Property development — Construction contract — Construction management agreement — Alleged breach of contract — Repudiation — Claim for prime costs owing under contract — Defence and counterclaim — Official referee ordering defendant to provide security for costs — Whether in substance defendant can bring an action independent of the transaction out of which the claim against him arose — Whether exceptional circumstances necessary before ordering defendant to give security for costs — Court of Appeal refusing defendant leave to appeal against that order
In June 1988 the defendant undertook a residential and commercial development for the owners of a site known as “The Circle”, near Tower Bridge, London SE1. The owners hoped to develop the site by building 315 residential apartments with some associated commercial properties. The defendant was a limited partnership between two limited companies and as such it was susceptible to an application for security for costs under section 726 of the Companies Act 1985. The plaintiffs were engaged by the defendant as construction managers for the development. The defendant agreed to pay as prime costs all costs reasonably incurred by the plaintiffs and a management fee of £1,200,000. In addition to their implied obligation to perform their functions with skill and care, the plaintiffs undertook to use all reasonable commercial efforts to arrange for completion of the project within the construction period.
Difficulties arose over the payment of the management fee and the plaintiffs contended that the defendant’s refusal to pay evinced an intention by the defendant no longer to be bound by the agreement and accepted that repudiation as a discharge of their obligations under the management agreement. In turn the defendant contended that the plaintiffs had repudiated the construction management agreement and purported to accept such termination as a wrongful repudiation.
By their statement of claim the plaintiffs claimed prime costs, allegedly due and unpaid in the sum of £894,421 and £92,000 on account of the construction management fees. By its defence and counterclaim the defendant denied that the plaintiffs were entitled to the sums they claimed, contending that it had already paid more than the sums agreed in the original cost plan; that no sums in respect of the plaintiffs’ prime costs were due; and that if the plaintiffs pressed an entitlement to any further sums under the agreement it would seek to set off sums claimed for costs and expenses incurred in providing for the cash flow following late completion, additional borrowing costs and funding for its operation generally, amounting to £15 m. In making the order, the judge stated that in essence the defendant was not simply defending but was setting up very large claims of its own. “What is fair and just? I think that the conclusion must be that it is fair and just that the defendant should give some security for costs.” The defendant was subsequently ordered to provide security for costs up to and including £270,000, an amount sufficient to provide security for the plaintiff’s costs of defending the counterclaim. The defendant applied to the Court of Appeal for leave to appeal against that order.
Held The application was refused.
1. The guidelines to be followed on the question of security for costs were clear and had been well settled by Vaughan Williams LJ in New Fenwicks v General Accident [1911] 2 KB 619.
2. Whether security for costs should be ordered to be given by a counterclaiming defendant was a matter of discretion. There were no hard and fast rules of practice as to the circumstances under which such an order ought to be made. Generally, a defendant simply setting up some claim by way of defence to an action ought not to be required to give security.
3. On the other hand it might be the practice that if such a defendant was simply bringing a cross claim having nothing to do with the transaction forming the subject-matter of the claim against him, the mere fact that he was a defendant did not prevent an order being made against him for security for costs. If in truth and in fact he was not only a defendant, but was bringing an action which was quite independent of the transaction out of which the claim against him arose, then he ought to be ordered to give security for costs.
4. However, it was not the case that whenever a cross action was made by such a defendant which went to any extent beyond mere matters of defence he ought to be ordered to give security for costs.
5. The court had to look at the substance of the claim set up by the defendant by way of defence to the claim against him and consider whether in substance, on the facts of the particular case, the defendants in the original action were to such an extent plaintiffs in the cross-action that they ought to be ordered to give security for costs because they had taken up the position of plaintiffs irrespective of the defence to the original action.
6. It was important not to lose sight of the purpose of the application for security for costs. It was in the interests of fairness between the parties to provide that if a plaintiff successfully repelled claims on a counterclaim which, if proved, would result not only in defeating his own claim but in making him liable to substantive claims which, in substance and extent, were separate and distinct from claims merely used as a shield, he should be protected from a proved inability on the part of the defendant to meet these costs.
7. In the circumstances of the present application the official referee could not be said to have erred in exercising his discretion. He had correctly applied the guidelines. It was only rarely that the Court of Appeal would interfere with the discretion of an official referee exercised upon the extent to which a counterclaim in a construction dispute amounted to a separate claim. No-one was better placed to exercise such a discretion than an official referee whose experience of such dispute, if not unequalled, was certainly not exceeded.
8. It had been submitted by defendant’s counsel that there was a rule of practice that in the absence of special circumstances the court should not require a counterclaiming defendant — who could also plead a set off, to provide security for the costs of the counterclaim. However, it by no means followed that in every case in which a defendant raised a counterclaim and by legal or equitable set off to defeat the plaintiff’s claim that a court could not make an order unless there were exceptional circumstances.
9. Further, the amount of the counterclaim was a factor to be taken into account. Both the nature of the claims in the cross-action and the amount claimed might give a clear indication of the substance of the counterclaim. It might also indicate the complexity of the issues involved and whether the setting up of such claims would or might require a plaintiff to expend substantial costs in meeting the claims raised by the counterclaim.
10. In dredging through reported cases for alleged principles of law, it was important not to lose sight of the purpose of the application for security for costs. It was in the interests of fairness between the parties to provide that if a plaintiff successfully repelled substantial claims on a counterclaim, which in substance and extent were separate and distinct from claims merely used by the defendant as a shield, the plaintiff should be protected from an inability of the part of the defendant to meet those costs.
Richard McCombe QC and Mark Raeside (instructed by Berwin Leighton) appeared for the plaintiff; Philip Naughton QC and Hugh Mercer (instructed by Davies Arnold Cooper) appeared for the defendant.
