Case No: HT-10-241
Neutral Citation Number: [2011] EWHC 881 (TCC)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 08/04/2011

Before:

MR JUSTICE EDWARDS-STUART
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Between:

	ZODIAC TRAINING LIMITED 	Claimant	
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	(1)	THIRD EYE TECHNOLOGIES LIMITED
(2)	PAUL SMITH	Defendant	

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Mr Alan Gourgey QC (instructed by Tilly Bailey & Irvine) for the Claimants
Mr James St.Ville (instructed by Fladgate LLP) for the Defendants

Hearing dates: 11th February 2011 
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Judgment
Mr Justice Edwards-Stuart: 
1.	This judgment concerns the issue of costs following an unsuccessful application by the Defendants for security for costs against the Claimant.
2.	The application was listed for 1½ hours at 11:30 am on Friday, 11 February 2011. Unfortunately this proved a gross underestimate and counsel for the Defendants was still opening the application by the end of the morning. It became clear during the afternoon that the court would not be able to sit late for reasons of religious observance affecting a representative of one of the parties. However, it was possible to conclude the argument in the time available and, since I had reached a clear conclusion as to the outcome, I gave a very brief extempore judgment giving my reasons for dismissing the application.
3.	The application was made in rather unusual circumstances. The trial was fixed to take place in the last two weeks of May 2011 but there was an outstanding application by the Defendants to have the trial date adjourned owing to the ill health of the Second Defendant, a director of the First Defendant. There was not time to hear that application in addition to the application for security for costs and, in any event, the Defendants were being asked to provide further medical evidence and so it seemed possible, at least, that that application might be resolved by consent if satisfactory medical evidence supporting the Defendants’ position was forthcoming. Indeed, an adjournment was ultimately agreed.
4.	However, for the purposes of the application for security it was necessary to assess the Claimant's financial position at the time when any order for costs was likely to be made (or, more precisely, when any such order would have to be met by the Claimant). It was assumed, by agreement, for the purpose of the application that a judgment would be delivered in July 2011, even though an order for costs might not be made at the same time. But the application for security necessarily predicates that the party applying will be successful at trial, and so it must be assumed for the purposes of this application that the judgment will be in favour of the Defendants and that some order for costs in the Defendants’ favour will be made.
5.	The relevance of the timing is that the Claimant's financial year runs from 1 August to 31 July. Accordingly, I concluded that if a judgment in the Defendants’ favour was delivered in July it would be the duty of the Claimant's accountants to make some provision in the accounts for the year ending 31 July 2011 for the contingent liability of the Claimant for some or all of the Defendants’ costs. The reason why it was necessary to reach a conclusion about this will become apparent later in this judgment.
6.	There were two unusual features about the Claimant's financial position. First, it owed a substantial sum of money to one of its directors, Lilian Mains. In a letter dated 25 November 2010 from the Claimant’s solicitors an undertaking was given that this loan would not be repaid until any order for costs in favour of the Defendants had been satisfied. This undertaking was subsequently repeated in a witness statement served by Ms Mains.
7.	The other unusual feature was that the Claimant had agreed to buy back shares worth £1 million from a former director, Ms McQueen, of which £500,000 was still outstanding. The payment of this sum was (by virtue of the provisions of the Companies Acts) contingent on there being distributable profits out of which to pay it. Indeed, according to my note counsel for the Defendants, when opening the application, submitted that this £500,000 would be paid as soon as there were profits in the company out of which to pay it.
8.	It is this feature that made the timing of any judgment in relation to the end of the Claimant's financial year important. As I have indicated above, I concluded, rightly or wrongly, that once a judgment had been given in the Defendants’ favour prior to the end of the Claimant's financial year, the Claimant's auditors would be required to make a provision in those accounts for the contingent liability of the Claimant to pay all or part of the Defendants’ costs. I therefore concluded (on the agreed assumption that judgment would be given in July 2011) that this liability to pay the £500,000 to Ms McQueen could be left out of account for the purposes of assessing the Claimant's ability to meet any order for costs made against it following the judgment.
9.	Since it was not possible to deal with questions of costs at the conclusion of the hearing, I directed that the parties were to make written submissions on costs and I would then deal with them on paper.
10.	The result of this direction was that each party made written submissions and then each party put in a further round of submissions in response to those submitted by the other. The first round of submissions produced by the Defendants amounted in large measure to an attempt to reopen the argument about the provision of security and was, in effect, a request that the court should recall the judgment and reconsider the position.  I decline to do this.  One matter that was relied on in particular was what the Defendants described as the failure on the part of the Claimant to provide a formal undertaking in relation to the payment of the £500,000 to Ms McQueen. The Claimant's position was very simply that the payment of this sum was subject to the provisions of, first, the agreement between the Claimant and Ms McQueen and, second, the provisions of the Companies Acts. By contrast, the position in relation to the debt owed to Ms Mains was a matter that was entirely within the control of the Claimant. So far as that debt is concerned, some form of undertaking was necessary if the Defendants’ interests were to be properly protected, and this was given.
11.	In response to the Defendants’ application that it should have the costs of the application or, alternatively, that the costs should not follow the event and that some form of split order for costs should be made, the Claimant responded that the relevant issues had been canvassed in correspondence prior to the making of the application and had been resolved or explained by the Claimant. In particular, the Claimant had explained a dip in its income during the first part of its trading year, an explanation subsequently confirmed in the statement of Ms Mains, and, in addition, had offered the undertaking on behalf of Ms Mains not to seek repayment of any part of the debt owed to her until any order for costs in favour of the Defendants had been satisfied. The question that was not addressed in the pre-application correspondence was the liability for the outstanding £500,000 owed to Ms McQueen.
12.	The Claimant submits that it did not address this question because it had not been raised on behalf of the Defendants. The Claimant submits, correctly as far as I can tell, that this point was only advanced for the first time in the witness statement of Mr Buckley, served in support of the application. It was answered in the witness statement of Ms Mains, at paragraph 18. The Defendants’ retort to this was that the McQueen contract was only raised in Mr Buckley's witness statement because the "management buyout" to which it related was only raised for the first time in the Claimant’s solicitors’ letter of 25 November 2010.
13.	What complicated matters was that in her witness statement Ms Mains stated that the outstanding £500,000 would be paid out of distributable profits "no later than" July 2011. This raised the spectre that this sum would not be available to meet any order for costs that might be made as a result of a judgment in the Defendants’ favour given in July 2011.
14.	In my judgment, this was an application which cried out for early service of the Claimant's evidence. Paragraph 6.4 of the TCC Guide requires that, in all but simple applications, evidence in opposition to an application should be served "at the least 5 working days before the hearing" (original emphasis). On 20 January and 1 February 2011 the Defendants’ solicitors wrote letters chasing the service of the Claimant's evidence in response to the application. The Claimants solicitors replied saying "we can confirm that we will be in a position to provide our client’s evidence in response to your clients’ application for security for costs within five working days of the hearing in accordance with the terms set out in section 6.4.2 of the Technology and Construction Court Guide" (my emphasis).
15.	The Claimant's evidence was served at 5 pm on Friday, 4 February 2011, which was less than 5 working days before the hearing on the following Friday. No explanation was provided in the witness statement of Ms Mains for the late service of the Claimant's evidence. I regret to say that I am left with the distinct feeling that the timing was tactical.  I have formed the impression from reading the inter-solicitor correspondence as a whole that both parties have adopted a pretty uncompromising approach, which only reinforces this feeling.
16.	In spite of the submissions on behalf of the Defendants, I am not persuaded that this is a case in which the costs should not follow the event in the ordinary way. This was an application for security for costs that failed.  The reason for the failure of the application was not, in my view, the result of any matters that only arose for the first time at the hearing. However, I consider that the Claimant is to be criticised for the late service of its evidence: I can see no reason why this evidence should not have been served earlier. Had it been, there is a possibility that the application might have been resolved by agreement. However, given the attitude of the parties to each other as I detect it to be, I would not put the prospects of this very high.  But in addition to this aspect, I consider that it is appropriate also to mark the court's displeasure of the late service, without any explanation, of the Claimant's evidence.  I therefore propose to award the Claimant only 85% of its costs: that is, 85% of the sum that I have assessed as being the proper amount.
17.	Having considered the statement of costs prepared by the Claimant, I assess its costs in the sum of £19,828.  By way of brief explanation, I consider that the 30 hours spent on attendance on documents is more than I regard as reasonably necessary and I have reduced the amount claimed for this to £3,500. I have also reduced the solicitor’s travelling time to 3 hours, because I do not consider that the Defendants should pay for the time spent on the return journey which could have been spent doing other work. I have reduced leading counsel's fee to £12,500 because I consider that the brief fee should be agreed in advance and should not be time dependent (as appears to have been the case): counsel takes the risk (within reason) that an application may take longer than anticipated, just as he or she takes the benefit if it goes short. I accept that different considerations will arise if an application runs into a second day.
18.	Accordingly, the Defendants are to pay the Claimant’s costs of the application for security in the sum of £16,853.80 (£19,828 x 85%).  That sum is to be paid within 21 days of the date of the issue of this judgment.