Merchantbridge & Co Ltd & Anor v Safron General Partner 1 Ltd [2011] EWHC 1524 (Comm)

[2011] EWHC 1524 (Comm)Case No 2003 FOLIO 884
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 15 th June 2011
Before
HIS HONOUR JUDGE MACKIE QC
Between
(1) MERCHANTBRIDGE & CO LIMITEDClaimant(2) SAFRON ADVISORS LIMITEDClaimant(1) SAFRON GENERAL PARTNER 1 LIMITEDDefendant- and -, (1) SAFRON GENERAL PARTNER 1 LIMITED Defendant, (2) H E MOHD AL ZUBAIR (3) ZENT INTERNATIONAL LIMITED (4) DEUTSCHE BANK (SUISSE) SA (5) BANKERS TRUST INTERNATIONAL FINANCE (JERSEY) LIMITED (6) ISLAY HOLDINGS LIMITED (7) WICKLOW SECURITIES LIMITED (8) SOLID INVESMENT HOLDINGS LIMITED (BVI)(9) TELCOM VENTURES LLC (10) DEUTSCHE BANK AG Defendants (Costs Only) for (1)(1) MERCHANTBRIDGE & CO LIMITED (2)(2) SAFRON ADVISORS LIMITED Claimants
Mr John Wardell QC and Mr Andrew Mold (instructed by Brown Rudnick LLP) for ClaimantsMr Matthew Collings QC (instructed by Farrer & Co) for 2 nd, 3 rd,6 th and 7 th DefendantsMr Stephen Midwinter (instructed by Osborne Clarke) for 4 th, 5 th and 10 th DefendantsHearing Hearing dates: 18 and 19 April 2011
JUDGMENT
[1]This is an application by the Claimants for costs orders against non-parties under Section 51 of the Senior Courts Act 1981. It is a further example of how these applications which were once intended to be short, prompt and summary exercises have become very expensive and time consuming satellite litigation. It is ten years since the events which have given rise to this claim arose; it is almost five years since I gave judgment at the trial. No party has gained anything from this case, only the lawyers have won. The two main protagonists have both died. In recent times this dispute has been only about who should bear the high costs fruitlessly incurred. At the trial of the action itself two Counsel appeared. At the hearing of this satellite application four Counsel have appeared, two of them leading Counsel. This has been a depressing saga.

The Parties to this Application

[2]The first Claimant (“Merchantbridge”) assigned its rights to this litigation to the second Claimant in 2004. The first Defendant (“SGP1”) is a Cayman Islands company which was the general partner of a limited partnership, Safron Partners 1 LP which operated an investment fund (“the Fund”). SGP1 acted as fund managers. I do not repeat background information about the parties and the disputes between them which is set out in my judgment dated 8 June 2006 following the trial of the action. The other nine defendants are all said to be investors in the Fund or involved with funding the costs of the defence of this action. These defendants fall into 3 camps.[3]First there are the second (“H E Al Zubair”), third (“Zent”), sixth (“Islay”) and seventh (“Wicklow”) Defendants for whom Mr Matthew Collings QC appears. H E Al Zubair paid £78,621 from an account of his, it is said (and I have no reason to doubt), on behalf of Zent. Islay funded the defence in the sum of £78,635, it says (and I have no reason to doubt) on behalf of Wicklow a company in the same group for which it provides management services.[4]Secondly, there are the fourth (“DB Suisse”), fifth (“BTI”) and tenth (“DB AG”) Defendants for whom Mr Stephen Midwinter appears. DB Suisse admits paying £78,351.16 towards SGP1’s defence costs. I have no reason to doubt the evidence from DB Suisse that it made the payments (after DB had acquired the Bankers Trust group) because the investor BTI had no bank account itself. DB AG is the parent company and made no contribution itself.[5]Thirdly there are the eighth (“Solid”) and ninth (“Telcom”) Defendants who have not participated. It seems clear that Solid contributed £78,635 towards the defence costs and Telcom £46,466 being 22% and 13% of the total funding of £360,888.[6]The Claimants contend that the second to tenth Defendants should be ordered to pay the claimant’s costs of the proceedings because they funded, substantially controlled and were interested in the defence of SGP1. The claimants say that these defendants were the “real parties” who funded and/or controlled the proceedings for their own benefit and interest. The second, third, sixth and seventh defendants admit the facts of the claim but contend that the vital ingredients of personal benefit and interest on the part of the funders are missing. The fourth, fifth and tenth Defendants contend that DB Suisse was the only funder in this group that it acted reasonably and in good faith throughout, was a reluctant funder and did not control or conduct the litigation. In this action I refer throughout to the first Defendant as SGP1. References to “the Defendants” are to the 2nd to 10th Defendants.

The Action and the Trial

[7]The matters in issue in the action itself occurred between 1997 and 2001. The action has somehow stayed on foot since 8 October 2003. I decline in what is supposed to be a summary procedure to conduct a detailed analysis of events taking place over 14 years and for a description of the issues in the action I refer to the judgment of the Court of Appeal dated 14 February 2005 setting aside the order of Morison J granting summary judgment to SGP1 and to my judgment at the trial which I have already mentioned. It will also shorten this judgment before dealing with the relevant facts to first identify the relevant legal principles.

The Law

[8]The relevant principles are not in dispute between the parties. The question whether a non-party costs order should be made is for the discretion of the Court exercised on the basis of the relevant facts. This is clear from Section 51 itself which provides in relevant part that the costs of and incidental to all proceedings in the High Court shall be in the discretion of the court and the court shall have full power to determine by whom and to what extent the costs are to be paid. By Section 51(3) these matters are then to be regulated by rules of court. It is clear from the authorities cited that the Court of Appeal sees these applications as requiring a summary procedure not over complicated by reference to or by over-analysis of case law. The process is not however straightforward for at least two reasons. First the cases to which I have been taken make it clear that it is for the appellate courts to establish guidelines and parameters for the exercise of the discretion by first instance judges. That guidance is to be found in at least nine of the appellate cases (one Privy Council and eight Court of Appeal) to which I have been taken. These are:-(i) Hamilton Al Fayed (No 2) [2003] QB 1175 (May 2002);(ii) Gulf Azov Shipping v Idisi [2004] EWCA Civ 292 (March 2004);(iii) Dymocks Franchise Systems v Todd [2004] 1 WLR2807 (July 2004);(iv) Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723 (April 2005);(v) Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055 (May 2005);(vi) Petromec Inc v Petroleo Brasileiro [2007] 2 Costs LR 212 (July 2006);(vii) Sims v Hawkins [2007] EWCA Civ 1175 (November 2007);(viii) Dolphin Quays Developments Ltd v Mills [2008] 1 WLR 1829 (April 2008); and(ix) Oriakhel v Vickers [2008] EWCA Civ 748 (July 2008). Secondly, the appellate guidance is contained in cases where the facts are often unusual and the relevant considerations diverse. Some observations relied upon by Counsel in this case are very specific to those facts and circumstances. A further factor is that in some respects “the law has moved a considerable distance” – see Petromec at paragraph 11 and the earlier cases are not always still as authoritative as they were. It seems to me that the aspects of the principles most relevant to this application are as follows.[9]First, the usual incidence of costs is between the parties. The court does not generally award costs against a non-party. There is however no longer, if there ever was, a requirement for the circumstances to be “exceptional” before the jurisdiction is exercised. As it is put in Petromec at paragraph 18:- “previous decisions of this court have rightly emphasised that the jurisdiction to order that costs be paid by a non-party must be exercised with caution but the circumstances of this case were, for the reasons which the judge gave, particularly compelling” (see also the judgment of Morritt LJ in Globe at 239-240 “…the exceptional case is one to be recognised by comparison with the ordinary run of cases not defined in advance by reference to any further characteristic”.). ‘Although costs orders against non-parties are to be regarded as “exceptional”, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.’Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, 2815 per Lord Brown. ‘Generally speaking the discretion will not be exercised against “pure funders”.’ Dymocks at 2815. Pure funders are ‘those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course’.Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 per Simon Brown LJ. Pure funders are in a similar position to ‘disinterested relatives’ who might fund a litigant’s case merely out of love or familial duty. ‘Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation’. ‘Nor, indeed, is it necessary that the non-party be “the only real party” to the litigation … provided that he is “a real party in … very important and critical respects”.’ Dymocks at 2815. It will generally be relevant to the Court’s exercise of discretion whether the non-party is responsible for the litigation taking place and has caused the successful litigant to incur costs which it would not otherwise have incurred. (In this case the funding has been of a Defence so the funders are not responsible for the case being brought.) A non-party’s ‘interest’ in the outcome of the proceedings does not have to be financial but may be personal such as satisfaction derived from defeating an opponent. Latimer Management Consultants Ltd v Ellingham Investments Ltd[2007] 1 WLR 2569, 2581-2582, Bernard Livesey QC. An order may be appropriate against a non-party funder who has an interest in the outcome of the proceedings even if the non-party does not exercise any control over the proceedings. Phillips Electronics NC v Aventi Limited [2003] EWHC 2589 (Pat).[10]Public policy recognises the importance of access to justice. As it was put in Gulf Azov at paragraph 54:- “[It was] submitted that [the third party’s] role, insofar as it went beyond that of a ‘pure funder’ was that of a ‘pure assister’. We are not sure that the adjective ‘pure’ assists in the analysis. It is, we believe, designed to draw a distinction between those who assist a litigant without ulterior motive and those who do so because they have a personal interest in the outcome of the litigation. Public policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation. Intervention to this end will not normally render the intervener liable to pay costs. If the intervener has agreed, or anticipates, some reward for his intervention, this will not necessarily expose him to liability for costs. Whether it does will depend upon what is just, having regard to the facts of the individual case. If the intervention is in bad faith, or for some ulterior motive, then the intervener will be at risk in relation to costs occasioned as a consequence of his intervention.” The importance of that right is illustrated by the following observation from Simon Brown LJ as he then was in Hamilton:- “Although none of the authorities to my mind precisely dictates the result of this appeal, I conclude that on balance they clearly favour the respondents’ argument and that the unfunded party’s ability to recover his costs must yield to the funded party’s right of access to the courts to litigate the dispute in the first place. That seems to me to be the essential policy underlying the cases.”[11]These considerations, taken largely from the points emphasised in the three skeleton arguments before me are not comprehensive and the weight to be given to them varies from case to case as the submissions of all three counsel have illustrated. These considerations are however the main ones I bear in mind when exercising a discretion on the basis of the most relevant facts and considerations which I now set out. Facts agreed or not greatly in dispute[12]Safron Corporation, the Cayman Islands holding company of SGP1 was capitalised and owned by the investors of the Fund. These included BTI whose interest was run by DB Suisse after 1999. BTI was represented on the Safron Corporation Board by Dr Koch with an alternate Mr Hoagland. Wicklow was a company through which the Binladin Group invested and was represented on the Safron Board by Sheikh Binladin and Mr Moawalla who had originally set up the Safron group in 1997 with Mr Basil Al-Rahim. Zent was owned by the Zubair family and Mr Hani Al-Zubair sat on the Board. Telcom and Solid were investors. There were other investors who are not defendants because they did not fund the defence.[13]The individuals particularly involved include Mr Al-Rahim who was a founder of the group and served as Director and CEO of Safron Corporation and as a Director of SGP1 until June 2001. Mr Richard Jackson was a Director of Merchantbridge until September 2001. He remained Managing Director of Safron Corporation until January 2002 and after that became a Consultant retained by the Defendants to complete the winding down of the Safron Group. Mr Moawalla was a Director of Safron Corporation, SGP1 and until May 2000 a Director of Merchantbridge. He worked mainly for the Binladin Group as Manager of its overseas investments. Dr Koch was Chief Executive of DB Suisse and a Director of Safron Corporation and SGP1. He was assisted by Mr Craig Fynn, in-house counsel employed by DB AG. Mr Hoagland was an alternate to Dr Koch. Merchantbridge provided services to SGP1 under an investment advisory agreement. The agreement for 2001 required Merchantbridge to provide investment advice to SGP1 in return for a fee of £1.1 million.[14]The Fund was not a success, disagreements arose and these came to a head in May and June 2001. The shareholders in Safron Corporation decided to close down the Fund and meet all SGP1’s existing commitments. Mr Al-Rahim was removed from Safron Corporation and his other group directorships apart from Merchantbridge. SGP1 repudiated the 2001 investment advisory agreement. As part of the unsuccessful separation process it was agreed that Mr Al-Rahim would be permitted to take over Merchantbridge, then named Safron Advisors UK Limited with SGP1, and in effect the shareholders, taking over that company’s liabilities as at 15 June 2001. It is therefore not surprising that the shareholders in the Safron Corporation, who believed that they had treated Mr Al-Rahim generously were incensed in 2003 when he caused the company which he had been able to acquire clear of its debts to bring the present action.[15]Merchantbridge started action on 8 October 2003 against SGP1 seeking recovery of outstanding fees and/or damages for breach of the investment advisory agreement. SGP1 was insolvent and unable to fund a defence. By this point the Directors of SGP1 were Mr Moawalla, Dr Koch, Mr Al-Zubair and Mr Haidar. Day to day management was in the hands of Mr Jackson who was paid by the Defendants for that work. It was decided that SGP1 should defend the proceedings and that shareholders would provide funds to enable it to do that. Macfarlanes, previously solicitors for Safron Corporation were engaged. No attempt was made by the Defendants to conceal the position. On 11 December 2003 Macfarlanes wrote to the claimant’s then solicitors Addleshaw Goddard stating, ‘Our client’s defence is being funded by a pure funder (Hamilton v Fayed (No 2) 2002) whose interest is to ensure that no judgment in default is entered against our client when our client believes there is a bona fide defence to the claim.’ SGP1 put forward a defence that the Claimants’ claim had previously been compromised by agreement between the parties in 2001. SGP1 applied for summary judgment and this was granted by Morison J on 18 June 2004 but reversed by the Court of Appeal on 14 February 2005. As a result of that decision SGP1 agreed to make an interim payment toward the Claimants’ costs of £16,262. The money was provided by the Defendants. On 21 July 2005 the Claimants applied for an order for disclosure of the identities of the funding parties. On 2 August 2005 Aikens J ordered SGP1 and Macfarlanes to “disclose the name and address of each person or entity who has provided funding to the defendant in this litigation, together with the dates and extent of such funding in each case”. An application to join the funders as defendants was adjourned. On 12 August 2005 Macfarlanes disclosed the identities of the funders with the amounts and dates. The action was tried before me between 3 and 6 April 2006 and I gave judgment on 8 June having circulated a draft well in advance. Once I decided liability the parties set about preparing for a trial on quantum but in April 2007 Macfarlanes came off the record and Mr Jackson wrote to me saying that the funders were no longer willing to fund SGP1’s defence. SGP1 took no further steps and on 22 May 2008 Andrew Smith J assessed quantum as being £784,405 plus interest of £239,705.56. The Judge also ordered that the Claimants write to each funder seeking payment of costs and gave them permission to restore the application to join the funders. No responses were received. A further application was made for permission to join the 2nd to 10th Defendants in the action and this was granted by Flaux J on 11 September 2009. Further delays seemed to have been largely due to difficulties in serving the Defendants (including, surprisingly, the Deutsche Bank parties) abroad.[16]The correspondence disclosed by the Defendants indicates how the defence of SGP1 was run and funded. Mr Jackson, a consultant working and paid for by the Defendants had day to day responsibility for the litigation. When the claim came in he briefed the investors by email on 29 October 2003. The email included this:
“Even though SGPI has no assets and, most likely has done nothing that would merit the claim, if Basil wanted to spend a reasonable amount of money, he could have a liquidator appointed who would take over SGPI and attempt to find cash to pay the claim including the possible pursuit of the directors. It could be a nuisance.”
Further emails in November and December sought decisions from the Defendants and from other shareholders and partners in Safron first about whether SGP1 should defend the claim and secondly, if so, confirmation that they would meet the legal fees. Mr Jackson appears to have sought instructions more from the Defendants than from the Directors of SGP1 or, at the least, drawn no distinction between these separate roles.Dr Koch expressed the view on 17 November 2003 that there was “no point in defending the claim” and his reluctance continued. In an internal email in December he expressed “my strong view: not defend. I have the impression Jackson wants to drag us into this further and further. He has his own agenda which is not the one of Deutsche Bank”. On 18th December his colleague Mr Hoagland saw the decision as involving “a business judgment based on the costs of proceeding one way or another”. On 15th December 2003 when proposing a conference call Mr Jackson had said this:
“Not defending is almost the same as pleading guilty so we will not have any chance to dispute the claim. Of course, we will be able to put up a strong defence if they try to attach partnership funds.”
On 22nd December 2003, seeking a decision within 48 hours he said:
“We must decide whether to defend or not to defend. If we defend, there will be a discovery process and statements taken from directors of Safron General Partner I and an eventual trial before a judge. Our lawyers think we have a good case. The cost of defending, assuming no surprises, could be approximately £20,000-25,000. If we do not defend, there will be a default judgement against GPI and, provided Basil is willing to pay costs, a liquidator of Safron GPI will be appointed and will cause a nuisance by subpoenaing directors, files and attempting to find assets to pay the claim. While there is no cash available in either the Safron Corporation or GPI, there are assets available in Safron Partners (and successor partnerships) and the liquidator will most likely attempt to attach these by arguing the partnership is responsible for Safron GPI’s debts. It should also be pointed out that the shareholders that participated in the convertible loan to GPI would be far larger creditors that Safron advisors. In summary, if we defend we more or less control the process. If we do not defend, we never get to make the arguments made in the Defence and we have no control over the process except wewill be able to strongly defend any claim against the partnership’s assets.”
It seems that Mr Jackson throughout underestimated the costs of the process. The Defendants agreed to provide funding and left it to Mr Jackson to supervise the application for summary judgment taking it through to the end of the appeal. The Defendants agreed to Mr Jackson’s recommendation that funding continue up to a mediation. When this failed Mr Jackson informed the funders on 11 May 2005 of the outcome, outlined the costs until trial and asked for comments. Dr Koch stated that DB Suisse’s view that the case should not be defended further and the other funders agreed.[17]After Aikens J ordered the disclosure of the identity of the funders Mr Jackson suggested to the funders that they should recommence funding rather than allow Mr Al-Rahim to pursue the litigation unchallenged. As Mr Jackson put it “we have completely lost control…” Macfarlanes then came back on the record. Dr Koch, Mr Fynn and Mr Moawalla took an intelligent interest in developments but left it to Mr Jackson to make the running. Dr Koch attended the trial briefly as a witness and Mr Fynn gave evidence by video link from Australia.[18]After the trial when schedules of loss were being considered and prepared the funders authorised Mr Jackson to enter a further mediation and to settle for up to £150,000. When that effort was unsuccessful the funders again decided to assist SGP1 no further. Once that decision had been taken, as Mr Jackson put it in an email of 30 March 2007:- “We believe it is now time for Basil to spend whatever he needs in order to attempt to get something from SGP1, which has no assets, and then perhaps the funders. It would cost us £200,000 to £250,000 to get to trial in September… We should be no worse off if we stop defending now compared to continuing to trial, and, going forward, Basil, will be the only one paying. If we need to defend ourselves against a costs order, we can decide on that at the time”. The Evidence[19]A number of witness statements were before the court. I mention only those most relevant to this application. The relevant evidence for the Claimants consisted of the sixth witness statement of Mr Al-Rahim and one from Mr Neil Micklethwaite of Brown Rudnick the Claimant’s solicitors’. Islay and Wicklow’s position is set out in the second witness statement of Mr Moawalla. The position of H E Al Zubair and Zent is set out in the witness statement of Mr Paul. That of DB Suisse, BTI and DB AG is contained in the witness statements of Mr Flynn and Mr Manners of Macfarlanes.[20]Mr Moawalla explains his belief that Mr Al-Rahim’s claims were entirely unfounded because in reality they had been compromised. Mr Moawalla believed that Mr Al-Rahim saw the terrorist attacks in the United States as an opportunity to obtain speedy settlement from an embarrassed Binladin family. There was a general feeling amongst the funders that Mr Al-Rahim was behaving badly in trying to extract further money from Safron Group. He believed that Mr Jackson felt particularly strongly at being let down by Mr Al-Rahim with whom he had worked closely over a number of years. He explains that initially steps were taken simply to preserve the position so that there was sufficient time for the shareholders of Safron Corporation to take an informed decision. Mr Jackson had explained that if a judgment was obtained Mr Al-Rahim was likely to appoint a liquidator and would make a nuisance trying to collect money from Safron partners. Another factor was Mr Jackson’s advice that “if we do not defend we will never get the chance to say why the claim is nonsense”. Mr Moawalla says that the prospect of the Claimants seeking to enforce a judgment against SGP1 did not concern him because there were no assets available and he did not believe that a judgment could be enforced against the shareholders or the remaining investments in a fund. He said that “by far and away my main concern was to ensure that SGP1 could defend the claim and it was not forced to ‘plead guilty’ to an unfounded claim because it did not have the funds to pay legal fees.” His main concern was that SGP1 should be able to defend what he thought was an unmeritorious claim but he was also aware of the “general nuisance value”.[21]Mr Fynn explained how the bringing of the claim was something of a surprise given the generosity of the termination arrangements for Mr Al-Rahim. The advice of Mr Jackson was that the claim had little merit and that SGP1 should defend it rather than let judgment go by default. Mr Fynn was confident that a claim, even if successful, would involve no exposure for the DB parties. The DB Suisse view was and continued to be for some time that it was a waste of time to defend the claim. He explains how none of the DB parties had any financial interest in the outcome of the proceedings. In the end DB Suisse was persuaded to agree to the funding because the other shareholders had agreed. There was some merit in Mr Jackson’s view that judgment should not be allowed to be entered by default because the contribution requested was for a small amount. Mr Fynn says that DB left it to Mr Jackson to direct the course of the defence with the assistance of Macfarlanes. He also says that he was aware that if DB Suisse attempted to control the conduct of the litigation this could be held against it if there were later a dispute about costs. He says that for that reason, he was careful to ensure that the running of the case was left to Mr Jackson.[22]Mr Paul explains that he is responsible for the investment activities of Zent, a Cayman Island company whose shareholders are members of the Zubair family. He explains how the investment came to be made from an account held in the name of H E Al-Zubair and the latter had no involvement in the funding decisions. Zent’s involvement had been very limited. For example it was not involved in an important conference call on 19 December 2003 and took no active part in any of the discussions. As they put it in an internal manuscript note at the time, “we are really getting dragged into it”. Only Zent was willing to be guided by Mr Jackson’s recommendations. Mr Jackson was responsible for running the litigation and had the benefit of legal advice in relation to its conduct. Zent never thought that there was anything to be gained for itself.[23]The remaining relevant witness statements provide information which is not disputed or not directly relevant to the application. There is no evidence from Mr Jackson because he sadly died some years ago. There is no up to date witness statement from Mr Al-Rahim because he sadly died in an air crash in Iraq in February 2011. Claimants’ Submissions’[24]Mr Wardell QC argues that an order against all the Defendants is justified. The Defendants had an interest in the outcome of the action, they substantially controlled the defence of SGP1, they were the real parties. Furthermore they were responsible for SGP1 defending the action and their funding and approach to the litigation caused the Claimants to incur substantial costs.[25]The suggestion that the Defendants funded the defence because it was the right thing to do or was part of providing access to justice is neither credible nor supported by any documents. The Defendants had an interest. They made a business judgment of the kind described by Mr Hoagland on 18 December 2003. This was a commercial decision. There was a risk albeit not high of the Claimants succeeding with consequences for the Defendants. The emails from Mr Jackson refer to the risks of the appointment of a liquidator, the loss of control and a potential for claims against the partnership’s assts. The Defendants had, as shareholders of Safron Corporation, resolved to meet the liabilities of SGP1 and this in itself might give rise to a further liability. By 2005 the funders were well aware that non-party costs orders might be made against them. Thus, on 7 August 2005 Mr Jackson had advised that “if SGP1 or the funders are not represented, it is somewhat likely that Basil will be successful in getting a judgment against the funders for his costs up to date…”[26]The Claimants say that the funders controlled the proceedings because while Mr Jackson was in charge from day to day he was powerless to do anything without their approval. He was retained and paid for by the Defendants as their consultant. Instead of simply communicating with the Directors of SGP1 as such Mr Jackson routinely corresponded and took instruction from the funders.[27]The Claimants contend that the Defendants were the “real parties” because they were also prepared to settle the claim with money. Further SGP1 had no separate interest in defending the claim; its corporate life was over. The Claimants say that the Defendants caused them to incur substantial costs because without their support there would have been a default judgment. The position was aggravated, the Claimants contend, by an aggressive and cynical approach to the conduct of the defence.[28]Finally the Claimants say that all the Defendants should be jointly liable. They acted together in consort and were each directly or indirectly interested in the outcome. H E Al Zubair, DB Suisse, Islay, Solid and Telcom provided money and they should be liable for that reason. Inferences should be drawn from the silence of Telcom and Solid in choosing not to participate. These two companies contributed throughout. Zent, BTI and Wicklow were shareholders and investors on whose behalf it is said money was paid. They procured that funding and controlled the litigation. DB AG should be liable. It is the ultimate parent of BTI and DB Suisse and would have felt any negative reputational or financial impact from the demise of Safron. Mr Fynn who was centrally involved in the conduct of the litigation worked for DB AG. DB AG had the power to control its subsidiaries. DB AG appears to have paid Mr Jackson’s fees.

Submissions of 2nd, 3rd, 6th and 7th Defendants

[29]As I accept the evidence that H E Al Zubair and Islay had a purely mechanical role in making payments upon behalf of Zent and Wicklow I am not concerned further with the 2nd or 6th Defendants.[30]Mr Collings QC in submissions that were particularly impressive because they were realistic and moderately expressed argues that neither Zent nor Wicklow controlled the proceedings beyond the extent to which mere funding inevitably does this. His clients had no personal interest in the proceedings. They had nothing to gain and nothing to lose. The funders’ interest was in ensuring that SGP1 had access to justice and could defend what was considered to be an unmeritorious claim. The fact that the funders were willing to settle for £150,000 is not relevant because that commitment was made only after the case had been lost on liability. Moreover the events were set against a background where the funders had behaved generously towards Mr Al-Rahim. Further Mr Al-Rahim knew that the Claimants were pursuing an impecunious Defendant and would have known that the funders had no personal risk at stake. The only collateral advantage sought in this case was by Mr Al-Rahim in seeking a quick and substantial settlement. Zent and Wicklow wanted to enable the defendant SGP1 to mount a defence which clearly had a degree of merit because a High Court Judge initially found in favour of it. The funders had no hidden agenda and no personal benefit. They had no interest in running up costs or causing difficulties to Mr Al-Rahim.

Submissions of DB Suisse, BTI and DB AG

[31]Mr Midwinter submits first that neither BTI nor DB AG provided any funding. They had no involvement with the litigation and the application as against them falls away. DB Suisse did provide funding but that of itself is not enough for a third party costs order. DB Suisse was not a “real party” as it neither controlled the litigation nor funded it substantially for its own financial benefit. The reality shown by the contemporaneous documents is that the litigation was conducted by Mr Jackson for SGP1 with the funders receiving little more than infrequent reports of progress and requests for funding. If an order is made against DB Suisse in this case the position will be that virtually any corporate party who provides funding to assist an impecunious defendant will be liable to pay the costs if that defendant ultimately loses. DB Suisse acted reasonably and in good faith at all times acting on advice received. It was a reluctant funder and at times tried to persuade others to let the matter drop. Mr Jackson, employed by SGP1, controlled and conducted the litigation. Mr Jackson worked for SGP1 not the funding parties. He had been a Director of SGP1 and was retained to wind down the business of the Safron Fund. He regarded himself as working for and in the interests of SGP1. He was not an employee of DB Suisse. DB Suisse was a bystander – to some extent intentionally so as Mr Fynn’s evidence demonstrates.[32]Mr Midwinter contends that there are other points which militate against the making of an order. Firstly, the effect of the funders actions was to protect SGP1’s human right to equality of arms by enabling it to put forward a defence. Secondly this is not a speculative claim where a funder hoped to share in the proceeds. Thirdly if the funding parties had provided monies through Safron Corporation rather than directly there would have been no question of imposing third party costs against them. In the ordinary way SGP1 was entitled to look to its shareholder Safron Corporation to provide funding and the company was in turn entitled to look to its shareholders. No order could be made against DB Suisse without the Court concluding that the evidence given by Mr Fynn as to the motivations and actions of DB Suisse is false. The Claimants knew that SGP1 had no assets right from the start but chose to pursue a claim without taking steps to protect their position, for example by joining the funding defendants to the litigation at the outset. Having chosen to sue an insolvent company the Claimants should not be allowed to complain about the inevitable consequences of doing that.[33]Mr Midwinter also submits that if the court were to grant some relief to the Claimants it would be unjust for it to make an order that the defendants be jointly and severally liable for the whole of the Claimants’ costs. DB Suisse contributed 22% of the funding but it is likely that any order for joint and several liability would fall entirely on DB Suisse because the other parties are based in jurisdictions outside Europe where the Claimants are likely to have difficulty in enforcing any judgment. It would be quite wrong for a party who contributed £78,000 towards a cost liability to be liable for over £700,000 in costs. It could not be just for DB Suisse to be in a worse position than a professional funder who supports an unmeritorious claim and (unlike DB Suisse) intends to benefit financially from victory. The liability of those funders is capped to the amount of funding they have provided. (See Arkin v Borchard Lines [2005] EWCA Civ 655]. He submits that the analogy with Arkin and the position of a professional funder provides a principaled alternative should a third party costs order be made. Decision of the Court[34]The court has a broad discretion but I have to exercise it, having regard to the considerations correctly identified by Counsel in their submissions.[35]As I see it the Defendants had an interest in the outcome of the proceedings. It is true that they had been carefully advised and were confident that neither they nor the funders would be liable in the unlikely event of the claim succeeding. However the claim was seen as creating a nuisance for the Defendants and Mr Jackson advised them of that. A vain attempt might be made to enforce a judgment against assets of the fund. Mr Al-Rahim might cause a liquidator to be appointed to SGP1, who in turn might bring claims. There was a risk that the Defendants would lose control of the situation, an important consideration in any business environment. Later on, certainly by 2005, the interest became more direct when the funders became fully aware that a successful claim might lead them to be ordered to pay the claimants’ costs. Advised that the claim was likely to fail and that the costs of defending it would be modest, those funders who gave the matter conscious thought made the business assessment articulated by Mr Hoagland and decided to pay up. I accept that DB Suisse would have preferred not to support the defence and was reluctant to do so. It nevertheless decided to fund the defence because other shareholders wished to do so, and for the other reasons given by Mr Fynn. I accept that the existence of this interest was not the only reason why the defendants chose to fund the defence. For example the funders were incensed at what they saw as the improper conduct of Mr Al-Rahim and did not want him to get away with it. Mr Jackson pointed out that if the position was not defended “we will never get the chance to say why the claim is nonsense.” This aspect barely features in the correspondence however and DB Suisse recognised that Mr Jackson had an agenda of his own. Contemporaneous exchanges between people of undisputed honesty and integrity, as they are in this case, carry greater weight than much later recollection to be found in the witness statements. This correspondence shows the more altruistic motives to be minor considerations.[36]The Defendants’ interest in the litigation was legitimate and not concealed but it was a business interest nonetheless. There was no shady or hidden motive or interest of the kind to be found in some of the cases, where funders have been ordered to pay up. But this was not the ‘pure’ litigation funding of disinterested parties of the kind identified in Al Fayed. Mr Collings makes the fair point that this application, unlike most, relates to third party funding of a defence, not a claim. He says that this means that the third party is less likely to have a sufficient personal interest in the claim because it is less likely to receive a personal benefit from the outcome. I bear this in mind but the fact remains that the Defendants did have the benefit and interest in removing the ‘nuisance’. That risk was seen as rather higher than shorthand use of the word “nuisance” connotes.[37]The Defendants contend that they did not control the proceedings, relying mainly on the fact that they were embroiled only in occasional discussions and in the taking of major decisions. The day to day conduct of the litigation was not in their hands but in those of Mr Jackson. There can be nothing in that point if Mr Jackson was in effect the agent of the funders. There is some disagreement about Mr Jackson’s role. In paragraph 8 of his second witness statement Mr Fynn says that:
‘In January 2002 Mr Richard Jackson… was appointed as a consultant of SGP1 and Safron Corporation... Mr Jackson was engaged as a consultant of SGP1 and Safron Corporation and various other funds of legacy investment.” However Mr Fynn does not exhibit a copy of the consultancy agreement or any other documents in support of what he says. If Mr Fynn were correct it would be necessary to examine the dealings between Mr Jackson wearing his SGP1 hat attending to the litigation and the funding defendants. However the evidence looked at as a whole established that Mr Jackson’s role, which was not closely examined at the time, was rather different. Mr Moawalla describes Mr Jackson as a consultant for ‘Safron Partners’ which acted as a fiduciary on behalf of the investors in the Fund. Mr Jackson’s fees and expenses were being paid by the Defendants not by SGP1 as emails of 31 May and 31 October 2005 make clear. In his witness statement dated 31 March 2004 Mr Jackson said: ‘In January 2002 my employment with Safron Corporation was terminated and Safron Partners LLP hired me as a consultant.’
In cross-examination at the 2006 trial he made it clear that he was being paid by the investors, including the Bin Ladin family and Deutsche Bank. In addition the way in which Mr Jackson carried out his duties, seeking instructions from the Defendants, rather than dealing with the directors of SGP1 as such, points to his engagement being at the behest of the Defendants.[38]In those circumstances it is unreal to draw a distinction between what the Defendants did and what Mr Jackson did at their behest. Further he had no authority to conduct the litigation without the express approval of the Defendants. It is not a case of an agent or employee of SGP1 reporting to its board and taking instructions. Indeed there is little sign in the winding down of its operations of the usual rigour with which corporate identities are addressed and protected in these situations.[39]It follows that the Defendants controlled this litigation. When they decided to fund the litigation, SGP1 participated. When they decided to stop funding, SGP1 took no part in the case. When the Defendants decided that SGP1 should resume conduct of the action and provided the funds, it duly did so. The decision by the Defendants to stop funding was taken for their own interests, not those of SGP1.[40]If the Defendants had not funded the defence of the action the Claimants would have obtained default judgment. No one else would have funded the case, as one sees from what happened when funding was withdrawn. I reject the particular criticism by the Claimants of the Defendants’ approach to the summary judgment issue. There is however substance in their criticism of the Defendants’ approach after liability had been established. The Defendants allowed the Claimants to run up a substantial amount of work and incur legal and forensic accountancy fees when preparing a case on quantum that was never to be heard. This period was marked by an attitude reflected in Mr Jackson’s later email of 30 March 2007. Although the sentiments were probably more those of Mr Jackson than the Defendants there is no sign that they disagreed.[41]Reliance is placed on the fact that the Claimants must have known when they brought this action that SGP1 would not be good for the money if it was successful. I do not see this as a significant factor. The Claimants were entitled to bring the action. They would have known that SGP1 was not good for the money. They may have considered that if successful, they could place SGP1 into liquidation and successfully pursue others for funds. They might have judged that the new Defendants would come forward with an offer. They might have hoped that if all the other liabilities of SGP1 were being met by the shareholders the Claimants would also be paid. Whatever those risks the Claimants would not have run up a fraction of the costs they incurred but for the intervention of the Defendants.[42]The Defendants took rational commercial decisions throughout in responding to litigation, a process with which some of them would have been unfamiliar. This is not a case where the Defendants attract moral blame, but they took a decision to fund the defence of an action where they had, amongst other things, an interest of their own to protect. They controlled that litigation by taking major decisions themselves and leaving minor ones to their agent, Mr Jackson. They were meeting SGP1’s other debts but resisting this one. The funders were acting outside their usual role in the ordinary run of cases. SGP1 had an interest in the outcome but so did the funders. But for their decision to fund the litigation the Claimants’ costs in succeeding with their claim would have been very much less. In those circumstances justice requires that the Defendants should in principle pay the Claimants’ costs of their action against SGP1. That raises three questions. First should the order be limited to costs over a particular period of the litigation? Secondly should the order be one payable jointly and severally by all the defendants? Thirdly should there be a cap on liability for a particular defendant?

For what period of the litigation should the order cover

[43]Mr Collings submits that if a costs order is to be made against the Defendants it should only take effect for the period after his clients resumed funding in/or around August 2005. By that stage the Defendants were well aware that there was risk of an application for a costs order against them and it was in part to avoid this, that they continued to fund the action. The position certainly became more stark after August 2005 but that is no reason not to impose an order for the earlier period. Right from the start the Defendants knew that there would be an issue about funding and they must have considered this. On 11 December 2003 Macfarlanes wrote to Addleshaw Goddard stating that the defence was being funded by a ‘pure funder’. They knew that they were running a risk about which they had taken advice. It follows that the Order should cover the entirety of the litigation apart from the initial period when service was being acknowledged and a Defence considered only for the purpose of preserving the position so that the Defendants could agree the extent to which SGP1 should defend the proceedings and how these should be funded. As I see it therefore the order should start from approximately 1 January 2004.

Should the order be against the defendants jointly and severally?

[44]In the ordinary way unsuccessful Defendants are ordered to pay the Claimants’ costs on a joint and several basis, but that is not an invariable practice. Similarly I do not accept the Claimants’ submission that there is a rule to that effect when the court is dealing with a non-party costs order. This is a matter of discretion. What is the position of each defendant? HE Al Zubair, BTI, Islay and DB AG should not as I see it pay anything. Their roles were either mechanical or in DB AG’s case well above the real fray. All the remaining defendants funded the litigation in much the same time and on the same basis. Wicklow took very little active interest in the matter but it might be said that it should have been more involved or even have taken its own legal advice. Zent was more actively concerned in the decisions made and Mr Moawalla looked at matters conscientiously. DB Suisse went along, despite its initial reluctance, and did so to some extent to accommodate the wishes of the other defendants. Against that DB Suisse was actively and visibly involved in the decision taking although its role was limited to a degree as a result of Mr Fynn’s perception that the risk of a funding liability would diminish if Mr Jackson called the shots as far as possible. Solid and Telcom were apparently content to pay their share. I have no submissions from them and thus no reason to see their role as excusing them from responsibility. As I see it the distinctions between the Defendants in the terms of their responsibility for funding are not sufficient for me to apportion greater or lesser liability between them.[45]The Defendants acted in concert and were in this together. There are no features suggesting that I should impose on the Claimants the task of proceeding separately against the Defendants for individually allocated sums of money. It is said on behalf of DB Suisse that such a result will place particular hardship on them because of potential difficulties of recovery against Zent, Wicklow, Solid and Telcom. While these companies are based abroad there is no evidence before the court that they will fail to pay. The Defendants chose to fund the defence. They knew who they were dealing with and who would share responsibility should the Claimants pursue to matter.[46]As I have mentioned Mr Midwinter submitted that it would be unfair, if an order were made, for his clients to have to pay to the Claimants an amount greater then they had paid towards the cost of the defence. That submission derives from the decision of the Court of Appeal in Arkin and Mr Midwinter says that it would be unfair for his clients to be put in a worse position than a professional litigation funder. I do not agree. The decision of the court in Arkin was based on a concern (see paragraph 39) that professional funding for a discrete part of an impecunious Claimants expenses would cease to be available if that funder faced potential liability for the whole of the defendants' costs. The solution put forward was designed (paragraph 40):
“to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation”
In those circumstances the court considered that a professional funder should not be liable for the costs of the opposing party beyond the extent of the funding which he has provided. That approach makes it possible for people without money to obtain professional funding for part of their costs of conducting a case. The situation is very different from that in this case and is driven by more obvious policy considerations that do not apply here, except to the limited extent to which access to justice has been relied on. I therefore see no reason to limit the obligations of the Defendants in the manner proposed by Mr Midwinter.

Conclusion

[47]It follows that the application succeeds as against Zent, DB Suisse, Wicklow, Solid and Telcom. It fails against the other Defendants.[48]As I have emphasised the Defendants were open and honest about the funding of the defence. They were also aware of the potential risks of continuing to fund that defence. They took decisions to fund the litigation in their legitimate business interests. They are not morally culpable but, as I see it, they should bear the financial consequence of their decisions given the conclusions I have reached in particular about interest and control. One of the few live memories I have of the trial is being somewhat surprised that a party such as Deutsche Bank was funding litigation on behalf of an insolvent company and running the risks which go with that. As so often in litigation initial decisions were taken, costs were underestimated and matters were left to drift. As I see it the funders must take the financial consequences of that.[49]I shall be grateful if Counsel will, not less than forty eight hours before hand down of this judgment, let me have corrections of the usual kind and a draft order, preferably agreed, and a note of any matters which they wish to raise at the hearing.[50]I am grateful to Counsel and Solicitors for the admirable way in which this application was presented and prepared.

Cited in 2 later judgments