Innocent Parties’ Costs In Norwich Pharmacal Proceedings
Z v Hawksford Trust Company Jersey Limited and Ors 03-Jan-2024
The Court considered the entitlement of the ‘innocent defendants’ in Norwich Pharmacal proceedings to payment of their reasonable costs in complying with the order. The costs incurred in this case, both in-house by the trust companies concerned and in terms of their legal costs, were very substantial because the Norwich Pharmacal orders that had been obtained covered some seventy entities over a long period of time. The costs incurred were contested by the plaintiff. Reasonable costs in this context equated to costs on the indemnity basis. The present judgment dealt with the defendants’ application for payment on account pending taxation. It provided an opportunity for an instructive review of the relevant case law regarding such costs, particularly in the context of offshore financial services business, the justifiable level of seniority of employees dealing with the matter and the need for lawyers to be involved.
The First to Fifth Defendants (the Hawksford Defendants) were defendants in these Norwich Pharmacal proceedings. The Norwich Pharmacal orders were obtained by the Plaintiff in aid of potential claims that she might have in respect of a family wealth structure running to many hundreds of millions of dollars. As is standard practice for plaintiffs in Norwich Pharmacal applications, the Plaintiff gave an undertaking that she would pay the “reasonable costs” of the Defendants, who were all “innocent parties”. It was accepted that “reasonable costs” was equivalent to a costs order on the indemnity basis.
The Orders were more extensive than typical Norwich Pharmacal orders in that they required the Hawksford Defendants not only to provide copies of documents, but also to collate and provide information, including statements of current assets. The Hawksford Defendants’ own costs up to 8 February 2023 totalled £256,925.31, not including legal or eDiscovery costs. The Hawksford Defendants also had invoices from their lawyers Walkers which had not been paid by the Plaintiff amounting to £719,619
The Hawksford Defendants sought a payment on account of costs and an order for the payment of the costs of their summons and a payment on account of such costs. They further request that taxation of all their costs be referred to the Assistant Judicial Greffier “for early determination”.
Held:
(1) Costs of Norwich Pharmacal innocent party – legal principles.
(a) In In the Matter of the Brazilian Trust[2018] JRC 038, Clyde-Smith, Commissioner, held (at para. 20) that the recoverable “reasonable costs” of the innocent party in Norwich Pharmacal proceedings should extend to all reasonable legal and administrative costs in complying. The Commissioner further held (at para. 21) that although the use of the expression “reasonable costs” predated the then current taxation regime under Part 12 of the Royal Court Rules 2004, it equated to indemnity costs as defined in Rule 12/5, namely “all costs except insofar as they are unreasonable in amount or have been unreasonably incurred with any doubt being resolved in favour of the receiving party”.
(b) In Marange Invs. (Pty.) Ltd v La Generale des Carrieres et des Mines SARL[2013] JRC 119A, Commissioner Clyde-Smith observed (at para. 53) that he understood that it was unusual for costs on the indemnity basis to be taxed down more than 10%.
(c) In the case which gave its name to this type of proceeding, Norwich Pharmacal v Commissioners of Customs and Excise [1974] AC 133, the House of Lords referred to the disclosing party being “reimbursed” the “expense incurred” in providing the information.
(d) In Cartier International v BT [2018] 1 WLR 3259, a UK Supreme Court decision involving a website blocking order, Lord Sumption reviewed the domestic English law position in relation to the costs of compliance with Norwich Pharmacal and similar orders (at paragraph 12 and 13): the position in relation to website blocking orders is no different in principle from the established position in domestic law in the case of Norwich Pharmacal orders, freezing orders and other injunctions granted to require an innocent party to assist the claimant in the assertion of its rights against a wrongdoer; the indemnity must be limited to reasonable compliance costs.
(e) The Court was advised by counsel for the Plaintiff that, consistent with these legal principles, it is the practice of the Assistant Judicial Greffier in Jersey on the taxation of internal administrative costs incurred by local service providers who have to review files to give Norwich Pharmacal disclosure, to allow only the actual and direct cost of the time spent by the relevant individuals involved but without any proportion of the overheads or any profit element.
(f) The Court agreed with the broad principles articulated by the Chief Justice of the Grand Court of the Cayman Islands in Iampshire Cosmetic Labs Ltd v Cayman National Bank [1999] CILR N-1. The Cayman Chief Justice held that a plaintiff cannot be expected to meet the costs of a bank in complying with an order where those costs are brought about because the bank’s staff is overwhelmed with other work. He noted that banking business in the Cayman Islands was such that disclosure orders have to be complied with and the appropriate numbers and levels of staffing should be in place to do so. There could also be very little reason to engage the time of the bank’s most senior officer in ensuring that the bank fulfils its legal obligations to all concerned in complying with an order where the bank also engages the services of lawyers who are to be highly paid for attending to just that matter. It was reasonable for the bank to expect to recover the actual costs of its officers involved in seeing to the observance of an order plus a little extra for the business disruption or inconvenience of having their time spent away from normal banking business.
(g) However, much will turn on the facts of an individual case. Given the frequency of disclosure orders that are made, whether as ancillary to freezing orders or as Norwich Pharmacal relief, it may well be prudent for Jersey financial services providers to have on their staff an officer at the appropriate level who can co-ordinate and deal with the response to such orders. Where the information sought is relatively straightforward, such as account balances, copy statements and the like, and is in respect of a relatively limited period, then the number of staff required is likely to be minimal.
(h) In the present case the Hawksford Defendants were required to review the files of some seventy Jersey entities, and, in some cases, the Orders referred to a time period starting from the date of incorporation of the entity. Of the seventy entities, nine were registered in the 1990s, eleven in the 2000s and thirty-seven between 2010 and 2015. Given the number of entities and the period of time covered by the disclosure orders, the scale of the exercise was significantly beyond the scale of the disclosure exercise contemplated by the Chief Justice in the Hampshire Cosmetic Labs It was therefore unsurprising that the Hawksford Defendants found themselves having to draw upon their lawyers to provide additional reviewer resources including paralegals and junior barristers. Furthermore, given the strict time limits required by the Orders for the provision of information, it would be unrealistic to expect the Hawksford Defendants to have recruited additional temporary staff at such short notice.
(2) The request for a payment on account – legal principles.
a) In relation to the Royal Court’s jurisdiction to order a payment on account of costs, the relevant principles were set out in Marange Invs. (Pty.) Ltd v La Generale des Carrieres et des Mines SARL[2013] JRC 119A, applying Mars UK Limited v Techknowledge Ltd [1999] 2 Costs LR 44. Where a party has won and has got an order for costs the only reason that he does not get the money straightaway is because of the need for taxation. The court should on a rough and ready basis normally order an amount to be paid on account, the amount being a lesser sum than the likely full amount.
(b) In exercising that discretion, the court must take into account all the circumstances of the particular case.
(c) In relation to the amount of detail that the receiving party needs to provide in order to enable the court to make its “rough and ready” calculation, the Royal Court held, in Representation of Shinhan Securities Co Ltd[2023] JRC 050, at paragraph 17, that: “…it is clear that the receiving party is not obliged to provide a formal bill of costs such as that which would be required for taxation”. The summary needed to be prepared so as to give the court adequate information to make an estimate of a reasonable sum.
(3) Decision.
(a) The starting point was that, as an “innocent party”, the Hawksford Defendants were entitled to their reasonable costs, which was the equivalent of costs on the indemnity basis, from the Plaintiff. Furthermore, where a party’s entitlement to costs was not in dispute, in this case as the Plaintiff has given the Court an undertaking to pay them, then the receiving party is entitled to ask the Court to order an amount to be paid on account, the amount being a lesser sum than the likely full amount and calculated “on a rough and ready basis”.
(b) There was little doubt that the work required to be carried out, at short notice and within a tight timeframe, by the Hawksford Defendants in order to comply with the Orders was a significant exercise. The scale of the exercise was such that it would have been unlikely that there would be sufficient resources within their business to deal with it. In those circumstances it was reasonable for them to look for external resources to assist. They looked to their lawyers to provide those resources and one of the issues to be determined on taxation would be whether that resulted in employing individuals with a higher level of expertise than was required, and thus higher cost. Whilst it might be argued that it would have been preferable for the Hawksford Defendants to have sought to employ less qualified staff directly on a temporary basis, that was unlikely to have been a realistic option given the timeframe and, in any event, might well have resulted in more input being required from their lawyers to check the results of the work. There may well therefore have been some advantages in making use of resources from a law firm as against employing temporary less-qualified staff. The Court recognised that on taxation, where a far more detailed review is carried out, there is likely to be some argument as to whether the staff used were at an appropriate level and whether their charge-out rates were reasonable.
(C) In relation to the Hawksford Defendants’ own costs of £236,925.31, the Plaintiff had not made any payment and has maintained, inter alia, that she had not received satisfactory answers to her questions. Taking into account the fact that the costs have already been discounted to remove the profit element, but recognising that there remained significant issues between the parties in relation to these costs that are as yet unresolved, the learned Commissioner ordered the Plaintiff to make a payment on account of 60% those costs, amounting to £142,155.18.
(d) In relation to the unpaid Walkers’ invoices amounting to £719,619, and recognising that there may be some significant areas of dispute on taxation of those costs, it was ordered that Z makes a payment on account of 50% of those costs, being £359,809.50.
(e) In relation to the costs of the summons, although the “innocent parties” to a Norwich Pharmacal application are able to recover their own costs of compliance with the orders in addition to their legal costs, it does not follow that this principle should be applied to the costs of the summons. The Court ordered the Plaintiff to pay the legal costs of the Hawksford Defendants in relation to the Summons on the standard basis, not the indemnity basis, and made no order in respect of the Hawksford Defendants’ own costs, nor did the Court make an order for a payment on account of the costs of the summons.
Taxation of all of the First to Fifth Defendants’ costs was referred to the Assistant Judicial Greffier in the normal course rather than an any expedited basis.
Bridgeford A, WDJL 15 – 21 January 2024