Sarpd Oil International Limited v Addax Energy SA & Another [2016] EWCA 120

(Sales, Longmore LJJ and Baker J; overturning Andrew Smith J [2015] 4 Costs LR 75)

David Lewis QC and Oliver Caplin acted for the successful Appellant in an appeal from the decision of Andrew Smith J, who had originally refused to grant the application of Addax Energy SA (“Addax”) for security for its, and a third party defendant’s, costs of just under £900,000. In setting aside the first instance decision, the Court of Appeal provided guidance on two important points of principle regarding applications for security for costs, and one relating to the operation of the post-Jackson costs budgeting regime.

The background

Addax is the defendant to a claim for off-specification gasoil brought against it by Sarpd Oil International Ltd (“Sarpd Oil”). Addax purchased the gasoil that is the subject of that claim from Glencore Energy UK Ltd (“Glencore”). The terms of the purchase from Glencore and onward sale to Sarpd Oil were essentially “back to back”. Faced with Sarpd Oil’s claim, Addax commenced CPR Part 20 proceedings against Glencore, thereby passing Sarpd Oil’s claim “up the chain”. It was common ground between the parties that if Sarpd Oil’s claim against Addax fails, so too inevitably will Addax’s Part 20 claim against Glencore.

Addax applied for security for its costs of defending the main proceedings on the basis that, pursuant to CPR r.25.13(2)(c), there was “reason to believe” that Sarpd Oil would be unable to pay an adverse costs order post-trial if it was ordered to do so (ie. if its claim failed). Addax argued that this “reason to believe” existed because (i) Sarpd Oil was incorporated a jurisdiction (the BVI) in which no publically available accounts could be obtained; and (ii) despite being asked, Sarpd Oil had failed to provide any evidence that it would have sufficient, liquid, assets to pay Addax’s costs if eventually ordered to do so.

However, Addax’s costs exposure was not limited just to its own costs of defending the main claim; if Sarpd Oil’s claim failed, it would also (in the normal way) be liable for Glencore’s costs of defending the Part 20 claim. It was common ground between the parties (based on Taly NDC International NV v Terra Nova Insurance Co Ltd and Others [1985] 1 WLR 1359) that Glencore itself, as Part 20 Defendant, could not apply directly for security for its costs against Sarpd Oil under the CPR.

It was, though, also common ground that if Addax was ordered to pay Glencore’s costs of the Part 20 claim, the usual order that the Court would make would be for a “Bullock” style order, whereby Addax would be entitled to “add” the costs it would have paid to Glencore onto its costs bill vis à vis Sarpd Oil.

In the circumstances, Addax argued that after Glencore’s costs were “added” to its own at the end of the proceedings, they would, for the purpose of CPR r.25.12, become Addax’s (or “his”) costs of the proceedings. If that was right, Addax argued that it should be entitled to security not only for its costs of defending the main proceedings against Sarpd Oil, but also security for (i) its own costs of advancing the Part 20 claim against Glencore and (ii) Glencore’s costs of defending the Part 20 claim.

Finally, there was a dispute as to the quantum of security that Addax was entitled to. The parties’ Precedent H Costs Budgets (the “Costs Budgets”) contained figures relating both to the parties’ future costs (ie. those that would be incurred during disclosure, trial), and also those costs that had already been incurred (eg. the costs of pleadings). As such, Addax sought an amount of security equal to the entire costs (incurred and future) set out in its and Glencore’s Costs Budgets, to which all the parties had agreed, and the Court (through Blair J) had approved when making the first CMC order.

Sarpd Oil sought, however, to go behind the Costs Budgets and argue that any security in relation to the already incurred costs should be ordered at a lower amount to reflect a lack of reasonableness and/ or proportionality. Addax argued that Sarpd Oil was not entitled to go behind the Costs Budgets; the proportionality and reasonableness of the parties’ costs (incurred and future) in those Budgets had already been finally determined (subject to a material change in circumstances, which had not occurred).

The decision below

At first instance Andrew Smith J held:

Decision 1: There was no reason to believe that Sarpd Oil would be unable to pay Addax’s costs post-trial if ordered to do so. Whilst the Judge accepted Sarpd Oil had been “reticent” about its financial position, the inference to draw from that reticence was that it did have sufficient funds, it just wished to make Addax believe it might not have in order to improve the strength of its position in any settlement negotiations. Whilst Counsel for Addax might have been right that there was a practice in the Commercial Court to order security when faced with a reticent claimant incorporated in an opaque jurisdiction, he declined to follow it. As a result, Addax’s application for security was dismissed.

Given he had heard argument on the other issues set out above, the Judge continued to hold obiter as follows:

Decision 2: Finding in favour of Addax, he would have included Addax’s own costs of passing on the claim to Glencore in any order for security, such costs being incidental to Addax’s defence of the main proceedings.

Decision 3: Finding against Addax, he would not have included Glencore’s costs of defending the Part 20 proceedings in any security order. Those costs were not, properly construed, Addax’s or “his” costs of the main proceedings as required by CPR r.25.12. The fact that such costs might be added to Addax’s costs recoverable from Sarpd Oil at the end of the proceedings in a Bullock-style order (which was accepted as being likely if Addax prevailed in the main proceedings and consequently failed in the Part 20 proceedings) did not change that analysis.

Decision 4: Finding in favour of Addax, Sarpd Oil was not entitled to go behind the costs figures set out in the Costs Budgets. The time for challenging those figures (for incurred or future costs) was at the first CMC. Consequently, security would have been ordered at the level of Addax’s budgeted costs, without any downward revisions.

Addax was granted permission to appeal Decisions 1 and 3 by Lewison LJ. Sarpd Oil was granted permission to cross-appeal Decisions 2 and 4.

The Court of Appeal

On appeal, Addax succeeded on its two grounds of appeal. Sarpd Oil’s two grounds of appeal were dismissed.

The Court held:

Decision 1: The Judge was “plainly wrong” to have held that there was no reason to believe that Sarpd Oil would be able to pay a costs order if required to do so. If a claimant, despite being given every opportunity to do so, refuses to show that it could pay a defendant’s costs when required, there is every reason to believe that it would be unable to do so when the time comes. If there was a practice in the Commercial Court to that effect, it would be right and should have been followed by the Judge. A party’s concerns about the confidentiality of its financial data do nothing to change that position: the Court has well adapted systems to deal with such concerns.

Decisions 2 and 3: Once a Part 20 defendant’s costs are added to a defendant’s costs at the end of a set of proceedings, they become that defendant’s (ie. “his”) costs for the purpose of CPR r.25.12. The importance of “doing justice” in any particular case, enshrined in CPR r.1.2, militates towards a party in Addax’s situation being granted security not only for its costs, but also: (i) for its costs of passing on the relevant claim to the Part 20 defendant; and (ii) a fortiori for that Part 20 defendant’s own costs of the Part 20 proceedings. In light of Taly NDC, if CPR r.25.12 was to be interpreted otherwise, there would be no way for the costs of a party in Glencore’s position to be secured. That could not be right.

Decision 4: The Judge had been right that Sarpd Oil was not entitled to go behind the figures in the Costs Budgets. By recording its approval for the Costs Budgets in the CMC order, the Court had approved the parties’ future costs as being reasonable and proportionate by virtue of CPR PD3E paragraph 7.3. Whilst strictly speaking pursuant to paragraph 7.4 of PD3E the Court did not “approve” already incurred costs, it did “record its comments” on them, and on a party’s total costs budget as a whole, a process which itself involved evaluating their reasonableness and proportionality. It could be assumed, therefore, that if the Court was content to approve a party’s overall budget, it was commenting positively on, amongst other things, the reasonableness and proportionality of the incurred costs.

Accordingly, a party would need to show “good reason” why previously approved and assessed budgeted costs should not be recoverable at any standard assessment at the end of proceedings, whether they be “incurred” costs or “future” costs.

Impact

Three key “take home” points of principle emerge from the Court of Appeal’s Judgment:

Key Point 1: The Courts will not allow a claimant who is incorporated in an off-shore financially opaque jurisdiction to undermine a defendant’s right to have its defence costs secured by refusing to deliver up, when asked, evidence that it could pay those defence costs (if required) at the appropriate time. Any practice of the Commercial Court to grant security in situations such as the one confronted by Addax was entirely justified.

Key Point 2: The Courts do have the power to order security for costs not only for a defendant’s/part 20 claimant’s own costs of defending the main proceedings, but also for that defendant’s costs of passing on a back to back claim down a contractual chain. This will be of particular importance for parties in charter/ sale of goods chains, which are often concluded on back to back terms, but has wider application outside of those specialist circumstances.

Key Point 3: In light of the Jackson Reforms and the new costs budgeting regime, the time for challenging the reasonableness and proportionality of a party’s incurred and future costs to trial is when the Precedent H costs budgets are being drawn up, prior to their approval at the first CMC. If a party agrees to the level of another’s costs at that stage, and the Court gives its approval, that party will be held to that agreement unless circumstances materially change during the proceedings. This applies equally to a party’s already incurred costs as it does to its future estimated costs.

Any party involved in proceedings to which the costs budgeting rules apply must therefore carefully scrutinize, and, if necessary, challenge the costs budgets of its opponents in good time before they are agreed or approved. Parties should not expect to be able to re-open questions of reasonableness and proportionality at the end of the proceedings.