Phaestos Ltd & Anor. v Peter Ho [2011] EWHC 3280 (TCC)

[2011] EWHC 3280 (TCC)Case No HQ09X05182
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 08/12/2011
Before
THE HON. MR. JUSTICE RAMSEY
Between
(1) Phaestos LimitedClaimants(2) Mindimaxnox LLPClaimantPeter HoDefendant(1) IKOS CIF LimitedClaimants(2) Phaestos LimitedClaimant(3) Mindimaxnox LLPClaimantTobin “Sam” Maxwell GoverDefendant
Paul Goulding QC and Charles Ciumei (instructed by Bird & Bird LLP) for ClaimantsNigel Tozzi QC (instructed by Wragge and Co LLP) for DefendantsHearing Hearing dates: 24 th November 2011
Judgment

Introduction

[1]This is an application by the Defendants to transfer two consolidated claims from the Queen’s Bench Division to the specialist list in the Technology and Construction Court (“TCC”).[2]The two Defendants are former employees of one or more of the Claimant companies. They were dismissed from their employment on 23 December 2008. These proceedings concern claims and counterclaims arising out of that termination of employment. At present claims by both Defendants in the Employment Tribunal are stayed as a result of these proceedings.[3]In November 2009, the Claimants issued proceedings in the Queen’s Bench Division against one Defendant, Peter Ho. Separate proceedings were brought against the other Defendant, Tobin “Sam” Gover, in Cyprus. Those Cyprus proceedings were dismissed for lack of jurisdiction in May 2010. In April 2011 the Claimants issued a claim in the Queen’s Bench Division against Mr Gover.[4]There have been two applications in these proceedings. The first application was heard by Eady J and concerned a preliminary issue relating to certain communications produced in December 2008, at the time of the termination of Mr Ho’s employment. The Claimants alleged that these communications were subject to without prejudice privilege and should not be referred to. As a result of the determination of the preliminary issue, certain allegations in Mr Ho’s Defence and Counterclaim were struck out.[5]The second application was heard by King J and was an application for interim relief by the Claimants against the Defendants in relation to the copying, retention and disclosure of confidential information. This led to a nine day hearing in July and September 2011. Copies of certain disk images have been ordered but there are remaining issues currently being considered by King J, both as to whether there should, in principle, be inspection of those disk images and also, if so, whether they should be inspected by the Claimants’ expert, a single-joint expert, or two independent experts.[6]The application to transfer these proceedings to the TCC was issued on 9 November 2011. I heard the Application on 24 November 2011 as a result of which I informed the parties that I would transfer the claims into the TCC. In this judgment I now set out my reasons for that decision. The Claims against Mr Ho and Mr Gover[7]In the consolidated Particulars of Claim dated 21 June 2011, the Claimants set out their claim against both Mr Ho and Mr Gover. The three Claimants are all involved with the IKOS Group which is a hedge fund management business. At paragraph 5 of the Particulars of Claim the Claimants plead that the investment and trading decisions relating to the IKOS portfolios are made by or with input from complex computer programs referred to as the “Code”. In essence, the Defendants’ employment involved them in dealing, in various ways, with mathematical models which are then analysed by the complex computer programs which form the Code.[8]At paragraph 7 of the Particulars of Claim it is pleaded, in relation to Mr Ho, that he was Head of Research and that, amongst other things, he had overall responsibility for analysing, developing and conducting diagnostic work on the existing mathematical models and the Code, principally in relation to equities portfolios. It is also stated that he was responsible for developing new mathematical models and the associated Code. In relation to Mr Gover, he was a Portfolio Manager who carried out fund management activities. At paragraph 14 of the Particulars of Claim it is pleaded that Mr Gover’s duties included the management of the futures portfolios of the IKOS group and the supervision of research in relation to the Code.[9]The Particulars of Claim plead the duties of Mr Ho and Mr Gover. First they plead common duties at paragraph 16. Then they plead Mr Ho’s duties at paragraph 17 and Mr Gover’s duties at paragraph 18. The breaches by Mr Ho of those duties and the alleged results are then pleaded in paragraph 26. Similarly, the breaches of Mr Gover’s duties are set out in paragraph 27, with the alleged results in paragraph 28. At paragraph 29 the Claimants plead the alleged results of all the breaches. It is pleaded at paragraph 30 that, as a result of the matters pleaded, some investors partly and/or completely redeemed their investment in IKOS Hedge Funds; some investors have decided not to invest further monies in IKOS Hedge Funds and some potential investors have decided not to invest in IKOS Hedge Funds.[10]At paragraphs 19 to 24 there are pleaded duties in relation to documents and, at paragraphs 31 to 33, the Claimants set out alleged breaches in relation to documents. Loss and damage is then pleaded at paragraphs 34 and 35. At paragraphs 36 to 53 the Claimants seek declarations that the Defendants are not entitled to be paid sums by way of profit share or bonus and that they have no legal or beneficial interest in the share capital of any of the Claimant companies. At paragraphs 54 to 61 the Claimants seek the return of £6,000,000 in respect of bonuses, as monies paid under a mistake. The Defence and Counterclaim[11]In the consolidated Defence and Counterclaim the Defendants plead to those allegations and bring a counterclaim for a profit share or bonus and an equity share in the IKOS Group. In addition the Defendants make various Claims arising out of the alleged surveillance by the Claimants which they allege to be harassment pursuant to Section 1 of the Protection from Harassment Act 1997; to give rise to contraventions of the requirements of the Data Protection Act 1998 and to interfere with rights under Article 8 of the European Convention on Human Rights. The issues in the case[12]Those pleadings give rise to issues which have been identified by Mr Paul Goulding QC, who appears with Mr Charles Ciumei on behalf of the Claimant. Those issues are:(1) the correct parties to the contracts of employment;(2) whether the Defendants owed the duties alleged;(3) whether the Defendants were in breach of the general duties;(4) whether the Defendants were in breach of the duties in relation to documents;(5) whether the Claimants are entitled to recover loss and damage;(6) whether the Defendants are entitled to an equity share, profit share or bonus;(7) whether the Claimants are entitled to the return of money paid under the mistake;(8) whether the Defendants have a cause of action against the Claimants in respect of the alleged surveillance. The Application[13]On this application, Mr Nigel Tozzi QC, who appears on behalf of the Defendants, submits that in accordance with the Part 60 Practice Direction and paragraphs 3.6.4 and 3.6.5 of the TCC Guide, the Court should transfer these proceedings to the TCC. He submits that although the claims and counterclaims arise in an employment context, the overwhelming bulk of time at trial is going to be concerned with technical and complex issues concerning the design, build and maintenance of a complex IT system including issues regarding coding, software development and testing activities. He provided the court with a list of 32 issues which he submitted were technical issues which arise out of the Particulars of Claim and Defence and Counterclaim.[14]He submits that the complexity of these issues is such that the case should be transferred to the TCC as this is likely to ensure that matters can be resolved speedily and at reduced cost.[15]On the other hand Mr Goulding submits that a transfer is inappropriate for the following reasons. First he submits that transfer is inappropriate given the extant application before King J and the real possibility of appeals, further orders arising out of that application and potential amendments to the pleadings. Secondly he submits that the bulk of the issues do not involve technical matters within the TCC’s particular expertise. By reference to the eight issues set out above, he submits that it is only part of the breach of the general duties which raises matters relating to the Code and that technical issues relating to the Code are likely to arise only by way of backdrop to the Defendants’ employment duties and responsibilities.[16]Thirdly, he submits that, even if there were little or only an insignificant difference between these claims proceeding in the Queen’s Bench Division or the TCC, the Court should exercise its discretion in favour of preserving the status quo so that the matter should remain in the Queen’s Bench Division. Fourthly he submits that Mr Ho has delayed two years in making this application and he says, amongst other things, that this reflects the fact that Mr Ho and his advisors considered it was entirely appropriate to remain in the Queen’s Bench Division. The principles for transfer to the TCC[17]Transfers to a specialist list are dealt with under CPR 30.5 which provides that a judge dealing with claims in a specialist list may order proceedings to be transferred to that list (CPR 30.5(2)) and that an application for transfer of proceedings to a specialist list must be made to a judge dealing with claims in that list (CPR 30.5(3)).[18]CPR 60.1(3) provides that “A claim may be brought as a TCC Claim if-(a) it involves issues or questions which are technically complex: or(b) a trial by a TCC Judge is desirable. (b) a trial by a TCC Judge is desirable.[19]Paragraph2.1 of Practice Direction 60 provides examples of the types of claims which it may be appropriate to bring as TCC Claims. Paragraph2.2 states that a claim given as an example in Paragraph 2.1 will not be suitable for the specialist list unless it demonstrates the characteristics in Rule 60.1(3). Similarly it states that the examples are not exhaustive and other types of claim may be appropriate to this specialist list.[20]There are two particular examples which are relied on in this case. First, paragraph 2.1(e) refers to “claims relating to the design, supply and installation of computers, computer software and related network systems” and, secondly, paragraph 2.1(k) refers to “claims involving taking of accounts where these are complicated”. It is also to be noted that among other claims, paragraph 2.1(c) includes claims by accountants and other specialised advisors relating to the services they provide. This demonstrates that, as set out in CPR 60.1(3), the case should involve issues or questions which are technically complex or matters where a trial by a TCC Judge is desirable or both. In the case of accountants, for instance, matters may not be technically complex but trial by a Judge in the TCC in accordance with procedure in the TCC Guide may be desirable.[21]The TCC Guide provides help on the way in which the TCC judges approach matters of transfer. Paragraph 3.6.4 and 3.6.5 set out the following guidance: 3.6.4 On an application to transfer the case to the TCC from another court or Division of the High Court, there are a number of relevant considerations:(a) Is the claim broadly one of the types of claim identified in paragraph 2.1 of the Part 60 Practice Direction?(b) Is the financial value of the claim and/or its complexity such that, in accordance with the overriding objective, the case should be transferred to the TCC.(c) What effect would transfer have on the likely costs, the speed with which the matter can be resolved, and any other broader questions of convenience for the parties? 3.6.5 On an application to transfer into the TCC, when considering the relative appropriateness of different courts or divisions, the judge will ascertain where and in what areas of judicial expertise and experience the bulk or preponderance of the issues may lie. If there was little significant difference between the appropriateness of the two venues, and the claimant, having started in one court or division, was anxious to remain there, then the application to transfer in by another party is likely to be unsuccessful.[22]The provisions have been considered in a number of cases and I was referred to two of those decisions. First, the decision of Akenhead J in Natl Amusements (UK) Ltd v White City (Shepherds Bush) Limited Partnership [2010] 1 WLR 1181 and secondly the decision of Edwards-Stuart J in CFH Total Document Management Ltd v OCE (UK) Ltd and National Australia Group Europe Ltd [2010] EWHC 541(TCC).[23]In Natl Amusements Akenhead J had to deal with an agreement for a lease of a cinema in a shopping development. At [42] he stated:
“I have formed the view that, taking into account CPR Part 30.5, CPR Part 60 and the TCC Practice Direction and having regard to the Overriding Objective, the most appropriate venue for this case is the TCC. The large bulk of the factual investigation and significant elements of the contractual interpretation involve the consideration of engineering and construction drawings, exchanges and practice as well as a substantial and significant history of professional building and engineering disciplines exchanging information and possibly acting upon such exchanges. The secondary issues are accepted to be TCC business. Whilst a number of issues, it is accepted, could be dealt with, with equal confidence either by the Chancery Division or the TCC in the Queen’s Bench Division.... All things being equal, time and cost will be saved by a trial in the TCC all of whose judges are extremely experienced in this area of construction and design.”
[24]In coming to that decision he had to consider questions of the appropriateness of one court compared to another. He said this at paragraphs 33 and 34:
“33. In my view, the court is entitled to have regard to the relative appropriateness of the different Divisions or specialist courts within them in considering whether the transfer should be made. Thus, given the increasing familiarity with and even greater competence of judges within the different divisions to deal with matters outside the traditional expertise of judges within their allotted divisions, the judge considering the transfer application should have regard to what is the more or most appropriate court to try the particular case. The judge considering the application must consider on the basis of the pleadings and other information put before the court upon what issues the bulk of the time, cost and resources involved in trying the case (and certainly the issues to be dealt with first) will be directed towards. Put another way, the court needs to ascertain if possible where and within what areas of judicial expertise and experience the bulk or preponderance of the issues lies. If there is little or only an insignificant difference between the two venues, the discretion will generally be exercised in favour of the status quo to reflect the fact that a claimant is entitled to issue proceedings in whatever division it thinks fit and that either court is sufficiently experienced in addressing the issues. I would add that, where it is clear that significantly greater expedition will be achieved in one court rather than the other, that would be a material factor to be taken into account; expedition is a factor recognised within the overriding objective. On a similar basis, where it is established that costs will be less in one Division rather than the other, that is a material factor. In the context of the TCC, the court should have specific regard to CPR Part 60 and the TCC Practice Direction with regard to the types of claim which are or may be appropriate for trial by the TCC. It is a reasonable presumption that, if the more or most appropriate court deals with the issues, there should be some saving in costs and time in disposing of the case. 34. In essence, in my judgement, the court should take a pragmatic approach to determine the most appropriate venue, taking into account the experience and expertise generally of judges therein, and any time and cost saving to be achieved in one venue rather than the other. It is not the case that the party seeking transfer must establish that it would be inappropriate for the case to remain in the Division in which it was issued. However, if it was to establish that factor, that would be a very strong ground in favour of transfer.”
[25]In CFH Total Document Management Limited Edwards-Stuart J dealt with a case where there was a dispute arising out of a contract for the provision of software. The claim was proceeding in the Mercantile Court in Bristol District Registry. It was submitted that the claim involved technical processes which the court would need to understand in order to be able to construe the relevant contract. Edwards-Stuart J said that any judge trying the case would have to have a reasonable understanding of the nature of the work that was the subject of the contract which would, in turn, require an understanding of what was involved in the software processes that CFH was engaged to carry on. He continued:
“however, this is not one of those cases where the software didn’t work and where the Court is being invited to investigate why. Such cases are notorious for being extremely difficult and as requiring a high level of understanding of the technical issues by the trial judge.”
[26]He decided that the matter should remain before the Mercantile Judge in Bristol but he reserved to that judge the question of whether or not an earlier trial date would be obtained before a TCC High Court Judge sitting in Bristol. Decision[27]In this case, as set out in the pleadings, a central issue relates to the mathematical modelling and complex computer programs which formed the Code. Whilst I accept that a number of the duties and alleged breaches concern management and reporting functions in relation to the mathematical models and the Code, I consider that the overwhelming amount of time and expert evidence will be likely to relate to technical aspects in terms of what was or should have been done by way of mathematical modelling and dealing with the Code. The fact that the Defendants deny the duties or rely on factual defences to the breaches of those duties does not, in my judgment, mean that the underlying technical issues will not need to be dealt with.[28]In relation to the alleged duties, they include for example the duty “to ensure that testing procedures were in place so as to detect any errors in the Code or its inputs” (para 16.3); “to ensure that models were given an appropriate weighting within the system” (para 16.6); “ to ensure that… the Claimants had access to a secure segregated server to test potential amendments to the Code” (para 16.8); “to ensure that … any potential amendments to the Code were fully tested on a secure segregated server” (para 16.9); “to ensure that any amendments to the Code were fully versioned”(para 16.10) and “not to deactivate … any automatic risk management trap” (para16.11).[29]Those duties are alleged to have been breached by failing to ensure that the Claimants had access to a secured segregated server (para 25.2); by making changes to the Code without first testing them at all and on a segregated server (para 25.3); by making amendments to the Code without versioning those amendments (para 25.4); by amending the trap and amending the Code in an attempt to ensure that the futures portfolios would de-leverage (para 25.5); by failing to test the Code to ensure the balance was limited to 5% (para 25.6); by failing to prevent or carry out adequate testing to detect the use of an arbitrary and irrelevant criterion in the “Alfar 2” model (para. 25.8) and by failing to review models which were underperforming (para 25.10). It is also alleged that the system did not properly adjust the degree of risk aversion (25.12); that the Defendants failed to take reasonable steps to monitor the performance of the models relating to 16 models such as “xcis” and “girs” (para27.1 ); that they failed to take reasonable steps to review the TAA Models and make consequential amendments (para27.2 ); that they introduced untested updates directly into the live system which included a basic “syntax error” in the Gauss Code (para27.3 ) and that they failed to test the de-leveraging process of the futures portfolio (para 27.13.1).[30]The Claimants allege that, as a result, the TAA models operated incorrectly and that uncorrected distortion occurred in the pricing of securities whenever there was an error in the provision of data and whenever a futures contract was de-listed and that the performance of the securities portfolio was reduced and/or the volatility of the securities portfolio was increased (para 28). It is also said that amendments were made to the Code without proper testing, causing the computer system to crash including on the following dates: 29 November 2007, 20 February 2008, 9 May 2008, 15 October 2008 (para 29).[31]The judges in the TCC have wide experience of dealing with these type of IT issues both from the technical standpoint and also, in particular, in dealing with issues of disclosure and expert evidence which arise in such cases. Experience has shown that these cases need careful case management to avoid costs and time being wasted.[32]Whilst there are other non-technical issues in this case, I consider that the central allegations concerned with mathematical modelling and the Code will be relevant to the scope and extent of the duties and matters of causation, as well as the scope and extent of the breaches. In addition, it is clear that in assessing losses suffered by the Claimants it will be necessary to analyse a wide range of lost trading opportunities. These are the type of matters which come within the scope of complex cases where trial in the TCC is desirable.[33]It is also clear from the documents that, in addition to IT expert evidence, the parties agree that it will be necessary to have evidence of the practice and procedures of trading in hedge funds. As indicated by paragraph 2.1(c) of the Part 60 Practice Direction, claims against accountants and other specialist advisors, which would include specialist investment advisors, are within the scope of the TCC area of expertise. The ability to give directions to control the scope and costs of expert evidence is an essential part of the TCC procedure.[34]I therefore consider that, on the pleadings, the bulk or preponderance of the issues which are likely to take most time and incur most of the costs will be matters either of a complex technical nature or where the trial by a TCC judge is desirable.[35]Mr Goulding rightly identifies the eight issues which arise in this case. Experience shows that a number of the factual issues will narrow as time proceeds. In particular the question of the relevant Claimant and the terms of any agreement of bonus, profit share or equity share are issues which are likely to be confined to a small number of documents and conversations. The quantum of the counterclaim is, as Mr Goulding correctly says, likely to be less complicated but if questions of accounting do arise then this again needs case management.[36]Mr Goulding also directed attention to the fact that there is a breach of duty in relation to documents which may give rise to potential further pleaded claims. This is an element where currently an issue relating to interim relief has been dealt with by King J. To the extent that allegations of breach of this duty concern documentation relating to matters of modelling or the Code, those matters evidently come within TCC expertise but, in any event, questions of disclosure of electronic documents are likely to arise which will require appropriate case management..[37]Mr Goulding also rightly refers to the pleaded causes of action arising out of the alleged surveillance. Whilst such matters do arise in the context of TCC cases they clearly are matters which can be dealt with in any Court.[38]He also refers to the fact that this is an employment dispute which would normally be dealt with in the Queen’s Bench Division. Whilst the TCC High Court Judges also sit in the Queen’s Bench Division where they hear such cases, it is clear that the fact it is an employment dispute would not generally justify transfer but, equally, would not prevent transfer.[39]Therefore, overall, I consider that the nature of the issues which are likely to take most time and incur most cost and the need for case management of documents and expert evidence are matters which weigh heavily in favour of transfer to the TCC.[40]There are three other matters raised on this application and which I need to consider. The first is that King J is already dealing with the application for interim relief in respect of inspection of the disk images of documents. I do not consider that this should prevent a transfer of the proceedings to the TCC if it is otherwise justified. Instead the appropriate order would be to reserve any matters arising from that interim application to King J, subject to further order by him or by this court, with liberty to apply.[41]Secondly, it is pointed out that this application has been made some two years after proceedings were commenced against Mr Ho in the Queen’s Bench Division. Whilst that is correct, it has to be borne in mind that the proceedings have just reached the stage where the consolidated pleadings have closed. It was only in April 2011 that the Claimants issued proceedings against Mr Gover which have now been joined with the proceedings against Mr Ho. I do not consider that this period of two years should affect the outcome of the application. No steps have been taken which would prevent the transfer or make it inappropriate. In relation to Mr Gover there was no delay. Further, I do not consider that the fact that Mr Ho has now applied for the transfer reflects any underlying weakness in the application, as was submitted on behalf of the Claimants.[42]The third point is whether in this case the status quo should be preserved by leaving proceedings in the Queen’s Bench Division, the court of choice for the Claimants. Given the matters that I have dealt with above, this is not a case where factors for and against transfer are balanced so that the court should adopt a position which preserves the status quo. Rather it is a case where, as Akenhead J said in Natl Amusements, time and cost are likely to be saved by transfer to the specialist jurisdiction of the TCC. Summary[43]In summary, I consider that this case raises complex issues, including technical issues relating to mathematical modelling and IT which will require case management, both in relation to disclosure and to expert evidence, particularly IT expert evidence. On my analysis the bulk or preponderance of the issues which are likely to take time and incur cost are matters within the provisions of CPR 30.1(3) and the examples of TCC Claims set out in paragraph 2.1 of the Part 60 Practice Direction. The financial value of the claim and the complexity also favour transfer and such transfer is likely to save time and costs.[44]In the circumstances, this is a case where it is appropriate for me to exercise my discretion and order a transfer from the Queen’s Bench Division to the TCC under CPR 30.5.