HIGH COURT OVERTURNS DECISION TO GRANT RELIEF FROM SANCTIONS: NON-COMPLIANCE CANNOT AMOUNT TO “GOOD REASON”

  In Pittville Ltd -v- Hunters & Frankau Limited [2016] EWHC 2683 Mr Justice Snowden overturned the decision of a Deputy Master granting relief from sanctions.   The judgment contains an important consideration of the question of “good reasons” for non-compliance. It also contains strictures against varying earlier court orders.

What is a “good reason” for non-compliance needs to take into account why the order was made in the first place. In the case of an order requiring the provision of security for costs under CPR 25.13(2)(c), the order is made because there is “reason to believe that the claimant will be unable to pay the defendant’s costs if ordered to do so.” In other words, the order for security is made precisely because there is reason to believe that the claimant does not have the funds to pay costs orders that might be made. It is, therefore, inherent in CPR 25.13 that an order for security for costs may be made in respect of a claimant which may find it difficult to provide the security, with the result that if the claimant does not provide the security as ordered, its case will be dismissed”.

KEY POINTS

  • A Deputy Master should not have granted a claimant for relief from sanctions following a failure to comply with an order to provide security for costs made four years earlier.
  • An order for security for costs was made because of concerns in relation to a litigant’s ability to pay costs. The failure to provide security and continued efforts to find insurance could not amount to “good reasons”.
  • When considering “good reason” it is important to consider why an order was made in the first place.
  • Similarly the Deputy Master should not have varied the terms of the original order made four years earlier.  There were no new factors and the inability to pay, and efforts to find security, did not amount to a change in circumstances or grounds to vary an order.

THE CASE

An order  had been made imposing sanctions arising from the claimant’s failure to comply with an order for security for costs. The Deputy Master granted relief from sanctions some four years later. The defendants appealed.

THE JUDGE’S JUDGMENT

  1. I start by acknowledging that the decisions of Deputy Master Cousins are discretionary case management decisions, and as the commentary in Civil Procedure (The White Book) indicates, at paragraph 3.9.6.11,
“Decisions as to whether or not to grant relief from sanctions are always discretionary and are highly case sensitive. Appeal courts will not interfere with a lower court’s decision on such matters unless satisfied that the lower court has erred in law, erred in fact or reached a conclusion which falls outside the generous ambit within which reasonable disagreement is possible.”
See also Global Torch v Apex Global Management (No.2) [2014] 1 WLR 4495 at paragraph 13 per Lord Neuberger, referring to the dictum of Lewison LJ in Broughton v Kop Football (Cayman) Limited [2012] EWCA Civ 1743 at paragraph 51.
  1. In relation to the First Judgment, and considering the Denton approach, the Deputy Master was plainly right to regard the failure to comply with the Unless Order as serious and significant. It is inherent in the very nature of an unless order that it is likely to have followed an earlier failure to comply with a court order and that the court regards compliance as sufficiently important to attach sanctions to it. This was also not a case in which MasterCigars had failed to provide the security for costs that had been ordered by a matter of days, weeks or even months. Even by the time of the hearings before Deputy Master Cousins, the security was still not available, some four years after it had been ordered to be provided.
  2. At the second stage of his Denton analysis, Deputy Master Cousins accepted the proposition that MasterCigars’ lack of available funds was a “good reason” for its failure to comply with the Security Order and the Unless Order. I think, however, that he was plainly wrong to do so.
  3. What is a “good reason” for non-compliance needs to take into account why the order was made in the first place. In the case of an order requiring the provision of security for costs under CPR 25.13(2)(c), the order is made because there is “reason to believe that the claimant will be unable to pay the defendant’s costs if ordered to do so.” In other words, the order for security is made precisely because there is reason to believe that the claimant does not have the funds to pay costs orders that might be made. It is, therefore, inherent in CPR 25.13 that an order for security for costs may be made in respect of a claimant which may find it difficult to provide the security, with the result that if the claimant does not provide the security as ordered, its case will be dismissed: see e.g. Pearson v Naydler[1977] 1 WLR 899 at 906G, per Megarry V-C, referred to by the Court of Appeal in Keary Developments v Tarmac Construction [1995] 3 All ER 534 at 539j-540a. As such, I cannot see how a claimant’s lack of financial resources can be both the reason for making the order in the first place and a “good reason” why it has not been complied with.
  4. Similarly, a decision to make a security for costs order takes into account whether it would be unjust for the claim to be stifled (i.e. dismissed) if security is ordered which cannot be complied with, especially where the defendant’s conduct may have been a material cause of the claimant’s impecuniosity: see e.g. Keary Developments v Tarmac Construction [1995] 3 All ER 534 at 540b-c. Again, therefore, I cannot see how such factors, which to the extent relevant will have been taken into account in the decision to make the order for security in the first place, can also constitute “good reasons” why the order has not been complied with.
  5. The obvious effect of Deputy Master Cousins’ finding that MasterCigars’ lack of money was a good reason for its failure to comply with the Unless Order was that it predisposed him to grant relief from sanctions at the third stage: see Denton at paragraph 35. But I also think that Deputy Master Cousins fell further into error at stage three of his Denton analysis.
  6. Although the Deputy Master referred compendiously to the requirement to consider all of the circumstances so as to enable the court to deal justly with the application, he did not appear to consider the two matters to which attention is specifically drawn by CPR 3.9(1), namely (a) the need for litigation to be conducted efficiently and at proportionate cost; and (b) the need to enforce compliance with rules, practice directions and orders.
  7. In Denton, as regards (a) – the requirement that litigation should be conducted efficiently and at proportionate cost, the Court of Appeal stated, at paragraph 34,
“Factor (a) makes it clear that the court must consider the effect of the breach in every case. If the breach has prevented the court or the parties from conducting the litigation (or other litigation) efficiently and at proportionate cost, that will be a factor weighing in favour of refusing relief. “
  1. MasterCigars’ failure to provide security had led to the Claim not being proceeded with for over three years before Pittville made its application. The required security was still not available in 2015, and by January 2016 – the extra time which Pittville sought from Deputy Master Cousins to try to obtain it, some four and a half years would have expired since the Security Order was made, and over eleven years would have expired since the consignment of cigars was intercepted and examined. The short point was that MasterCigars’ breach had prevented the Claim from being conducted at all for a very long time indeed, and even if the security was finally provided, it would be inevitable that substantial further costs would be wasted as lawyers sought to pick up the case again after such a long period.
  2. In relation to the second requirement – the need to enforce compliance with orders – the Court of Appeal in Denton emphasised that there had been a policy move away from the old, lax culture of non-compliance with court orders. But I think that this second requirement also encompasses an equally fundamental practical point – namely that when considering whether it is just in all the circumstances to grant relief from sanctions, the court should ask whether the applicant for relief is actually in a position to comply with the order in question.
  3. In this case, Mr. Kenyon’s evidence was that, four years on, neither MasterCigars nor Pittville was able to provide any security for costs. Specifically there was no evidence that either company had any prospect of providing cash or a bank guarantee so as to comply with the requirements of the Unless Order. Of itself that ought to have been a weighty factor in the scales against the grant of relief from sanctions.
  4. In reality, Pittville’s only prospect of providing any security for costs was if it could obtain an ATE policy that offered a suitable alternative to cash or a bank guarantee or allowed the court to reduce the amount of cash or guarantee cover required to a level that was affordable. In that respect, the evidence was that Mr. Kenyon had already failed in a number of attempts over several years to arrange an ATE policy, including recent efforts with the assistance of his legal team. Mr. Kenyon had expressed new optimism, but as this largely depended upon relief from sanctions being granted before he made a renewed approach to funders, this clearly involved an element of circularity: the question was whether such relief should be granted in the first place.
  5. As such, the Deputy Master should have appreciated at stage three of his Denton analysis that it could only conceivably be appropriate to grant relief from sanctions if it was also appropriate, four years after the event, to vary the Unless Order to allow for the provision of security by way of an ATE policy, and if it was also appropriate to give a significant further extension of time to Pittville to obtain a satisfactory ATE policy. Although the Deputy Master tentatively indicated in his First Judgment that he was minded to make such an order, those questions were only properly addressed in the Second Judgment, by which time the Deputy Master had painted himself into a corner by already having decided to grant relief from sanctions in the First Judgment.
  6. When the Deputy Master did address the questions of variation and extension of time for complying with the Unless Order in the Second Judgment, he faced (as he acknowledged), the problem that the case management power of the court to vary or revoke an order under CPR 3.1(7) is subject to significant limitations. The circumstances in which the power can properly be exercised were considered by the Court of Appeal in Tibbles v SIG plc [2012] 1 WLR 2591 and were summarised by Rix LJ at paragraph 39 as follows,
“39. In my judgment, this jurisprudence permits the following conclusions to be drawn:
(i) Despite occasional references to a possible distinction between jurisdiction and discretion in the operation of CPR r. 3.1(7), there is in all probability no line to be drawn between the two. The rule is apparently broad and unfettered, but considerations of finality, the undesirability of allowing litigants to have two bites at the cherry, and the need to avoid undermining the concept of appeal, all push towards a principled curtailment of an otherwise apparently open discretion. Whether that curtailment goes even further in the case of a final order does not arise in this appeal.
(ii) The cases all warn against an attempt at an exhaustive definition of the circumstances in which a principled exercise of the discretion may arise. Subject to that, however, the jurisprudence has laid down firm guidance as to the primary circumstances in which the discretion may, as a matter of principle, be appropriately exercised, namely normally only (a) where there has been a material change of circumstances since the order was made, or (b) where the facts on which the original decision was made were (innocently or otherwise) misstated.
….
(vii) The cases considered above suggest that the successful invocation of the rule is rare. Exceptional is a dangerous and sometimes misleading word: however, such is the interest of justice in the finality of a court’s orders that it ought normally to take something out of the ordinary to lead to variation or revocation of an order, especially in the absence of a change of circumstances in an interlocutory situation.”
  1. In this case, there is no suggestion of a misstatement of fact. The Deputy Master based his decision on what he held was a material change of circumstances since the order was made, or upon the backdrop to the case being “well out of the ordinary”. In my judgment he was plainly wrong on both counts.
  2. As regards a material change of circumstances, the Deputy Master relied upon the efforts of Mr. Kenyon to obtain funding after the Claim had been dismissed in 2011, and upon the fact that “it is now said [an ATE policy] is likely to be forthcoming”. I do not think that these matters could amount to a material change of circumstances as envisaged by the Court of Appeal in Tibbles. When the court makes an unless order requiring a party to do something by a certain time, and specifies that if it is not done a certain sanction will follow, the court will have considered the possibility that the party will not be able to comply and the justice of imposing the sanction if it does not. If the terms of the order are unjust, the remedy for the party affected is to appeal. It cannot be open to the party concerned to decide not to appeal the order, but then to come back to court at a distant point in the future when it has been able to arrange its affairs so that it is (or thinks it might be) able to do what was required, and assert that its new situation amounts to a material change in circumstances. That would entirely undermine the interests of finality in litigation, the purpose of the original unless order, and the concept of an appeal.
  3. The instant case is even more extreme. Viewed objectively there had been no change of circumstances at all. MasterCigars (which was the subject of the Unless Order) was still not able to provide the security required, and in spite of Mr. Kenyon’s best efforts, neither was Pittville. The only “change” was that Mr. Kenyon had expressed the subjective opinion that if the application for relief from sanctions was granted, and if Pittville were to be substituted, he was “confident that the pursuit of funding [by Pittville] will be positive at this stage.” It cannot be a material change of circumstances justifying a variation of an unless order that the party against whom the order is made still cannot comply with it and is in no different position than before, except that it has assigned its rights to someone else, who also cannot comply, but asserts that it thinks it might be able to do so if given a further period to time to try to do so.
  4. That leaves Deputy Master Cousins’ reliance on his view that “the backdrop to the case discloses the most unusual set of circumstances which are well out of the ordinary” and his reference to “paragraph 52ff” of his First Judgment. Paragraph 52 of the First Judgment was as follows,
“I immediately acknowledge that the background to the Application is most unusual, not least by reason of the delay in seeking to make the Application. However, I consider that the history of the matter demonstrates that there are exceptional circumstances at play. The historical consequences can be found in the Fysh Judgment, to which I have made some reference above. It is to be noted that the findings of fact which Judge Fysh made were not challenged on appeal and were therefore not overturned by the Court of Appeal. Specifically the finding of Judge Fysh that the Consignment contained no counterfeit goods remains unchallenged. It is submitted that the important point for the Claimants is that the Judge proceeded on the basis that the single box would have been counterfeit had it been part of the consignment, but he concluded that it did not form part of the consignment and did not form part of the consignment as a result of anyone acting on behalf of MasterCigars. He found that the only party who could legitimately had been in possession of such a box without the Hologram was Hunters & Frankau since they received boxes from Cuba directly without bearing the Hologram. It is also to be noted that Mr Butler who was a former employee of Hunters & Frankau has now provided a witness statement for the Claimants, Mr Butler’s evidence being supportive of the case for MasterCigars.”
The Deputy Master’s reference to “paragraph 52ff” must have been to paragraphs 53-55 of the First Judgment (which I have summarised at length above) dealing with Deputy Master Cousins’ Dentonanalysis and in particular to the difficulties encountered by Mr. Kenyon in obtaining an assignment of the Claim and in approaching third party funders.
  1. The Deputy Master never clearly identified in what respect the circumstances to which he referred in those paragraphs of his First Judgment were exceptional or out of the ordinary. Still less did he identify in what respects they were relevant to an application to vary the Unless Order. Apart from the fact that the case concerns habanos, its underlying facts are no more or less unusual than many other commercial cases in which one side accuses the other of unlawful or deceptive conduct to harm its business. Neither is there anything exceptional in delays in the realisation of assets in an insolvency or in a party seeking, but being unsuccessful in obtaining, third party funding for litigation.
  2. Instead, in spite of Mr. Strauss QC’s submissions to the contrary, the natural reading of the Deputy Master’s reference to paragraph 52 of the First Judgment suggests to me that the Deputy Master was placing reliance upon the fact that the Claim was based upon an earlier unchallenged judicial finding by HHJ Fysh QC that the box of cigars without the hologram had not been put into the consignment by anyone on behalf of MasterCigars, and that the only party who could legitimately have access to a box without a hologram in the UK was Hunters & Frankau. When coupled with his reference to Mr. Butler having provided evidence supporting the Claim, it seems to me that the Deputy Master can only be understood as saying that he had formed the prima facie view that MasterCigars had a meritorious Claim.
  3. I do not, however, think that this could amount to exceptional circumstances for the purpose of CPR 3.1(7). It is inherent in the jurisdiction to order security for costs that to do so might mean that a meritorious claim cannot be pursued; and subject to the warning that the court should generally not go into the merits in any detail unless it is clear that one side or the other is likely to win, the court can have regard to the claimant’s prospects for success when deciding whether to make an order for security for costs: see Keary Developments at page 540d. The findings of HHJ Fysh QC had been well known since before the Claim was commenced and were certainly available to Master Bragge to take into account when he decided to make the Security Order and the Unless Order in the terms that he did. I therefore do not see how it was appropriate for Deputy Master Cousins, four years on, to take his own view of the background facts, and treat them as exceptional reasons for varying Master Bragge’s Unless Order.
  4. Moreover, in Global Torch, which concerned an appeal against a series of case management decisions including the making of an unless order, the entry of a judgment in default, and the rejection of a subsequent application to vary that order and for relief from sanctions, Lord Neuberger stated, at paragraphs 29-30,
“29. In my view, the strength of a party’s case on the ultimate merits of the proceedings is generally irrelevant when it comes to case management issues of the sort which were the subject matter of the decisions of Vos, Norris and Mann JJ in these proceedings. The one possible exception could be where a party has a case whose strength would entitle him to summary judgment. Both the general rule and the exception appeared to be common ground between the parties, although Mr Fenwick seemed to be inclined at one stage to suggest that the exception might be a little wider. In my view, the general rule is justifiable on both principled and practical grounds.
30. A trial involves directions and case management decisions, and it is hard to see why the strength of either party’s case should, at least normally, affect the nature or the enforcement of those directions and decisions. While it may be a different way of making the same point, it is also hard to identify quite how a court, when giving directions or imposing a sanction, could satisfactorily take into account the ultimate prospects of success in a principled way. Further, it would be thoroughly undesirable if, every time the court was considering the imposition or enforcement of a sanction, it could be faced with the exercise of assessing the strength of the parties’ respective cases: it would lead to such applications costing much more and taking up much more court time than they already do. It would thus be inherently undesirable and contrary to the aim of the Woolf and Jackson reforms.
  1. MasterCigars’ case did not fall into the category of a case justifying summary judgment, and accordingly I think that perceptions as to the merits of the Claim (whether described as the “backdrop” or otherwise) should have played no part in the Deputy Master’s decision.
  2. The only other material upon which the Deputy Master expressly relied in 2015 was the statement of Mr. Butler. That statement had not been before Master Bragge when he considered the matter in May and July 2011. However, the statement was dated 26 April 2011, and so far as Deputy Master Cousins was concerned, it was therefore a document that must have been available to MasterCigars at the time that the Security Order and the Unless Order were made in 2011.
  3. In Lloyds Investment (Scandinavia) Ltd v Ager-Hanssen [2003] EWHC 1740 (Ch) at paragraph 7, in a passage referred to with evident approval by the Court of Appeal in Tibbles, Patten J commented,
“…If all that is sought is a reconsideration of the order on the basis of the same material, then that can only be done, in my judgment, in the context of an appeal. Similarly it is not, I think, open to a party to the earlier application to seek in effect to reargue that application by relying on submissions and evidence which were available to him at the time of the earlier hearing, but which, for whatever reason, he or his legal representatives chose not to deploy.

(my emphasis)

  1. On that basis, it seems to me that the Deputy Master should not have placed any reliance upon the contents of Mr. Butler’s 2011 statement in deciding to vary the Unless Order.
  2. The position as regards Mr. Butler’s 2011 statement does not, however, end there. Following the conclusion of the hearing before me, and whilst I was preparing this judgment in late September and October 2016, I received a spate of communications relating to Mr. Butler’s statement. These communications commenced with a new witness statement of Mr. Butler dated 28 September 2016 which had been prepared and signed by him after he had received independent legal advice from Stephenson Harwood LLP (albeit paid for by Hunters & Frankau). Mr. Butler’s 2016 statement gave an account of the circumstances surrounding the preparation of his statement in April 2011 and sought to retract or amend much of that earlier statement.
  3. Mr. Butler’s 2016 statement indicated that he had attended a lengthy meeting with Mr. Kenyon and MasterCigar’s solicitors (Fulbright & Jaworski LLP) on 26 April 2011. Mr. Butler said that he had signed a piece of paper (which he described as “blank” even though it in fact contained the words “I believe that the facts stated in this witness statement are true” above his signature) at the end of the meeting to signify that he had attended the meeting and had consented to a draft witness statement being produced for him to sign. He said, however, that he had not had a chance to check the contents of the statement at the meeting and had understood that no statement from him would be used in the proceedings until he had done so.
  4. Mr. Butler was sent a copy of his statement the next day, 27 April 2011 under cover of an email from Fulbright & Jaworski that stated that it would not be handed over to the Defendants without Mr. Butler being told in advance. Fulbright & Jaworski also confirmed by email on 3 May 2011 (two days before the hearing before Master Bragge) that the statement would not be sent to the Defendants until Mr. Butler had had the chance to check it.
  5. There matters rested until about a year later in 18 April 2012 when Mr. Butler emailed Fulbright & Jaworski asking for an update of the proceedings, stating that he had not “fully checked” his statement, and reminding Fulbright & Jaworski that they had agreed that his statement would not be used until he had been spoken to first. The final emails in this exchange from Fulbright & Jaworski agreed that the statement would not be used unless Mr. Butler had been spoken to first and stated “We’ll revisit the statement with you if it is to be used”.
  6. In response to Mr. Butler’s 2016 statement, Mr. Kenyon produced a statement asserting that so far as he was concerned, Mr. Butler’s 2011 statement had accurately reflected what Mr. Butler had said at the meeting at Fulbright & Jaworski. In order to explain how the 2011 statement had come to be used to support Pittville’s application in 2014, Mr. Kenyon indicated that although he had originally known that Mr. Butler had asked that his statement should not be used without his being told, he (Mr. Kenyon) had “forgotten about this later”.
  7. Mr. Kenyon also went on to state that he had been approached by Mr. Butler in late August 2016. The approach took place after Mr. Butler had attended meetings with Hunters & Frankau initially to discuss his pension arrangements, at which he had been made aware that his 2011 statement had been used by Pittville at the hearings before Deputy Master Cousins. Mr. Kenyon exhibited transcripts of tape-recordings that he had secretly made of subsequent conversations with Mr. Butler in a casino in Westcliffe-on-Sea, at the Broadgate Tower near to Liverpool Street and on the telephone, together with several text message exchanges. The gist of Mr. Kenyon’s evidence was that although Mr. Butler had confirmed that his 2011 statement had been accurate, he felt caught between the rival parties and wanted to be paid £50,000 not to retract it, which Mr. Kenyon declined to pay. That evidence in turn prompted a rebuttal from Hunters & Frankau’s solicitor, denying that any pressure had been placed upon Mr. Butler by Hunters & Frankau.
  8. I am obviously not in a position to reach any conclusion about the truth or otherwise of any of Mr. Butler’s evidence on this application. But neither do I think that it is necessary for me to do so. The only relevant fact, which cannot be disputed, is that in 2011 it would have been open to MasterCigars or its lawyers, had they wished to do so, to take steps to ask Mr. Butler to check and confirm his statement with a view to deploying it before Master Bragge. However, MasterCigars and its lawyers did not, for whatever reason, seek to do so. The matter was simply left in abeyance until Mr. Butler asked about it again in 2012.
  9. That decision by MasterCigars not to seek to finalise and deploy Mr. Butler’s evidence in 2011 simply confirms the conclusion that I have reached above that having regard to the observations of Patten J in Lloyds Investment (Scandinavia), Deputy Master Cousins should not have had regard to the contents of Mr. Butler’s 2011 statement when deciding whether it was appropriate to vary the Unless Order.
CONCLUSION
  1. Standing back, it seems to me that Deputy Master Cousins erred in finding that MasterCigars had a “good reason” for failing to comply with the Unless Order, and he failed to give any, or any appropriate, weight to the very powerful arguments against the grant of relief from sanctions and against the variation of the Unless Order.
  2. The Deputy Master seems to have been impressed by the continued efforts of Mr. Kenyon to obtain funding, but looking at the matter objectively, such efforts to obtain funding had not proved successful over a considerable period of time whilst the Claim had for all purposes been dead. There was, moreover, still no assurance that they would be successful in the near future.
  3. The Deputy Master’s references to the “exceptional circumstances” of the case, including the findings of HHJ Fysh and the statement of Mr. Butler, were, if relevant at all, matters that were before Master Bragge or could have been before him when he made the Security Order and the Unless Order in 2011. Neither of those orders was appealed and there was nothing new or out of the ordinary to justify Deputy Master Cousins simply preferring his own view of such matters in 2015. Still less was he entitled to have regard to his own view of the merits of the Claim.
  4. For these reasons I therefore conclude that the Deputy Master plainly erred in his approach to the application for relief from sanctions and for the variation of the Unless Order. The consequence was that in my view he reached a decision that, even allowing for a wide margin of appreciation, he should not have reached.
  5. I shall, therefore, allow the appeal, set aside the order of Deputy Master Cousins of 7 October 2015 and restore the judgment and order of Deputy Master Nurse in favour of the Defendants dated 26 August 2011.

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