Re Sherlock Holmes International Society Ltd; Aidiniantz v Sherlock Holmes International Society Ltd

Hearing dates: 9, 10 May 2016

Mark Anderson QC:

The facts and the history of the litigation, and the identity of the participants, are dealt with in the principal judgment [2016] EWHC 1076 (Ch). I now have to deal with costs, including an application by Mr Aidiniantz that Messrs Pinder Reaux and Associates, who purported to act for the Company on the instructions of Ms Decoteau and Mr Riley, should be added as a party and ordered to pay Mr Aidiniantz's costs.

I will use the same abbreviations, names and defined phrases as I used in the principal judgment without explaining them again here, but I will provide a brief synopsis of the litigation.

On 1 July 2014 Mr Aidiniantz presented a petition to wind up the Company on the insolvency ground. The persons in de facto control of the Company included Mr Riley and Ms Decoteau. In early July 2014 Ms Decoteau retained Pinder Reaux on behalf of the Company to resist the petition on the ground that the Company has a counterclaim against Mr Aidiniantz for some £1.8m. In October 2014 Pinder Reaux were instructed to bring proceedings to enforce it and a claim form was served. The proceedings were stayed when the winding up order was made.

In about July 2014 Ms Decoteau appointed Mr Riley as a director and then resigned, leaving him as the sole director. However she continued to involve herself in the affairs of the Company, which by this time were confined to resisting the petition and pursuing the October 2014 claim.

Mr Riley's appointment as a director automatically expired on 31 December 2014 and the Company was left without a director, but no one noticed that that had occurred. Mr Riley and Ms Decoteau continued to give instructions to Pinder Reaux and the petition took its course to a hearing before Registrar Derrett in January 2015. In a judgment handed down in March she ordered that the Company be wound up. On instructions from Mr Riley and Ms Decoteau, Pinder Reaux launched an appeal for which Henderson J granted permission. The appeal was listed for 3 November 2015 before me.

On 16 October 2015 Gordon Dadds LLP, MrAidiniantz's solicitors, wrote to Pinder Reaux to question Mr Riley's status as a director on the ground that his original appointment had been invalid. On 27 October Gordon Dadds issued an application for adeclaration on the same ground. The result was that the appeal did not proceed on 3 November but directions were given for a trial of the issue which had been raised. At that hearing, the expiry of Mr Riley's appointment on 31 December 2014 was raised for the first time in the alternative to the contention that it had never been valid at all. It is that alternative ground of objection which has succeeded.

The matter came on for hearing on 11 January 2016. In the principal judgment, circulated in draft in early February, I declared that Mr Riley's appointment had indeed expired on the date alleged, but rejected the argument that it had never been valid at all.

In light of my conclusion Pinder Reaux ceased to act for the Company. At the hearing which gives rise to this judgment the Company was unrepresented. Pinder Reaux were represented by Ms Niamh O'Reilly on instructions from RPC LLP and Mr Aidiniantz by Mr Hugh Sims QC and Mr Christopher Brockman on instructions from Gordon Dadds. Ms Decoteau and Mr Riley appeared before me without legal representation and Ms Decoteau spoke for both of them.

Mr Aidiniantz claims his costs from Pinder Reaux. He applies in the alternative for an order that his costs be paid by Ms Decoteau and Mr Riley, who have already been added as defendants for that purpose. At the hearing Ms Decoteau submitted that there should be no order as to costs. She subsequently made written submissions which I agreed to consider, arguing that Mr Aidiniantz or Pinder Reaux should meet the costs which have been paid to Pinder Reaux.

Mr Aidiniantz's application against Pinder Reaux

The ground for the application against Pinder Reaux is that they purported to act for the Company in bringing the appeal from 1 January 2015 onwards, without any authority to do so. It is a claim for breach of warranty of authority. No application has been made against Pinder Reaux for a wasted costs order under section 51 (6) of the Senior Courts Act 1981. Mr Yapp's witness statement in response to Pinder Reaux's evidence indicated that Mr Aidiniantz was seeking such an order, but at the hearing Mr Sims recognised the difficulty of making an application only in a witness statement in response, and did not press for a wasted costs order to be made at this hearing.

Submissions

Mr Sims argued that Pinder Reaux warranted that they had authority to act on behalf of the Company, that warranty was breached, and the breach caused Mr Aidiniantz to lose all the costs he incurred from 1 January 2015 onwards. Mr Sims says that Pinder Reaux are strictly liable for those costs on a solicitor/own client basis. They amount to some £275,000, although that includes some costs incurred in the October 2014 action.

In response, Ms O'Reilly relies on ostensible authority. The evidence of Mr John Spyrou of PinderReaux is that his firm was first retained on 1 July 2014 by Ms Decoteau who was then a director. At some point, also in 2014, she appointed Mr Riley in her place. So Pinder Reaux were properly instructed by the Company in 2014. Ms O'Reilly argues that Mr Aidiniantz was entitled to assume that Mr Riley's authority continued until he learned otherwise: Scarf v Jardine (1882) 7 App Cas 345. Pinder Reaux therefore had the Company's ostensible authority to bring the appeal. There was therefore no breach of warranty.

Alternatively Ms O'Reilly relies on section 161 of the Companies Act 2006 which provides that the acts of a person acting as a director are valid notwithstanding that it is afterwards discovered that he had ceased to hold office. She says that section 161 continued to apply even after 16 October 2015, when Gordon Dadds' letter raised the issue of Mr Riley's appointment. She says that it was not discovered that Mr Riley's appointment had terminated until I circulated my draft judgment.

Next Ms O'Reilly contends that even if Pinder Reaux were in breach of a warranty of authority, that breach caused no loss. The warranty, if true, would have enabled Mr Aidiniantz to obtain an order for costs against the Company. The basis of this petition is that the Company is insolvent. Therefore the order for costs would have been worthless. Damages for breach of warranty should not put the claimant into a better position than he would have enjoyed if the warranty had been true. She invokes "the important qualification on the entitlement of a contracting party to claim reliance expenditure, which is that he cannot do so in order to escape from a bad bargain; he cannot put himself in a better position than if the contract had been properly performed" (McGregor on Damages 19 ^th ed. at §34–022). It follows, she says, that where the party for whom the solicitor purports to act would not have been able to meet an order for costs, the solicitor is not liable. That was the view expressed by Colman J in Skylight Maritimev Ascot Underwriting [2005] EWHC 15 (Comm).

Finally Ms O'Reilly argued that even if she is wrong about everything else, the litigation initiated by the application notice of 27 October 2015 was about the very issue alleged to have been warranted. Solicitors do not warrant the correctness of their client's case and Mr Aidiniantz could not claim to have relied on any such warranty when litigating to achieve a declaration to the opposite effect.

Mr Sims responded that ostensible authority can never defeat a claim for breach of warranty of authority because the warranty is that the agent is actually authorised, not ostensibly so. He points out that ostensible authority has not been argued as a defence to such a claim in any reported case about unauthorised litigation, let alone successfully so. He says that the leading case of Yonge v Toynbee [1910] 1 KB 215 would have been decided differently if ostensible authority provided a defence.

Mr Sims argued that section 161 only deals with procedural or similar slips in a person's appointment and has no application where the appointment was never made or never renewed at all: Morris v Kanssen [1946] AC 459; and further that Pinder Reaux were on notice of the expiry of Mr Riley's office and that a person with notice can derive no protection from section 161 or ostensible authority.

As to the issue whether a breach of warranty caused his client loss, Mr Sims argued that the measure of damages is the amount of costs expended in dealing with the unauthorised proceedings, notwithstanding that the Company in respect of which the warranty was given is insolvent. He says that the comments of Colman J in Skylight Maritime to contrary effect were obiter and wrong. Partly in reliance on the decision of His Honour Judge Seymour QC in Stevenson v Singh [2012] EWHC 2880 (QB) at [78ff], Mr Sims argued that the nature of the remedy depends on the nature of the warranty; and that where the warranty was...