against Pinder Reaux for a wasted costs order under section 51 (6) of the Senior Courts Act 1981. Mr Yapp’s witness statement in response to Pinder Reaux’s evidence indicated that Mr Aidiniantz was seeking such an order, but at the hearing Mr Sims recognised the difficulty of making an application only in a witness statement in response, and did not press for a wasted costs order to be made at this hearing.

Submissions

[11]Mr Sims argued that Pinder Reaux warranted that they had authority to act on behalf of the Company, that warranty was breached, and the breach caused Mr Aidiniantz to lose all the costs he incurred from 1 January 2015 onwards. Mr Sims says that Pinder Reaux are strictly liable for those costs on a solicitor/own client basis. They amount to some £275,000, although that includes some costs incurred in the October 2014 action.[12]In response, Ms O’Reilly relies on ostensible authority. The evidence of Mr John Spyrou of Pinder Reaux is that his firm was first retained on 1 July 2014 by Ms Decoteau who was then a director. At some point, also in 2014, she appointed Mr Riley in her place. So Pinder Reaux were properly instructed by the Company in 2014. Ms O’Reilly argues that Mr Aidiniantz was entitled to assume that Mr Riley’s authority continued until he learned otherwise: Scarf v Jardine (1882) 7 App Cas 345. Pinder Reaux therefore had the Company’s ostensible authority to bring the appeal. There was therefore no breach of warranty.[13]Alternatively Ms O’Reilly relies on section 161 of the Companies Act 2006 which provides that the acts of a person acting as a director are valid notwithstanding that it is afterwards discovered that he had ceased to hold office. She says that section 161 continued to apply even after 16 October 2015, when Gordon Dadds’ letter raised the issue of Mr Riley’s appointment. She says that it was not discovered that Mr Riley’s appointment had terminated until I circulated my draft judgment.[14]Next Ms O’Reilly contends that even if Pinder Reaux were in breach of a warranty of authority, that breach caused no loss. The warranty, if true, would have enabled Mr Aidiniantz to obtain an order for costs against the Company. The basis of this petition is that the Company is insolvent. Therefore the order for costs would have been worthless. Damages for breach of warranty should not put the claimant into a better position than he would have enjoyed if the warranty had been true. She invokes “the important qualification on the entitlement of a contracting party to claim reliance expenditure, which is that he cannot do so in order to escape from a bad bargain; he cannot put himself in a better position than if the contract had been properly performed” (McGregor on Damages 19th ed. at §34-022). It follows, she says, that where the party for whom the solicitor purports to act would not have been able to meet an order for costs, the solicitor is not liable. That was the view expressed by Colman J in Skylight Maritime v Ascot Underwriting [2005] EWHC 15 (Comm).[15]Finally Ms O’Reilly argued that even if she is wrong about everything else, the litigation initiated by the application notice of 27 October 2015 was about the very issue alleged to have been warranted. Solicitors do not warrant the correctness of their client’s case and Mr Aidiniantz could not claim to have relied on any such warranty when litigating to achieve a declaration to the opposite effect.[16]Mr Sims responded that ostensible authority can never defeat a claim for breach of warranty of authority because the warranty is that the agent is actually authorised, not ostensibly so. He points out that ostensible authority has not been argued as a defence to such a claim in any reported case about unauthorised litigation, let alone successfully so. He says that the leading case of Yonge v Toynbee [1910] 1 KB 215 would have been decided differently if ostensible authority provided a defence.[17]Mr Sims argued that section 161 only deals with procedural or similar slips in a person’s appointment and has no application where the appointment was never made or never renewed at all: Morris v Kanssen [1946] AC 459; and further that Pinder Reaux were on notice of the expiry of Mr Riley’s office and that a person with notice can derive no protection from section 161 or ostensible authority.[18]As to the issue whether a breach of warranty caused his client loss, Mr Sims argued that the measure of damages is the amount of costs expended in dealing with the unauthorised proceedings, notwithstanding that the Company in respect of which the warranty was given is insolvent. He says that the comments of Colman J in Skylight Maritime to contrary effect were obiter and wrong. Partly in reliance on the decision of His Honour Judge Seymour QC in Stevenson v Singh [2012] EWHC 2880 (QB) at [78ff], Mr Sims argued that the nature of the remedy depends on the nature of the warranty; and that where the warranty was that impliedly given by a solicitor who conducts litigation, the measure of damages must be the amount of costs thrown away in resisting the proceedings. He points out that in Yonge v Toynbee [1910] 1 KB 215, Buckley LJ said that the damages would be “the amount of the plaintiffs costs thrown away in the action.” In Fernée v Gorlitz [1914] 1 Ch 177 Eve J explicitly found that the loss to be compensated was the costs thrown away in resisting the proceedings. In Stevenson, HHJ Seymour QC at [79] took Fernée as establishing “that, in a case in which a solicitor has acted in breach of his warranty of authority in commencing an action the measure of damages is the actual costs to which the opposite party was put in consequence in having to resist the action”. That was also the order made by Steyn J in Babury Ltd v London Industrial plc (1989) NLJ 1596 where the solicitor had purported to act for a company which had been dissolved.[19]As regards the position after 16 October 2015, Mr Sims says that Pinder Reaux continued to warrant that they acted for the Company and anyway the costs of inquiring into whether the warranty was breached were caused by the breach.

The jurisdiction

[20]In Yonge v Toynbee [1910] 1 KB 215 the Court of Appeal identified the conceptual basis of the liability as compensation for breach of an implied warranty given by the solicitor that he was authorised to act by his client The rationale of the inferred warranty in the context of litigation is that the solicitor is uniquely placed to verify that the person giving him instructions is authorised to do so. Swinfen Eady J said at 233-4:
“The manner in which business is ordinarily conducted requires that each party should be able to rely upon the solicitor of the other party having obtained a proper authority before assuming to act. It is always open to a solicitor to communicate as best he can with his own client, and obtain from time to time such authority and instructions as may be necessary. But the solicitor on the other side does not communicate with his opponent’s client, and, speaking generally, it is not proper for him to do so ... It is in my opinion essential to the proper conduct of legal business that a solicitor should be held to warrant the authority which he claims of representing the client; if it were not so, no one would be safe in assuming that his opponent's solicitor was duly authorised in what he said or did, and it would be impossible to conduct legal business upon the footing now existing; and, whatever the legal liability may be, the Court, in exercising the authority which it possesses over its own officers, ought to proceed upon the footing that a solicitor assuming to act, in an action, for one of the parties to the action warrants his authority.”
[21]A further aspect of the rationale is that “Making the solicitor liable in such circumstances avoids the injustice which would otherwise be caused by the fact that the person for whom the unauthorised solicitor was purporting to act could not himself be made responsible for the opposing party’s costs” (SEB Trygg Liv Holding v Manches [2006] 1 WLR 2276 at 2298).[22]Although the conceptual basis of the jurisdiction is contractual, the court is of course not actually dealing with a breach of contract. As Waller LJ explained in Nelson v Nelson [1997] 1 WLR 233 at 239H, the court is exercising its authority over solicitors as its officers, but is doing so on the footing that the solicitor warrants his authority. A solicitor who breaches the warranty is amenable to the supervisory jurisdiction of the court and may in the court’s discretion be ordered summarily to pay the other party’s costs.[23]As to discretion, Waller LJ said at 241:
“I should finally make clear two things. First, because even in the want of authority case the court is exercising its inherent jurisdiction, it must be right to say that the court ultimately has a discretion. But, second, it is of such importance that solicitors do not commence proceedings without authority leaving the opposing party without even a person or entity against whom an order for costs can be obtained, that it is difficult to contemplate circumstances where, if the lack of authority leads to that result, the discretion would be exercised in favour of the solicitors. The warranty by analogy, however, is not a warranty of solvency or that the costs will be recovered; it is that the plaintiff exists and has authorised the proceedings and no more.”
[24]Although the remedy is discretionary, "It has never been considered to be a bar to the exercise of this jurisdiction that the solicitor acted bona fide and in reasonable reliance upon instructions” (per Steyn J in Babury Ltd v London Industrial plc (1989) NU 1596). In that sense, liability is strict.[25]However the jurisdiction is only to be exercised in clear cases where there are no issues unsuitable for summary disposal. In Babury Steyn J went on to say:
“It might, for example, sometimes in less than clear cut cases be right to leave the aggrieved party to his remedy in an action in damages for breach of warranty of authority against the solicitor. Having made clear that there is no inflexible rule, it is nevertheless right in my view to emphasise that a solicitor who clearly acted without authority, causing by his representation of authority the opposing party to incur wasted costs, must usually expect to be ordered to pay the costs in the exercise of the court's summary jurisdiction.”
[26]In Skylight Maritime Colman J said at [13]:
“The result of the authorities and the demands of the twin objectives of making solicitors accountable for their unauthorised conduct of litigation and yet of protecting them against untested allegations of want of authority is that, whereas in clear cases of breach of warranty of authority and consequent recoverable loss, the court can summarily determine the solicitors’ liability for damages, in cases where there are real issues as to the facts or law, the courts should not do so but should leave the opposite party to start proceedings by issuing a claim for breach of warranty of authority.”

What warranty was given in this case and for what period?

[27]It is common ground that Pinder Reaux gave a warranty in instituting the appeal and in conducting it until Mr Riley’s status was first brought into question on 16 October 2015. Ms O’Reilly did not submit that the warranty was satisfied on the basis that Pinder Reaux did have a client who had authorised the appeal, namely Mr Riley. She accepted that the warranty was that the Company had authorised the appeal. The issue is whether the warranty continued after 16 October 2015.[28]The application for a declaration made on 27 October raised a new issue and initiated a new phase in the litigation. Although raised within an appeal to which the Company was a party, and in which Pinder Reaux were on the record as acting for it, in resisting the application Pinder Reaux were advancing Mr Riley’s claim to be a director. Pinder Reaux and counsel chose to express their position as acting for the Company because that was consistent with the case which they were instructed to advance, but it was obvious to all that that begged the very question in dispute. It was merely incidental to Mr Riley’s position to assert that the Company shared it. Applying ordinary objective principles, a reasonable person in the position of Mr Aidiniantz would not have concluded that in making (and causing counsel to make) submissions to that effect, Pinder Reaux were warranting that Mr Riley was still a director. Legal representatives do not warrant the arguments they make on behalf of their clients. See for example -• SEB Trygg Liv Holding v Manches [2006] 1 WLR 2276 at [66]: “It is important to bear in mind that generally a solicitor conducting proceedings does not warrant what he says or does on behalf of his client. Thus he does not warrant that his client, the named party to the proceedings, has title to sue, is solvent, has a good cause of action or defence or has any other attribute asserted on his behalf’; and• Nelson v Nelson [1997] 1 WLR 233 per Peter Gibson LJ at 237: “He does not warrant that the client has a good cause of action or that the client is solvent”.[29]Moreover the rationale of inferring a warranty of authority, identified in paragraph 20 above, does not arise where the very issue in the litigation is the authority alleged to have been warranted. It is not the case that Mr Aidiniantz was unable to make his own inquiries about Mr Riley’s status as a director. After 16 October he was exactly as well placed as Pinder Reaux to inquire whether or not Mr Riley’s appointment had expired. A person equally well placed as the agent to know whether the agent’s authority has come to an end does not have the benefit of an implied warranty of authority: Smout v Ilbery (1842) 10 M and W 1 as explained in Yonge v Toynbee by Buckley LJ at 227-228. And in Babury Ltd v London Industrial plc (1989) NLJ 1596, Steyn J observed that the general rule (that a warranty is given) “may sometimes have to yield to special circumstances, for example in a case where the opposing party’s solicitor is informed that there was a doubt about the solicitor's authority.”[30]Pinder Reaux did not need to inform Mr Aidiniantz that there was a doubt about their authority. He knew that he could not, in the words of Buckley LJ, safely assume it. In asserting that they did have authority, Pinder Reaux were advancing Mr Riley’s case, not warranting it. A solicitor does not warrant his authority where that issue is known to be controversial and the parties are engaged in litigation to find the answer.[31]Neither is the further aspect of the rationale (mentioned in paragraph 21 above) present in this case. Mr Aidiniantz never expected to be awarded his costs against the Company. He knew all along that his only chance of recovering costs was against Mr Riley and Ms Decoteau. He still has that chance.[32]I therefore conclude that Pinder Reaux ceased to give any warranty as to their authority after Mr Aidiniantz’s assertion that Mr Riley was not a director of the Company on 16 October 2015. However they did give the warranty mentioned in paragraph 27 above for the period before that assertion. Was the warranty breached? The “better position” controversy

Was the warranty breached?

[33]Although the issue summarised in paragraphs 14 and 18 above was argued in the context of causation and quantification of loss, for reasons I will explain the question whether a claimant can recover damages providing a better outcome than if the warranty had been true is relevant to the defences based on ostensible authority and section 161. I will therefore address that issue before dealing with those defences.[34]In Skylight Maritime Colman J set out his analysis as follows; “15. The question that then arises is what is the appropriate measure of loss?16. It is important not to lose sight of the fact that the relevant breach of warranty is the non-existence of the authority that was warranted. Therefore, the opposite party or promisee has lost the benefit of the position he would have been in had the warranty been true. In other words, the court is concerned to quantify what benefit has been lost by reason of the fact that the supposed client is not after all a party to the proceedings. In the ordinary case, the promisee will have lost the ability to recover from that client the costs of the proceedings in the event of a costs order in the promisee’s favour. This is usually quantified as the amount of costs thrown away by the promisee in relation to the proceedings from the first participant in them of the solicitor until the promisee is apprised of the solicitor's lack of authority.17. In Firbank's Executors v. Humphreys (1886) 18 QBD 54, Lord Esher MR stated at p60: ‘The damages under the general rule are arrived at by considering the difference in the position he [the person acting in reliance on the warranty] would have been in had the representation been true and the position he is actually in consequence of its being untrue.'18. In re National Coffee Palace Company (1883) 24 Ch D 367 there are observations by Brett MR at 372 and by Bowen LJ at 375 to the effect that if the supposed principal is insolvent the promisee will not be entitled to recover substantial damages from the warrantor of authority because he would not have been able to recover from the suppose principal if the warranty had been true.19. In Habton Farms v. Nimmo [2004] QB 1 Clarke LJ in the Court of Appeal, with whom Auld LJ agreed, approved file following passage in McGregor on Damages 16th Ed in relation to breach of warranty of an agent's authority to contract on behalf of an apparent party to the contract at page 18: ‘1311. Given an enforceable contract had the agent had authority and given a solvent principal, the damages will be based on the measure of damages that the plaintiff could have recovered in an action for breach of contract against the principal had the principal been bound, and this will generally give him damages for the loss of his bargain. The particular measure falls to be judged in accordance with the particular type of contract that the defendant had warranted his authority to negotiate, and illustrations in the cases range over a variety of contract types.’20. Accordingly, a claim for breach of warranty of authority cannot be deployed to put the promisee in a better position than if the warranty had been true. Thus, if a supposed client is insolvent, substantial damages for breach of a solicitor's warranty of authority will not normally be recoverable because the promisee would not have been able to recover costs against the client even if the solicitor had authority to act.”[35]I do not accept Mr Sims' argument that Colman J’s analysis was obiter. He decided that he could not exercise the court’s summary jurisdiction because there were factual complications, one of which was whether the purported principal was solvent or not at the relevant time: see paragraph 60 of the judgment. I should follow that decision and will do so.[36]I will however briefly address Mr Sims’ submissions as to why the decision was wrong, not least because the contractual nature of the liability raises issues which did not arise in Skylight, namely the availability of ostensible authority and section 161 of the Companies Act 2006 as defences to a claim for breach of warranty of authority.[37]The Court of Appeal observed in SEB Trygg Liv Holding v Manches [2006] 1 WLR 2276 at 2299 that “Although this contractual theory presents some conceptual problems in the case of a solicitor conducting litigation, this is nevertheless the established basis for the liability.” I accept that this does not mean that the court acts on a legal fiction that there is a contract. I accept also that the nature of the warranty must inform the remedy for its breach, as submitted by Mr Sims in reliance on the words of Judge Seymour QC in Stevenson v Singh [2012] EWHC 2880 (QB). However neither of these points leads to the conclusion, and there is nothing in Judge Seymour QC’s judgment to suggest, that costs may be quantified on the footing of damages for breach of warranty whilst ignoring some of the contractual principles altogether. The warranty given by solicitors in litigation has never been treated as conceptually different from the warranty given in non-contentious business nor from the warranty given by other types of agent in non-legal business. Although the nature of the warranty will determine the remedy, it would be surprising if that meant that established contractual principles were disregarded.[38]In my judgment none of the cases relied on by Mr Sims (Yonge v Toynbee, Fernée v Gorlitz and Babury v London Industrial) is authority for the proposition that damages for breach of warranty of authority may put the claimant into a better position than if the warranty had been true. In Babury the supposed principal did not exist. In Yonge and in Fernée the clients were under a disability and therefore not able to give instructions. In all three cases the warranty could never have been true and so there was no possibility that damages assessed as wasted expenditure would put the plaintiffs into a better position than they would have enjoyed if the warranty had been true.[39]For these reasons, although I accept that the usual measure of damages in the litigation cases will be the costs that have been wasted, that will not be so if that would put the claimant into a better position than if the warranty had been true.

Ostensible authority

[40]Pinder Reaux were properly retained by Ms Decoteau on behalf of the Company in 2014 and notice of the termination of their retainer was not given to Mr Aidiniantz. He would therefore have been entitled to insist that the Company was bound by the actions which Pinder Reaux had taken on its behalf: Scarf v Jardine (1882) 7 App Cas 345. Pinder Reaux were ostensibly authorised to act for the Company. Mr Sims did not submit that his own client had notice that they were not authorised.[41]The same conclusion arises from the rule in Royal British Bank v Turquand (1856) 6E&B 327, which was summarised by Lord Simmonds in Morris v Kanssen [1946] AC 459 as follows (at 474):
"Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular."
[42]However Pinder Reaux gave a warranty that the Company had authorised the appeal. That was not the case. The warranty was untrue. So the question arises whether ostensible authority is enough to satisfy a solicitor’s warranty of authority.[43]In Rainbow v Howkins [1904] 2 KB 322, an auctioneer knocked a horse down to the plaintiff in error, at a price below a reserve of which the plaintiff was unaware. In so doing the auctioneer purported to make a contract of sale on the owner’s behalf and warranted his authority to do so. The auctioneer noticed the error before a memorandum of sale had been made, so the sale was unenforceable. The auctioneer refused to proceed with the sale and the plaintiff sued him for breach of his warranty of authority, claiming the profit he would have made if the sale had gone ahead. He lost. The Divisional Court held that the auctioneer had ostensible authority to sell the horse to the plaintiff and therefore the plaintiff could have enforced the contract but for the want of a memorandum. “Here the answer to the plaintiff’s claim on the ground of breach of warranty or misrepresentation of authority is that there was none. The defendant’s principal was as much bound as if he had made the bargain himself.” So although the auctioneer was not actually authorised to sell the horse to the plaintiff, his ostensible authority made good the warranty. The case was not decided on the basis of a breach which caused no loss. There was no breach.[44]That case demonstrates no more than that ostensible authority provides a defence to a claim for breach of warranty of authority, if and to the extent that it puts the claimant into the same position as he would have enjoyed if there had been actual authority. In my judgment this is but a reflection of the principle that a claim for breach of warranty cannot put the claimant into a better position than if the warranty had been true.[45]If Mr Sims had been right that the measure of loss is always the amount of costs expended in the unauthorised litigation, even where the supposed principal is insolvent, then I would have accepted that ostensible authority could not provide a defence. It is the existence of the ostensible authority which causes the claimant to incur the costs, and it would be wrong if the same facts barred him from a remedy he would otherwise have. Ostensible authority is a doctrine intended to protect third parties against the want of authority of an apparent agent, not the other way round. However this consideration falls away if one accepts that damages cannot put the claimant into a better position than if the warranty had been true. Ostensible authority is invoked to prevent a claimant, whose only cause of action depends on X being untrue, from being put into a better position than if X were true.[46]If ostensible authority does not have the effect of putting the claimant into the same position as actual authority would have done, then it does not provide a defence to a claim for breach of warranty of authority. Yonge v Toynbee [1910] 1 KB 215 is an example. The solicitors who acted for Mr Toynbee may well have had ostensible authority under the principles of Scarf v Jardine, but the steps taken in the litigation purportedly on behalf of Mr Toynbee could not have been validated by that ostensible authority because Mr Toynbee was under a disability. Similar considerations applied in Fernée v Gorlitz. Such considerations do not apply here.[47]For these reasons, I consider that Pinder Reaux’s ostensible authority provides an answer to Mr Aidiniantz’s claim for breach of warranty of authority, for the period during which the ostensible authority endured - until Mr Aidiniantz appreciated that he could no longer safely assume that they were acting for the Company which I take as 16 October 2015. I have already decided that after that period, no warranty was given.[48]However a further consideration arises. If the warranty had been true, Mr Aidiniantz would have had no reason to cause his solicitors to write the letter of 16 October 2015, to issue his application dated 27 October, to cause the hearing of the appeal not to proceed on 3 November and to engage in the lengthy hearing before me in January I must consider whether the costs of that dispute were the result of Pinder Reaux’s want of actual authority. If they were, then their ostensible authority was not as good for Mr Aidiniantz as actual authority and the defence of ostensible authority would not avail Pinder Reaux to the extent of those costs.[49]In my judgment, the cost of litigating this issue were not caused by Pinder Reaux’s lack of actual authority before the issue was raised. They were caused because Pinder Reaux’s ostensible authority came to an end in controversial circumstances. Pinder Reaux did not warrant that their authority would continue for any particular period into the future; neither did they warrant that their authority would not expire in controversial circumstances which could give rise to expensive litigation to establish that expiry.[50]In principle the costs of litigation to decide whether a warranty of authority was false may be recoverable as damages for its breach. Such was the outcome in Collen v Wright (1857) 8 E&B 647. However in that case the costs were incurred by an unsuccessful attempt to establish that the warranty was true. The reverse is the position here. Mr Aidiniantz preferred the warranty to be untrue and incurred costs in order to benefit from the better position into which he perceived its falsity would put him. Whether or not it was actually a better position, it was not forced upon him by the fact that Pinder Reaux had not had actual authority. In no sense were these costs a loss resulting from the fact that the authority, while it lasted, had been ostensible not actual.[51]Moreover it was agreed for the purpose of these proceedings that Mr Aidiniantz was the sole living member of the Company. He could therefore have chosen to allow the appeal to proceed. If he had thought that the truth of the warranted position was preferable to its falsity, he would have done so. Even without the peculiar feature that he was the Company’s only member, he did not need to deploy the point about Mr Riley’s authority to bring the appeal to an end. He could have let matters take their course. His discovery of the defect in Mr Riley’s appointment offered him the opportunity of being in a different position than if the warranty had been true, but did not compel him to be. He obviously calculated that his position would be better if the warranty was untrue than if it was true. That was his preferred outcome. If the fact that the authority was ostensible results in the claimant being in a better position than if it had been actual, for reasons already explored he cannot complain of breach of warranty of authority.[52]I must not be taken as criticising Mr Aidiniantz for challenging Mr Riley’s status instead of getting on with the appeal on its merits. His challenge was resisted and was successful. Many (perhaps most) in his position would have made the same choice. It may seem odd that his claim for costs is lost because it was open to him, but he chose not, to allow an unauthorised appeal to proceed against his interests. I think that the apparent oddity disappears when one comes back to the starting point, which is that a solicitor’s warranty of authority imposes no-fault liability and is therefore narrowly confined to being that the solicitor has a client against whom an order for costs can be made. Only the risk of the solicitor having no client is allocated to the solicitor without proof of fault. The warranty offers protection on a no-fault basis, but offers no greater protection than that. I agree with Mr Sims that the nature of the warranty determines the remedy, but that is precisely why there is no remedy in this case. If the claimant wants greater protection or fuller redress than is offered by the narrow no-fault warranty of authority, he has to look to other means of redress and assume the burden of proving that the solicitor was guilty of improper, unreasonable or negligent behaviour, or of establishing some other grounds for making a costs order against him. Companies Act 2006, section 161[53]I heard full argument about the defence based on section 161 and will deal with it in case I am wrong on other matters.[54]Section 143 of the Companies Act 1929 provided that “The acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification.” In Morris v Kanssen [1946] AC 459, Lord Simonds, with whom the rest of the House agreed, said of section 143 (emphasis supplied):
“There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all. In the first case it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose; in the second case there is not a defect, there is no act at all. The section does not say that the acts of a person acting as director shall be valid notwithstanding that it is afterwards discovered that he was not appointed a director. Even if it did, it might well be contended that at least a purported appointment was postulated. But it does not do so, and it would, I think, be doing violence to plain language to construe the section as covering a case in which there has been no genuine attempt to appoint at all. These observations apply equally where the term of office of a director has expired, but he nevertheless continues to act as a director, and where the office has been from the outset usurped without the colour of authority.”
[55]However section 161 of the Companies Act 2006 contained new provisions not found in its predecessors:
“(1) The acts of a person acting as a director are valid notwithstanding that it is afterwards discovered— (a) that there was a defect in his appointment; (b) that he was disqualified from holding office; (c) that he had ceased to hold office; (d) that he was not entitled to vote on the matter in question.” (a) that there was a defect in his appointment; (b) that he was disqualified from holding office; (c) that he had ceased to hold office; (d) that he was not entitled to vote on the matter in question.”
[56]In my judgment Morris v Kansscn dealt with the words now to be found in section 161(l)(a) (defect in appointment) and 161(l)(b) (want of qualification), but not with the new paragraph 161(l)(c). It is easy to understand why a failure to appoint or reappoint someone is not a defect in his appointment or reappointment, so section 161(a) would not apply. But the 2006 Act was intended to widen the circumstances in which section 161 was to operate by adding two new subparagraphs, (c) and (d), dealing with situations with which the section had not previously dealt, one being that the purported director had in fact ceased to hold office and had not been reappointed. Gore Brown on Companies at 13[25] supports this view.[57]I do not think it helpful to ask if what has occurred is a “slip in the appointment” as Mr Sims suggested. That phrase was used in Morris v Kansscn to explain their Lordships’ decision in that case, and should not be taken as a gloss to the words of section 143, and obviously not to the new words of section 161. I can see nothing in section 161(1)(c) to suggest that it only applies where the cessation of office was caused by some, but not other, circumstances, and there is no reason why it should not apply where a director has ceased to hold office upon expiry of his appointment. I therefore reject Mr Sims’ submission on that point.[58]Mr Sims next says that the section does not apply because Pinder Reaux were on notice of the defect in Mr Riley’s appointment. Ms O’Reilly retorts that Pinder Reaux’s state of mind is irrelevant. She says that section 161 validates Mr Riley’s instructions to Pinder Reaux in favour of Mr Aidiniantz unless Mr Aidiniantz was himself on notice of the expiry of Mr Riley’s appointment.[59]It was decided by the Court of Appeal in Kanssen v Rialto (West End) Ltd [1944] 1Ch 346,which went to the House of Lords as Morris v Kanssen, that section 143(and therefore section 161) does not validate acts in favour of a person who had notice of the defect. That issue did not arise on appeal, but Lord Simonds summarised the Court of Appeal’s reasoning as being that a person who invokes section 143“must be subject to the same obligation as if he was relying on the general law as stated in Royal British Bank v Turquand”. One aspect of that obligation is to make proper inquiry if put on notice of the true position. For that reason it was decided in Morris that the rule in Turquand does not apply to validate acts in favour of directors who participated in the impugned transaction, because directors have a duty to see that the affairs of the company are properly conducted. The modem expression of that duty is to be found in section 171 of the Companies Act 2006.[60]The alignment of section 161 with the rule in Turquand on the issue of notice leads me to the conclusion that a sole director cannot invoke section 161 to validate a transaction which was invalid because of some defect caused by a breach of his duty to see that the affairs of the company are properly conducted. The Court of Appeal so held, not in relation to section 161 but in relation to (what is now) section 40 of the 2006 Act, in Smith v Henniker-Major [2003] Ch 182 and I think that that reasoning applies in this case.[61]It would therefore not be open to Mr Riley to rely on section 161 as validating this appeal, because he was in breach of section 171, and such validation cannot have been achieved merely because he appointed solicitors to act on his behalf. For that reason Ms O’Reilly is right that Pinder Reaux’s state of mind does not come into the matter. In my judgment section 161 validates unauthorised actions in favour of those dealing with a company. It does not validate hostile actions which persons dealing with the company do not want to be validated, such as litigation against them. So the appeal was not actually validated by section 161 because Mr Aidiniantz chose not to invoke the protection which was offered.[62]However the fact remains that he could have done so if he had wanted the warranted position. So for the same reasons as apply in the case of ostensible authority, I think that Pinder Reaux are entitled to rely on section 161 as providing a defence to the claim for breach of warranty of authority for the period before the expiry of Mr Riley’s appointment was discovered, which was I assume shortly before 3 November 2015. I reject Ms O’Reilly’s contention that the defect was not discovered until I circulated my draft judgment. Everyone had notice of the point by 3 November. Indeed by the time of the hearing in January no one was arguing that Mr Riley was in fact still a director. The only point taken was laches. Quantification of loss[63]For reasons already explained, even if I had found Pinder Reaux in breach of the warranty mentioned in paragraph 27 above, the costs incurred during the period of the warranty would not be recoverable because the warranty was that the Company had authorised the appeal, and the Company was never going to pay the costs anyway.[64]If I had decided that the costs of litigating the issue were in principle caused by Pinder Reaux’s lack of actual authority, that would not have caused me to award them pursuant to the summary jurisdiction. If the warranty had been true, the appeal would have proceeded. If it had succeeded, further expensive litigation would have been inevitable. The claim which had been instituted in October 2014 would have remained to be litigated and there would have been further litigation about who were the members of the Company and therefore who was entitled to appoint directors. Mr Riley’s standing as a director would therefore have remained unresolved and the costs of resolving it would have been incurred sooner or later. A further winding up petition would have been likely at some point as well.[65]All of that would only have occurred if the appeal had been allowed. For these reasons I could not have decided whether an award of the costs occasioned by the dispute about Mr Riley’s appointment would have put Mr Aidiniantz into a better position than if the warranty had been true. This would not have been a case suitable for summary disposal.[66]The same considerations would have applied if I had decided that damages could in principle be assessed on the reliance expenditure basis. That would have involved inquiry into what would have happened if Pinder Reaux had not given the warranty, which is tantamount to asking what would have happened if no solicitor had acted. Judging by what happened in this case after Pinder Reaux did cease to act, when Ms Decoteau continued to purport to represent the Company without their services (even after I had delivered a draft of my judgment and after it had been handed down), I could not have been satisfied that Mr Aidiniantz’s costs were caused by Pinder Reaux’s warranty even as reliance expenditure. Conclusion[67]I decline to exercise the court’s supervisory jurisdiction over Pinder Reaux to make an order for costs against them. I do not consider that the basis of the liability is made out. If I am wrong about that, the quantification of the liability would not have been suitable for summary disposal.[68]I do not have to exercise a discretion in these circumstances but the contractual basis of assessment seems to me to give full effect to the merits in this case. The want of authority has not left Mr Aidiniantz without anyone from whom he can recover costs. He has been left with exactly the same persons as he believed all along he would have recourse against.[69]I will add Pinder Reaux as a party and dismiss Mr Aidiniantz’s claim against them. Costs under section 51 Senior Courts Act 1981 The claim against Pinder Reaux by Ms Decoteau and Mr Riley[70]In the absence of an application for wasted costs, there is no jurisdiction pursuant to which I could order Pinder Reaux to reimburse the costs paid to them as suggested by Ms Decoteau in her written submission after the hearing. Ms Decoteau made very serious allegations about Pinder Reaux’s conduct which she should not have made, because they were irrelevant to any issue before me. Pinder Reaux were unable to respond to them because they were bound to maintain the Company’s privilege. The claim against Ms Decoteau and Mr Riley by Mr Aidiniantz[71]Mr Aidiniantz claims that his costs of the appeal, and in light of my decision in the main judgment his costs below after 31 December 2014, should be paid by Mr Riley and Ms Decoteau.[72]Mr Aidiniantz has made an application to Registrar Derrett that Ms Decoteau and Mr Riley pay his costs of the proceedings before her, and that application is still outstanding. An award of costs against a non-party involves exercising a wide discretion having regard to the matters set out in CPR 44.2, about which I know very little as regards the proceedings before the Registrar. I am in no position to deal with that application and must leave that to the Registrar. This also makes it difficult for me to decide the application in respect of the costs of the appeal, at least before the application notice of 27 October 2015. The appeal was an extension of the opposition to the winding up petition. Therefore if Registrar Derrett decides that the costs before her should be borne to any extent by Ms Decoteau and/or Mr Riley, it seems likely (without deciding the matter) that a similar order would follow in respect of the costs of the appeal up to 27 October. For these reasons I think that the issue of those costs are best left to Registrar Derrett as well.[73]However different considerations apply in respect of the proceedings concerning the application made on 27 October 2015. As I have already indicated, the real respondents to that application were Ms Decoteau and Mr Riley. I include Ms Decoteau because she and Mr Riley have made common cause throughout this dispute. Both have given instructions to Pinder Reaux on behalf of the Company. Ms Decoteau was not a director at any material time except at the very outset of Pinder Reaux’s retainer, but she entered that retainer on behalf of the Company. It was she who spoke for Mr Riley at the hearing before me and she has said nothing to me to suggest that she has not been actively involved in the litigation. Indeed she admits that she funded at least some of the sums paid to Pinder Reaux.[74]I was told at the hearing in January that Ms Decoteau intended to bring a claim that she was a member of the Company. She and Mr Riley were obviously very keen to retain control of the Company. They instructed Pinder Reaux to resist the application of 27 October 2015 for that reason. It was Mr Riley’s and Ms Decoteau’s own dispute. They controlled the litigation and they were the real parties. The matters discussed in paragraph 28 above are also relevant here.[75]I conclude that this application was not resisted by the Company for its benefit. It was resisted by Mr Riley and Ms Decoteau for their own perceived benefit. I therefore conclude that this is a case which is outside the ordinary run of cases which parties defend for their own benefit and at their own expense. I direct that Ms Decoteau and Mr Riley should in principle pay any costs to which Mr Aidiniantz may be entitled in the exercise of my discretion on the footing that they were the true respondents to the application of 27 October 2015.[76]The relevant rule is therefore CPR 44.2:(1) The court has discretion as to— (a) whether costs are payable by one party to another; (b) the amount of those costs; and (c) when they are to be paid.(2) If the court decides to make an order about costs— (a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but (b) the court may make a different order. (1) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including— (a) the conduct of all the parties; (b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and (c) any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply. (2) The conduct of the parties includes— (a) conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction—Pre-Action Conduct or any relevant pre-action protocol; (b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; (c) the manner in which a party has pursued or defended its case or a particular allegation or issue; and (d) whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.(3) The orders which the court may make under this rule include an order that a party must pay- (a) a proportion of another party’s costs; (b) a stated amount in respect of another party’s costs; (c) costs from or until a certain date only; (d) costs incurred before proceedings have begun; (e) costs relating to particular steps taken in the proceedings; (f) costs relating only to a distinct part of the proceedings; and (g) interest on costs from or until a certain date, including a date before judgment.(4) Before the court considers making an order under paragraph (6)(f), it will consider whether it is practicable to make an order under paragraph (6)(a) or (c) instead.[77]I have first to decide whether to make a costs order at all. I think that I should. Costs have been incurred in litigating the issue of who was legitimately in control of the Company in which both sides had perceived personal interests. Mr Aidiniantz is the clear winner since, as a result of the application, he has succeeded in having the appeal dismissed and therefore in putting the Company under the control of a liquidator and out of the control of Mr Riley and Ms Decoteau. His success has not been complete because he achieved a decision that Mr Riley ceased to be a director on 31 December 2014, whereas he sought a decision that his original appointment was invalid. However he is the clear winner and has incurred costs in vindicating his position. I should make an order for costs and the starting point is that it should be in his favour.[78]In the exercise of my discretion I think it right that Mr Aidiniantz should not recover all of his costs since 27 October. I do not think it helpful to count up the number of issues on which he succeeded or failed - that just leads to confusion as to what counts as an issue. In my judgment the really significant point is that Mr Aidiniantz’s argument that Mr Riley was not qualified for appointment as a director - the membership requirement - occupied a very significant proportion of the time taken at the hearing and I have no doubt of both sides’ time in preparing for it. It was that argument which required me to consider the history of the family’s dealings back to 2012, in particular the earlier litigation and its fall-out. The hearing in January occupied four days. The Article 32 point could have been resolved within a much shorter timescale.[79]Another matter to be taken into account is the timing of the application on 27 October, less than a week before the hearing of the appeal was due to commence. I accept Mr Yapp’s evidence that none of Mr Aidiniantz’s legal team had thought of the membership requirement point until shortly before 16 October, but Mr Yapp’s witness statement said nothing about Mr Aidiniantz’s own awareness of the point and the contents of his 2013 Defence as related in paragraph 23 of the principal judgment suggest that he was aware of it, at least then. However, although I think that the timing of the application limited the amount of progress we were able to make at the hearing on 3 November, so did the claim that Mr Riley was a member, supported by minutes of meetings which later turned out to have been fabricated. I take all these matters into account.[80]A further matter to be taken into account is Mr Aidiniantz’s conduct of the case on 11 January 2016 as recounted in paragraph 47 and 48 of the principal judgment, which I described as unfortunate. That conduct lengthened the hearing. I also, however, have regard to the (partially) counterbalancing matters mentioned in paragraphs 50 and 51 of the judgment.[81]I have to consider the conduct of the paying parties as well. The deployment of the false documents described in paragraphs 39 and 40 of the judgment was conduct from which neither Mr Riley nor Ms Decoteau have distanced themselves, and in which Ms Decoteau was personally involved; and the impact of that conduct as described in paragraphs 43 to 45 of the principal judgment was significant. Two interlocutory hearings were required and a great deal of Mr Aidiniantz’s resources must have been devoted to the issue. I must take into account the seriousness of this conduct itself, as well as the serious impact it must have had on Mr Aidiniantz’s costs, in deciding the extent to which his costs should be met by Ms Decoteau and Mr Riley.[82]Taking all these factors into account, I order that Ms Decoteau and Mr Riley be jointly and severally liable for 60 per cent of Mr Aidiniantz’s costs of and occasioned by his application dated 27 October 2015, to be assessed on the standard basis if not agreed. Obviously the conduct mentioned in the preceding paragraph would have merited an order for assessment on the indemnity basis, but I have taken that into account in deciding the overall percentage.[83]I have evidence that invoices rendered to Mr Aidiniantz since the date of the application total £274,374 but am told by Mr Brockman on instructions that only £216,734 can be unarguably attributed to the application. Sixty per cent of that figure is roughly £130,000. Under CPR44.2(8) where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs unless there is good reason not to do so. Despite submissions made to me by email by Ms Decoteau, I can see no good reason here so Ms Decoteau and Mr Riley must make an interim payment. I accept Ms Decoteau’s submission, which is true in this case as in most others, that much of Mr Aidiniantz’s claim for costs might be discounted on detailed assessment, so I order that £60,000 be paid on account of the costs order. The costs of the application against Pinder Reaux[84]The order made above does not apply to Pinder Reaux’s or Mr Aidiniantz’s costs of Mr Aidiniantz’s application against Pinder Reaux. In that application Pinder Reaux were the successful party and Mr Aidiniantz the unsuccessful one, and I can see no reason for displacing the general rule. Mr Aidiniantz must pay Pinder Reaux’s costs of that application on the standard basis. This order applies to the hearing of 9 and 10 May and Pinder Reaux’s associated costs of preparing to deal with Mr Aidiniantz’s application against them. However this order applies only to Pinder Reaux’s costs of resisting Mr Aidiniantz’s application. It does not apply to their costs of dealing with Ms Decoteau or Mr Riley generally (otherwise than at the May hearing), only to costs properly attributed to Mr Aidiniantz’s application.[85]I am told that those costs amount to £26,000 and I order that Mr Aidiniantz pays half that amount on account.[86]I reject Mr Brockman’s submission that Ms Decoteau and Mr Riley should pay some of those costs instead of Mr Aidiniantz. Although dealing with Ms Decoteau’s contribution in preparing for the hearing would have been time-consuming for Pinder Reaux, it was Mr Aidiniantz who brought Pinder Reaux before the same court in the same hearing as Ms Decoteau and Mr Riley and I do not think that he can escape paying some of Pinder Reaux’s costs just because they were increased by other parties whom he had also brought before the court.[87]The order mentioned in paragraph 82 against Mr Riley and Ms Decoteau above does not extend to Mr Aidiniantz’s costs of his application against Pinder Reaux nor to his costs of 9 and 10 May and subsequent costs in working out the order. Although he made a successful application for costs against Mr Riley and Ms Decoteau, the time taken in preparing to advance that application is likely to have been, and in advancing it at court was, insignificant compared with the time taken by his application against Pinder Reaux.[88]I have considered the lengthy submissions made by email by Ms Decoteau and indeed the preceding paragraph reflects my agreement with them on the only aspect of the case about which the submissions were invited. The rest of her submissions i. continued to make inappropriate allegations against Pinder Reaux despite her having seen a draft of this judgment including paragraph 70. There is no application for wasted costs against Pinder Reaux. ii. were largely based on the premise that my judgment above (which she had seen in draft) is wrong. I cannot take that possibility into account when deciding costs.

Cited in 2 later judgments