Tim-Alexander Gunther Nikolaus Hertel and Another v John Francis Saunders and Another

Hearing date: 21 September 2015

Approved Judgment

Introduction

This is an appeal by the Defendants against orders for costs (and a consequential order for a payment on account of costs) made by Deputy Master Lloyd on 8 May 2015. The appeal is brought with the permission of Proudman J granted on 10 July 2015.

The Defendants are Mr Saunders and Liquid Strategies Ltd ("Liquid"), which is a company wholly owned and controlled by Mr Saunders. The Claimants are Mr Hertel and Artemis International SARL ("Artemis"), which is a company wholly owned and controlled by Mr Hertel.

The Deputy Master made orders for costs whereby the Defendants were required to pay all of the Claimants' costs of their claim (save for the Claimants' costs of an amendment) up to 10 March 2015 and the Claimants' costs of a hearing on 30 March 2015, at which the issue as to costs had been argued.

The Deputy Master made his orders on the basis that the Defendants had made a Part 36 offer on 17 February 2015 which had been accepted by the Claimants on 10 March 2015 and that the matter was governed by r. 36.10(2) (in the form which applied before Part 36 was amended with effect from 6 April 2015). Before the Deputy Master, both sides accepted that the offer letter of 17 February 2015 (hereinafter referred to as "the offer letter") was indeed a Part 36 offer. On the hearing of this appeal, the Defendants now contend that the offer letter was not after all a Part 36 offer so that r. 36.10(2) had no application and so that the appeal court should now exercise its own discretion under r. 44.2 to produce the result that the Claimants should be ordered to pay the Defendants' costs. The Defendants' appeal therefore raises new points which were not argued before the Deputy Master and which are indeed contrary to the position then adopted by the Defendants. Nonetheless, the Claimants do not contend that the Defendants are prevented from arguing these new points as to Part 36 on this appeal.

Mr Samek QC appeared on behalf of the Defendants/Appellants; he did not appear at the hearing before the Deputy Master. Mr Cohen appeared on behalf of the Claimants/Respondents both before the Deputy Master and on this appeal.

The procedural history

It is necessary to describe in a little detail the allegations made by the parties in their pleadings. The Claim Form stated that the claim was for:

(1) a declaration that there was a partnership or joint venture between Mr Hertel and Mr Saunders and that Mr Hertel's share of remuneration under the partnership or joint venture was to be paid to Artemis;

(2) an order winding up the partnership or joint venture;

(3) accounts and inquiries;

(4) an order that the Defendants account to the Claimants; and

(5) an award of damages in favour of the Claimants against the Defendants for breach of agreement.

The Particulars of Claim referred to a number of projects with which the parties to this litigation were involved. The Claimants' primary case was that in relation to such projects there was a partnership between the individuals, Mr Hertel and Mr Saunders. The two companies were not alleged to be members of this partnership. Instead, it was pleaded that Liquid was to be used by Mr Saunders as "the corporate vehicle" for the purpose of the projects and that Mr Hertel's entitlement to remuneration would be satisfied by payments made to Artemis. It was also pleaded that Mr Saunders was under an obligation to cause Liquid to pay sums to Artemis at Mr Hertel's direction and in default of Liquid paying such sums, Mr Saunders himself would be liable to account for the same.

The Claimants' alternative case was that there was a joint venture agreement between the individuals, Mr Hertel and Mr Saunders, for the joint benefit of the individuals and with rights and liabilities similar to those in a partnership. It was also pleaded, apparently only in relation to this alternative case, that all payments made to Liquid by third parties in relation to the projects were held by Liquid on trust for itself and Mr Hertel and Artemis so that Liquid had a duty as trustee to account to Mr Hertel and Artemis.

The Particulars of Claim pleaded that specified sums had been received by Liquid (or Liquid was entitled to receive such sums) and Liquid was liable to account to Artemis for the monies payable to Artemis. It was then pleaded that Mr Saunders had written to Mr Hertel/Artemis on 30 September 2011 asserting that no partnership existed but instead there was a contract with Liquid (the pleading does not make it clear whether the other party to the contract as alleged by the Defendants was Mr Hertel or Artemis).

Finally, the Particulars of Claim raised a further matter. It was pleaded that Mr Saunders on behalf of Liquid had refused to subscribe for shares in BR Gaming Ltd whereby Mr Saunders and Liquid had acted in breach of a duty of good faith and were liable to account for a resulting loss and/or to pay damages. This allegation as to a failure to subscribe for shares was not the subject of any real attention at the hearing of the appeal.

The Claimants gave Further Information in relation to the Particulars of Claim before a Defence was served. The Further Information repeated the claim that Mr Hertel and Mr Saunders were partners. It was then added that Liquid owed a duty as a constructive trustee to account to Mr Hertel and Artemis. In so far as there was a joint venture between Mr Hertel and Mr Saunders, rather than a partnership, it was said that Liquid was liable to account as a fiduciary. It was repeated that in the case of a joint venture, Mr Saunders was liable to cause Liquid to account to Artemis; it was added that in so far as Mr Saunders had personally received Artemis' share of the remuneration from joint venture projects, he was liable to account for that to Artemis.

The Defendants served a Defence and Counterclaim. The Defence pleaded that invoices had been rendered by Artemis to Liquid in relation to consultancy services and that was the basis of the relationship between the two companies. It was said that there was no partnership or joint venture between Mr Hertel and Mr Saunders. It was said that there was an agreement between Artemis and Liquid under which in certain circumstances, Liquid would be obliged to pay a fee to Artemis; the fee was to be paid after Artemis had provided its services and Liquid had received the remuneration from which the fee was to be paid. In relation to the Claimants' claim that specific sums had been received by Liquid so that monies were due to Artemis, the Defence pleaded that certain sums were received by Liquid but denied the liability to pay Artemis. It was then pleaded that Mr Hertel had acted in breach of a duty owed to Liquid causing Liquid loss and damage which Liquid was entitled to set off against any fee payable to Artemis. As to the claim that Mr Saunders and Liquid had failed to subscribe for shares in BR Gaming Ltd, it was accepted that they had not subscribed for such shares but it was denied that they were under any obligation to do so or had broken any such obligation. As to the relief claimed by the Claimants, the Defendants denied that there was a partnership or joint venture or that monies were due under a partnership or a joint venture. The Counterclaim appeared to have been made by both Defendants against both Claimants although it relied upon a matter pleaded in the Defence as a breach by Mr Hertel of a duty allegedly owed by him to Liquid.

The Defendants provided Further Information in relation to their Defence. They were asked to clarify their denial of Artemis' entitlement to an account and they pleaded that Artemis was not entitled to any account. This was expanded by pleading:

(1) there was no partnership;

(2) there was no joint venture;

(3) there was an agreement pursuant to which Artemis would become entitled to payment of certain sums;

(4) there was an agreement pursuant to which Liquid would be entitled to payment of "overheads";

(5) the conditions giving rise to an entitlement to payment had not arisen;

(6) an entitlement to payment was not the same as an entitlement to an account;

(7) Liquid was entitled to deduct Artemis' liability for overheads;

(8) Liquid was entitled to deduct a sum for damages caused by Mr Hertel's breach of duty.

The Claimants served a Reply and Defence to Counterclaim, to which it is not necessary to refer.

On 11 July 2014, Master Teverson held a case management conference. At that hearing the Claimants indicated that they wished to serve an amended Particulars of Claim. The Master ordered that:

(1) the Claimants were to serve a copy of their proposed amendments by 25 July 2014;

(2) the Defendants were to tell the Claimants, by 1 August 2014, whether they accepted the proposed amendments; and

(3) in the event that the Defendants did not accept the proposed amendments, the Claimants were, promptly thereafter, to make an application for permission to amend.

The Master's order did not contain any express wording dealing with the position if the Defendants informed the Claimants that they accepted the proposed amendments. The Master's order then contained further directions and imposed a stay to permit the parties to attempt to settle...