Kagalovsky & Anor v Balmore Invest Ltd & Ors [2015] EWHC 1337 (QB)

Case No HQ13X03761/2/3[2015] EWHC 1337 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 13/05/2015
Before
MR JUSTICE TURNER
Between
KONSTANTIN KAGALOVSKYApplicantsWILCOX VENTURES LIMITEDApplicantBALMORE INVEST LIMITEDRespondentsINVEST INFO ONE LIMITEDRespondentINVEST RATING TWO LIMITEDRespondentINVEST MEDIA THREE LIMITEDRespondentINVEST CREATIVE FOUR LIMITEDRespondentINVEST ACTIVE FIVE LIMITEDRespondentCREDIT INVESTBANQUE PLCRespondentALEXANDER ALTMANRespondent
James Ramsden (instructed by Russell-Cooke LLP) for ApplicantsP J Kirby QC & Ms Gemma Witherington (instructed by Bond Dickinson LLP) for 1 st RespondentRoger Stewart QC & Ms Clare Dixon (instructed by Withers LLP) for 2 nd RespondentHearing Hearing date: 6 th May 2015
JudgmentThe Hon Mr Justice Turner:INTRODUCTION
[1]In this case the claimants seek a wasted costs order against solicitors, Kerman & Co. LLP (“Kermans”), and counsel, Mr Robert Levy QC (“Mr Levy”).[2]Kermans and Mr Levy represented the eighth defendant, Mr Alexander Altman, in contempt proceedings brought against him by the claimants. Mr Altman lost and was sentenced to eighteen months imprisonment. The relevant judgments can be found at Kagalovsky v Balmore Invest limited[2013] EWHC 3876 andKagalovsky v Balmore Invest limited[2014] EWHC 161.[3]However, Mr Altman has so far escaped justice by remaining outside the jurisdiction. Attempts to extradite him have been unsuccessful. Furthermore, the claimants have incurred substantial costs which Mr Altman was ordered to pay. Predictably, he has not done so. It is against the background of this Pyrrhic victory that the claimants now seek to persuade the court to order Mr Altman’s legal representatives to foot the unpaid bill.

THE WASTED COSTS JURISDICTION

[4]Section 51 of the Senior Courts Act 1981 provides:
“(1) Subject to the provisions of this or any other enactment and to the rules of court, the cost of and incidental to all proceedings in- The civil division of the Court of Appeal; The High Court; and Any County Court Shall be in the discretion of the court… (6) In any proceedings mentioned in subsection (1), the court may disallow, or (as the case may be) order the legal or other representative concerned to meet, the whole of any wasted costs or such part of them as may be determined in accordance with rules of court.”
The High Court; and Any County Court

Shall be in the discretion of the court…

[5]Those rules of court are to be found in CPR Part 46.8 which provides:
“(1) This rule applies where the court is considering whether to make an order under section 51(6) of the Senior Courts Act 1981 (court's power to disallow or (as the case may be) order a legal representative to meet, wasted costs). (2) The court will give the legal representative a reasonable opportunity to make written submissions or, if the legal representative prefers, to attend a hearing before it makes such an order. (3) When the court makes a wasted costs order, it will- (a) specify the amount to be disallowed or paid; or (b) direct a costs judge or a District Judge to decide the amount of costs to be disallowed or paid. (4) The court may direct that notice must be given to the legal representative's client, in such manner as the court may direct- (a) of any proceedings under this rule; or (b) of any order made under it against his legal representative.” (a) specify the amount to be disallowed or paid; or (b) direct a costs judge or a District Judge to decide the amount of costs to be disallowed or paid. (a) of any proceedings under this rule; or (b) of any order made under it against his legal representative.”
[6]The Practice Direction to Pt.46.8 provides additional guidance in relation to the procedure to be adopted at paragraphs 5.6 to 5.8 inclusive: “5.6 The court will give directions about the procedure to be followed in each case in order to ensure that the issues are dealt with in a way which is fair and as simple and summary as the circumstances permit. 5.7 As a general rule the court will consider whether to make a wasted costs order in two stages-(a) at the first stage the court must be satisfied- (i) that it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; and (ii) the wasted costs proceedings are justified notwithstanding the likely costs involved;(b) at the second stage, the court will consider, after giving the legal representative an opportunity to make representations in writing or at a hearing, whether it is appropriate to make a wasted costs order in accordance with paragraph 5.5 above. 5.8 The court may proceed to the second stage described in paragraph 5.7 without first adjourning the hearing if it is satisfied that the legal representative has already had a reasonable opportunity to make representations.” (a) at the first stage the court must be satisfied- (i) that it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; and (ii) the wasted costs proceedings are justified notwithstanding the likely costs involved; (b) at the second stage, the court will consider, after giving the legal representative an opportunity to make representations in writing or at a hearing, whether it is appropriate to make a wasted costs order in accordance with paragraph 5.5 above.[7]In order for the conduct of the respondents in any given case to be such as to engage the wasted costs jurisdiction it must be improper, unreasonable or negligent.

THE SCOPE OF STAGE ONE

[8]On 3 February 2015, I ordered, in accordance with the Practice Direction, that consideration of the wasted costs application should follow a two stage process. The hearing to which this judgment relates is the stage one hearing.[9]The rationale behind the procedure set out in the Practice Direction is not difficult to discern. Salutary as the wasted costs jurisdiction undoubtedly is in appropriate cases, there lurks the risk that satellite litigation, growing like Topsy, will come to generate costs and absorb the time and resources of the parties and the court to an extent which is disproportionate to the object to be achieved. By splitting the wasted costs application into two stages, the Practice Direction seeks to place a burden on the applicant to demonstrate a prima facie case as one of the preconditions to be fulfilled before a further and more detailed consideration of the substantive merits will be entertained. Thus unpromising applications can be nipped in the bud before they start taking up too much time and giving rise to disproportionate expense.[10]In the particular circumstances of this application, issues arise as to the proper scope of stage one. This is primarily because Kermans and Mr Levy QC seek to participate very fully indeed at this stage whereas the Practice Direction envisages that the respondents’ representations, whether in writing or at a hearing, will be made wholly or mainly at stage two.[11]One can readily understand why legal advisers against whom a wasted costs application is made should want to engage with the process pre-emptively. By doing so they seek to maximise their chances of achieving a prompt termination of the process whilst preserving the opportunity to take a second bite of the cherry if they are unsuccessful at the first stage. Of course the danger is that the stage one process then becomes overburdened with detail and complexity when it is intended to be pragmatically lean and uncluttered.[12]It is to be noted however, that the Practice Direction sets out the procedure to be followed “as a general rule”. The procedural route therein laid down is not therefore to be treated with mechanistic slavishness where the particular circumstances of the case demand a different approach in order best to achieve the overriding objective. In the more straightforward cases there may be little or no participation at the first stage on the part of the legal advisers against whom the order is sought. However, this case could not be regarded as being straightforward on any analysis and it would be both wrong and artificial for this court entirely to disregard the detailed submissions made on behalf of the respondents. Of course, the court in any case like this must be alert to the possibility that respondents may be tempted tactically to be over-inclusive in meeting a wasted costs application in order artificially to create the impression that the issue is less susceptible to summary determination than is really the case.

THE ALLEGATIONS

[13]The claimants advance six categories of conduct which they contend fall within the scope of the wasted costs jurisdiction: i) The submission of a dishonest defence to the committal application by Mr Altman; ii) Actions designed to cause delay including the adjournment of the first listed hearing of the application for committal by way of the submission of that dishonest defence; iii) Actions which resulted in a successful application being made for the disclosure of part of Kermans’ file; iv) Providing affidavits, witness statements and correspondence which contained incorrect and misleading information in light of the disclosure of Kermans’ file; v) Failing to comply promptly with the order for disclosure of Kermans’ file; and vi) The pursuit of irrelevant topics of cross-examination causing the trial, which had been realistically estimated to last for two days, to run onto five days with a sixth day for written submissions and a further hearing to address sanction and costs.[14]The claimants contend that costs have been incurred in excess of £400,000 as a result of the conduct of which complaint has been made.[15]In submissions made on behalf of Kermans, Mr Kirby QC articulated seven grounds upon which the claimants’ application should be rejected: i) Procedure. The wasted costs summary procedure was irremediably unsuited to the scale and complexity of the application in this case; ii) Delay. The claimants are guilty of inordinate delay in the bringing of this application; iii) Privilege. The respondents are prevented by the operation of legal professional privilege from being able fairly and fully to respond to the allegations; iv) Changing allegations. The allegations themselves have changed over time and in some respects are not clear enough to enable the respondents to know with sufficient precision what case they have to meet; v) Unsuitability. The wasted costs procedure is an inappropriate vehicle through which findings of dishonesty could be made against the respondents in the circumstances of this case; vi) Particular allegations. In respect of none of the allegations have the claimants passed the threshold test of satisfying the court that it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; vii) Causation. Even if all of the above challenges were rejected, the claimants cannot establish that the conduct of the respondents was the cause of the alleged or any costs consequences.[16]These contentions were adopted on behalf of Mr Levy, expanded upon and combined with further submissions of more particular relevance to his individual position.

PROCEDURE

[17]In support of the first ground of opposition, the respondents point out that it has already led to three hearings before this court. The first concerned the giving of directions pursuant to the Practice Direction. The second, which lasted half a day, involved a strongly contested application by the claimants to disapply legal professional privilege in respect of documents held by the respondents. The third, relating to the first stage test, has occupied the court for a full day. If the matter were to go further to the second stage the claimants concede that it would last a further full day and the respondents contend that it would actually last considerably longer, particularly if I were to decide that legal professional privilege should no longer apply to significant numbers of documents which would then have to be perused and analysed.[18]This first stage application is supported by nine bundles of documents. The claimants’ outline submission is fifteen pages long and runs to 61 paragraphs. Appended to it is a thirteen page schedule of specific allegations. A supplementary shorter submission was served shortly before the hearing. Kermans’ skeleton argument runs to 36 pages and comprises 102 paragraphs. Mr Levy’s skeleton argument runs to 23 pages and comprises 73 paragraphs. I have been provided with three bundles of authorities.[19]Kermans estimate that their costs of the stage one application amount to about £70,000 plus VAT. Mr Levy is said to have incurred costs up to the end of the stage one hearing in the region of £118,000. It is estimated on his behalf that a stage two hearing lasting two days would give rise to the expenditure of further costs in the region of £60,000 or more. These further costs would be likely to be higher in the event that privilege were waived.[20]The nature of the wasted costs regime has been considered by the courts on very many occasions. Indeed, I have been provided with reports of no fewer than about thirty authorities which are said to be material to my approach to this case. I will resist the temptation to refer to them all and confine myself to a consideration of a salient few.[21]Re Freudiana Holdings Ltd (Times, December 4, 1995) involved a dispute over a joint venture concerning a musical based upon the life of Sigmund Freud. Appositely, there was a clash of egos between the two men who were the driving force behind the project. Each accused the other of fraud.[22]The appellant was the victor in the substantive litigation which ensued. He applied for an order that the legal representatives of the losing party should pay his costs alleging that they had been complicit in the presentation of a case which they knew to be fraudulent. The judge at first instance declined to make such an order and his decision was challenged in the Court of Appeal.[23]Rose L.J. held at page 5 that the kind of allegations made against the losing party’s solicitors were bound, if in issue “to evoke a detailed response and a full investigation of a kind for which summary wasted costs procedures are likely to be unsuitable.” He concluded that:
“Unless wasted costs orders proceedings can take place in summary form, on or very soon after the delivery of judgment, they are unlikely to be appropriate.”
[24]Millet LJ observed that the trial judge would have been in an excellent position to form a prima facie view corrected or reinforced by any explanations given by the legal representative concerned if the allegations had been limited to complaints of conduct before the judge. However, the appellant had chosen to put in issue a number of other matters which included allegations that the respondent solicitors had had knowledge of and had participated in their client’s fraud. It had been further alleged that counsel had failed to investigate the truth of their own client’s allegations.[25]There was an additional factor in Freudiana which militated against summary adjudication. The appellant was also seeking to put in issue the outcome of the trial itself. Nevertheless, the judgment of Millet LJ makes it plain that the additional issue relating to the lawyers’ knowledge of and participation in the fraud or failure to investigate the truth of their own client’s allegations was one of those issues which “were quite unsuitable for a wasted costs application.”[26]Millet LJ went on to hold that the appellant’s remedy lay in bringing fresh proceedings against the legal advisers alleging their knowing participation in a fraud and claiming damages, which would include unrecovered costs. He acknowledged that the summary procedure would not necessarily be inappropriate in every case in which knowing or negligent participation in an abuse of process was alleged against legal representatives. However, he went on to hold that it would only be suitable in “a plain and simple case”. The example which he gave was of a solicitor advising on the presentation of a winding up petition in order to bring pressure with respect to a debt which he knew to be disputed on bona fide grounds.[27]It is to be noted that Millet LJ was prepared to have countenanced a two to three day hearing of a summary application for wasted costs in that case but this was on the basis that the issues should have been limited to conduct in the face of the court and in the context of a substantive hearing which had lasted 165 days and which had resulted in a judgment of 500 pages.[28]Medcalf v Mardell [2003] 1 AC 120 involved an application for wasted costs against legal advisers who had allegedly raised allegations of dishonesty on inadequate material. Lord Bingham held at paragraph 24:
“Save in the clearest case, applications against the lawyers acting for an opposing party are unlikely to be apt for summary determination, since any hearing to investigate the conduct of a complex action is itself likely to be expensive and time-consuming.”
[29]Ultimately, as section 51 of the Senior Courts Act 1981 provides, the issue of costs, including the resolution of applications for wasted costs, is a matter for the discretion of the court.[30]In the circumstances of this case, I decline to embark on any further inquiry into the issues relevant to the application for wasted costs on the basis that the application is demonstrably unsuitable for summary determination. Of particular significance are the following features: i) The claimants’ central allegations would require the resolution of issues concerning matters which did not occur in the face of the court; ii) These allegations call into question the professional integrity of practitioners all of whom have enjoyed long careers unblemished by any suggestion of impropriety; iii) The sheer number and variety of allegations and the volume of material generated in support of this application is sufficient of itself to show that this case could not be characterised as “plain and simple”; iv) Despite the relatively high level of costs alleged to be at stake, the further time and resources which would be involved in proceeding to a substantive determination of this application would be disproportionate and inconsistent with the concept of summary determination. Bearing in mind that the stage one hearing lasted a day, I am satisfied that the respondents are right to predict that any stage two hearing would last at least two or even three days. Indeed, there is a high probability that the respondents would wish to give evidence and/or call others as witnesses.[31]It follows that despite the characteristic skill and restraint with which Mr Ramsden advanced his clients’ case, I am satisfied that he falls at the first hurdle. The issues he seeks to ventilate are simply unsuitable for summary determination and I decline to permit this application to proceed further.

OTHER ISSUES

[32]My findings with respect to the unsuitability of this case for summary determination render it unnecessary for me to deal in any detail with the remaining bases upon which the application was resisted. I have kept this judgment deliberately short. One distinct advantage of this is that it has enabled me to distribute it in draft form within two days of the hearing. A detailed analysis of the other issues would have demanded prolonged consideration the uncertain value of which would not have compensated for the further delay to which it would have given rise. I bear particularly in mind the entirely understandable anxieties of Mr Levy and his former instructing solicitors whose professional careers have been put in potential jeopardy by this application. There would be no virtue in prolonging their agonies any further.[33]I will, therefore, restrict myself to some passing observations on the remaining issues upon which I have expressed no fully reasoned view.[34]The respondents castigate the claimants for the time it has taken for this application to be made which they characterise as being inordinate and inexcusable. The claimants respond by asserting that the delay is entirely justified in the particular circumstances of the case. The truth, as it so often does, lies somewhere in between. It is difficult to escape the conclusion, however, that one contributory factor to the slow progress has been the relative complexity and broad scope of the application. It should not normally take a year to launch an application suitable for summary determination. Nevertheless, had I found that the application was suitable for summary determination I would not have found that the delay alone was such as to justify striking out the application.[35]I turn now to the issue of privilege. On 7 April 2015, the claimants applied for specific inspection of documents in the control of Mr Altman for the purpose of furthering their claim for wasted costs against the respondents. The categories of documentation in respect of which the application was made would normally be protected by legal professional privilege. They comprised all instructions received by the respondents in connection with the committal application and all advice given by them to their client in this regard. It is unnecessary for me for the purposes of this judgment to set out the basis upon which the application was made. Suffice it to say that I declined to adjudicate on this issue before I had heard the stage one arguments. In retrospect I am satisfied that I was right so to do.[36]Even if I had declined to accede to the specific inspection application I would still have found that the wasted costs application fell outside the legitimate parameters of a summary process. Further, the claimants would have faced the additional difficulties which would have arisen in attempting to persuade the court that it would be fair to make a finding against the respondents who would, arguably, have been handicapped by the maintenance of privilege.[37]On the other hand, if I had ruled in favour of inspection, the inevitable consequence would have been the expenditure by all parties of further significant time and resources on perusing and analysing the material which thereby saw the light of day. It would be impermissible for me to speculate on the likely impact, if any, that such inspection would have had on the merits of the wasted costs application but there would certainly be no guarantee that it would have resolved the merits either way (particularly those relating to causation and quantification) and there would be a very real risk that it would serve merely to extend further the parameters and complexity of the application.[38]The suggestion that some of the claimants’ allegations are insufficiently clear or have varied over time is one which I do not intend to resolve. Suffice it to say that the number of allegations and the level of detail contained within the schedule appended to the claimants’ outline submissions always made it likely that issues such as this would arise. The claimants faced a difficult tactical choice. Were they to provide mere bare outline submissions and run the risk of attracting criticism that the respondents did not know the case they had to meet? Or were they to provide fully particularised allegations the detail and extent of which might reinforce the respondents’ argument that the application was unsuitable for summary determination? In the event, I am satisfied that no amount of drafting skill could have safely negotiated the passage between Scylla and Charybdis.[39]I have taken into account the nature and seriousness of the allegations of professional impropriety against the respondents when dealing with the issue of the appropriateness of a summary determination and see no purpose in rehearsing my conclusions under this distinct head of objection.[40]I also decline to decide whether, in respect of each of the various individual allegations, there is a prima facie case. This, of course, would often be an essential step in the assessment of a wasted costs application at stage one. However, since the application taken as a whole must fail, it would be disproportionate for me sequentially to consider the hypothetical merits of the items recorded in the schedule.[41]I take the same approach to the issue of causation of loss.

CONCLUSION

[42]For the reasons set out above, I am satisfied that this application must fail at this stage. I am not without sympathy for the position of the claimants who have been the victims of a ruthless and criminal coup but I must end this judgment as Ward LJ began his in Hedrich v Standard Bank London Ltd [2008] EWCA Civ 905:
“A cigarette packet carries the warning that smoking can kill you. Solicitors' standard terms of business should carry a warning that litigation can cost you. For litigation is an inherently risky business: there are no certain winners; and very often even the fruits of success are never recovered. This is just such a case. The moral is caveat litigator.”

Cited in 4 later judgments