(1) TC Development (South East) Ltd (2) BUJ Architects LLP -v- Investin Quay House Limited: IBB successfully obtains an Order for Security for Costs against a Counterclaiming Defendant.
IBB recently acted for clients, TC Developments (South East) Ltd (“TCD”) and BUJ Architects LLP (“BUJ”) who successfully obtained an order for security for costs in the Technology and Construction Court. The ruling will be of significant interest as our clients are in fact the claimants of the litigation and a successful order was made against the counterclaiming defendant, Investin Quay House Limited (“Investin”).
TCD, a company providing project management and coordination services and BUJ, a firm of architects separately entered into service agreements (defined in the pleadings as the “TCD Contract” and “BUJ Contract”) with Investin to assist Investin with obtaining planning permission for the redevelopment of a site owned by Investin known as Quay House. TCD and BUJ were instructed by Investin following Investin’s unsuccessful planning application in 2014 for the same site. Despite TCD and BUJ performing their contracts fully, Investin opted to sell Quay House prior to submitting their application for planning permission. Investin did not notify TCD and BUJ of the sale and did not pay them their professional fees. Investin sold Quay House for £26 million plus VAT.
It was an express term of the TCD contract, that should Investin sell Quay House within 12 months of the contract without submitting the planning application, then TCD would be entitled to a fee of £150,000 plus VAT.
Under the BUJ Contract, it is an express term that BUJ is paid its fees if the contract is terminated in a prescribed manner by Investin. As Investin did not terminate the contract, it is BUJ’s case that it is an implied term of the contract that (i) Investin were required to terminate the contract in the prescribed manner when it decided not to pursue its planning application; and (ii) it was a breach of the contract that Investin did not submit its planning application or that (iii) BUJ is entitled to a payment on a quantum meruit basis. BUJ claims payment of £295,000 plus VAT or alternatively £750,000 plus VAT.
Upon our clients learning of the sale of Quay House, they entered into correspondence with Investin regarding their unpaid fees. However, Investin made it clear that the proceeds of sale would be removed from the company and the company would be liquidating itself thereafter. Accordingly, IBB were successful in obtaining a mareva freezing injunction against Investin on behalf of our clients. However, by this stage only circa £91,000 remained in Investin’s bank accounts in Jersey, largely due to Investin repaying unsecured shareholder loans of circa £23 million to its sole shareholder, John Downer.
Thereafter proceedings were issued by our clients and Investin filed and served a defence by way of setoff and counterclaim in reply which alleged that our clients had caused Investin to suffer loss because:
- Our clients’ proposed scheme in support of the planning application was “uncommercial”; and
- Our clients failed to inform Investin that the demolition required access to an adjoining strip of land owned by a third party.
Despite not quantifying the value of their counterclaim, it was understood to be in the millions. The only open indication of the value of Investin’s counterclaim was in their pleading which stated that its value was “substantially greater” than the combined value of both our clients’ respective claims for fees.
Accordingly, as the value of Investin’s counterclaim was “substantially greater” than the value of our clients’ combined claims for fees, in order to protect our clients from being put to great expense in defending this significant counterclaim, we sought an order from the court that Investin provide security for our clients’ costs for defending the counterclaim.
The principle of security for costs is found under CPR 25 and derives out of providing certain defendants (that qualify under the conditions listed in CPR 25) with the safety blanket of knowing that should they succeed at trial and an adverse costs order is made against the claimant(s)/counterclaimant(s) then they will be able to recover their costs as funds will be held by the Court.
The design of the rules is to protect a defendant (or a claimant placed in a similar position by a counterclaim) who is forced into litigation at the election of someone else against adverse costs consequences of that litigation” (Autoweld Systems Ltd v Kilto Enterprises Ltd).
The test for security is two fold:
- that in all the circumstances of the case it is just to make an order for security; and
- one or more of the conditions outlined in CPR 25.13(2) are satisfied.
The conditions our clients relied on in this application are found at CPR 25.13(2)(a) and (c), namely that Investin were resident outside the jurisdiction (by virtue of being a company incorporated in Jersey) and were an impecunious company respectively.
In relation to the former, it is trite law that this condition can only be relied on for an order for security when there is a potential difficulty in enforcing a money judgment abroad. Investin submitted into evidence prior to the hearing, a letter of advice from its Jersey legal representatives outlining the apparent ease of registering an English judgment at the Royal Court in Jersey. Accordingly, reliance on this condition by our clients was not abandoned but detailed submissions were not advanced at the hearing in response due to the strength of their case relying on condition (c); that Investin were impecunious and unable to meet an adverse costs order.
Accordingly, our clients made clear to the Judge at the outset of the hearing, that the application would turn on the their reliance on condition (c). Essentially, the Judge needed to determine whether what Investin had pleaded by way of set off and counterclaim is in reality a “mere defence” or whether Investin’s counterclaim can be said to be a cross-action or to have “independent vitality of its own”.
Investin made the submission that the counterclaim did not have “independent vitality” on the basis that:-
- There is complete overlap between the factual enquiry required for its defence of set-off and its proposed counterclaim i.e. our clients would be put to no additional expense by defending the counterclaim;
- Investin’s counterclaim is shortly pleaded. The submission was made that its defence and counterclaim consisted of 13 pages with only three sentences attributed to the counterclaim and pointed to the fact that our clients’ Reply and Defence to Counterclaim was pleaded in similar form. The point was made that the pleadings reflected the reality of the situation that the litigation centred around the issues raised in Investin’s Defence; and
- The counterclaim and defence of set-off arise from the same transactions as our clients’ claims and the facts relied on are solely pleaded in its Defence.
Our clients’ key submission at the hearing was to ask the Court to consider the scenario of Investin issuing proceedings first. We knew from Investin’s pleading that the counterclaim was “substantially greater” than the combined value of our clients’ claims for fees. Therefore, if Investin issued proceedings first and our clients counterclaimed for its fees, it would be plainly obvious that the fees claim and the counterclaim had independent vitality and as no evidence was provided to the contrary, the Court must infer that Investin would have issued proceedings in respect of their counterclaim and it was a mere procedural accident that our clients beat them to the punch. Therefore, security must be ordered. Alternatively, if Investin had no intention of bringing their claim against our clients and their counterclaim is a mere tactical device used to frustrate our clients’ claims then it would be unjust for the Court to support such a ploy by not ordering security.
Mr Justice Stuart-Smith was satisfied that Investin’s claim had independent vitality and made an order for security. The Judge made the inference (in the absence of evidence to the contrary) that Investin’s counterclaim would have been pursued anyway considering its value was “substantially greater” than our clients’ claims for fees. Further, the Judge disagreed with Investin that the same factual investigation was required of our clients to deal with Investin’s Defence. In fact, the Judge was of the view that our clients’ primary claims were mere questions of contractual interpretation and Investin’s counterclaim required detailed investigation into both factual and expert evidence into both the knowledge of Investin and the purported negligence of our clients.
The Judge made the following additional observations of note which are founded in established principles:-
- The Court are to look at the substantial position of the parties and not the form as appearing from the pleadings or otherwise. Accordingly, the fact that Investin’s counterclaim is drafted in three sentences is not determinative or even of any real influence if the reality is that it has gone beyond merely defending itself and has launched a cross-claim with independent vitality.
- An order for security against a counterclaiming defendant is not precluded because the counterclaim arises out of the same transaction of the claim.
The order for security acted as an important device in this litigation as Investin did not pay the first tranche of security in breach of Mr Justice Stuart-Smith’s Order and accordingly their counterclaim was struck out by Mrs Justice O’ Farrell at the Costs and Case Management Conference on 28 June 2019. Therefore, this case should be a word of warning for Defendants who are at risk of being ordered to pay security if they bring a counterclaim. As this case illustrates, a counterclaim with a higher value than the primary claim is at high risk of being treated by the courts as being an independent claim and the inference will be that it would have been pursued anyway in the absence of evidence to the contrary. As a result, like Investin, a Defendant will be stuck in the trap of either being forced to fund both its own and the claimants’ costs for the remainder of the litigation or abandoning its counterclaim and allowing the court to draw the inference that its counterclaim had no merits and if the facts supporting the counterclaim are the same facts supporting its Defence (as is the case here) then the Court may then draw the natural inference that its Defence has no merits and putting them on the backfoot for the remainder of the litigation.
This ongoing case is being handled by Charles Grossman in the firm’s Property Litigation Team. Should you require any assistance with property disputes to contact him on 01895 207296 or email firstname.lastname@example.org
Contact our office
Make an enquiry