Source: https://familylawhub.co.uk/default.aspx?i=ce6302
Timestamp: 2019-10-18 06:32:05
Document Index: 705288962

Matched Legal Cases: ['art 12', 'art 12', 'art 12', 'art 1', 'EWCA ', 'EWCA ', 'EWCA ', 'art.\n63']

RS v LS & LMP [2018] EWHC 449 (Fam)
Application by wife to set aside judgment for costs obtained by her former solicitors, who acted for her in the context of financial remedy proceedings.
Neutral Citation Number: [2018] EWHC 449 (Fam)
Case No: RG11D00397
RS (Petitioner)
LS (First Respondent)
Levison Meltzer Pigott (Second Respondent)
The First Respondent ("LS") appeared in person
Mr Shaiba Ilyas (instructed by DWF LLP) for the The Second Respondent ("LMP")
There was no appearance by the Petitioner
Hearing dates: 29 November 2017
MRS JUSTICE ROBERTS:
1. This is an application by LS, a judgment debtor, to set aside a default judgment in the sum of £107,361.07 obtained by solicitors, Levison Meltzer Pigott ("LMP") on 28 January 2016. LMP acted for LS in the context of financial claims arising as a result of divorce proceedings between LS and her former husband, RS. The litigation between these former spouses has been ongoing in the Family Division since 2011; it has been bitterly contested, highly acrimonious, and extremely expensive. I have dealt with the case throughout and have delivered substantial written judgments in relation to fact-finding/computation of assets (October 20131), the distribution or apportionment of those assets (July 20142), and subsequent potential amendments to distribution following a successful application pursuant to the Barrell jurisdiction (May 20153).
2. LMP represented LS for a significant period during the currency of this litigation. LS withdrew her instructions from the firm in 2014. The judgment debt which they have obtained relates to the balance of their professional fees which remains unpaid together with a significant element of interest charged pursuant to a contractual retainer into which the parties entered in May 2013.
3. LS seeks to defend the claim on the basis of a variation in the contractual terms agreed, on her case, in March 2014. Pursuant to this agreed variation in terms, she contends that no interest is payable to her former solicitors. She also relies on the terms of a final order which I made in the financial remedy proceedings whereby she secured from RS a partial (but significant) indemnity in respect what was then agreed to be the balance of her outstanding costs due to LMP. Because by that stage there was very little liquidity in the case, that indemnity and the balance of the costs order was deferred and payable by RS out of his share of the net proceeds of sale from a property in Moscow ('Property R') which was to be sold as part of the distribution exercise which flowed from my final order.
4. The sale of Property R remains a live issue in terms of ongoing enforcement proceedings issued by RS and there is a further three day hearing listed before me in March 2018. There is an issue between LS and RS as to who has been at fault in terms of lengthy delays in the marketing of that property, an issue which has been compounded by the apparent collapse of the Moscow housing market and the lack of interest from potential purchasers. The practical consequence of the ongoing and unforeseen delay in releasing equity from Property R is that the obligation on RS to discharge the balance of LS's legal fees has not yet crystallised. In the meantime, and on the case advanced by LMP, contractual interest continues to run on the unpaid balance which is due to it. Because the stipulated interest rate is 1.5% compound every 30 days, there is now a very substantial sum due in respect of interest. The expectation of LS at the time of the final costs order in May 2015 was that she would be responsible for discharging a small balance of some £5,000 odd due to LMP, that sum falling outside the indemnity which RS was to meet from his share of the equity in Property R. That liability is, of course, now dwarfed by the default judgment in the sum of £107,361.07, a liability which potentially continues to attract interest at the judgment debt rate of 8%.
5. Whilst LS owns a property in Moscow ("Property A"), she has no assets within this jurisdiction against which LMP might be able to enforce its judgment debt. Whilst the firm's position is informally secured to some extent by the provision in my order requiring RS to pay the majority of his former wife's outstanding costs from the financial remedy proceedings (and I have made provision for the direct payment of this sum to LMP by those responsible for the conveyancing), there is no requirement on RS to pay any element of outstanding interest.
6. Because the litigation had all but exhausted the parties' liquid capital, the distribution exercise reflected in my final order had been carried out on the basis of an assessment of the future needs of LS, RS and their three children, each of whom remained in full-time education at the time. The expectation was that LS and at least two of the three children would continue to make their home in Property F, the former matrimonial home in Maidenhead. The expectation was that once Property R in Moscow had been sold and the proceeds distributed, the title to that English property would be transferred into the name of LS who would then take over the mortgage repayments. RS would use the balance of his share of the net proceeds from Property R to buy a modest home for himself and his new partner and child. RS is now retired and relies upon a modest pension to support his future income needs. LS was awarded Property A, an un-mortgaged apartment in Moscow which is let to tenants, in order to provide her with a capital asset which would secure her income needs into the future through the rental stream it would continue to generate.
7. The burden of a very significant costs order against RS in the fixed sum of £300,000 reflected what I found to be his egregious litigation misconduct in relation to his failure to disclose during the currency of the proceedings the existence of substantial funds held in an offshore bank account. The majority of that costs order was intended to enable LS to repay a substantial commercial litigation loan which was itself attracting a compound interest rate of 18%. That loan was duly discharged by RS from the remaining liquid capital held in one of his bank accounts. I allowed him to defer payment of the balance of some £70,000 odd until the sale of Property R because I found that he did not have the reserves available to pay the balance whilst continuing to pay his rent and meet his and his family's outgoings in the interim.
8. Both LS and RS were represented by counsel at the distribution hearing which had taken place over the course of four days in July 2014. Both thereafter dis-instructed their respective legal teams: there were by then insufficient resources for either to continue to pay for professional representation. There was thus a significant delay in the court receiving a draft order. In the meantime, RS had issued the Barrell application to which I have referred above. Contrary to the common expectation of RS and the court at the time of the hearing in November 2014 that LS and the children would live in Property F in England, she had in fact moved to Moscow shortly after the hearing. Her case is that (i) she had told LMP about her intentions at the time of the final hearing; and (ii) she made the move to secure a tax advantage which would have been for the benefit of both herself and RS. LS has dual Russian/British nationality.. Whilst RS is British, they had lived in Moscow for a significant period during the marriage. By returning to Property A for a tax year in 2015/2016, LS contends that she had hoped to achieve some tax saving in relation to the sale of Property R.
9. There was a preliminary hearing in relation to the Barrell application on 25 November 2014. The matter came back before me on 1 May 2015. I listed the matter because I was not prepared to allow any further delay in the drawing of a final order implementing the decisions I had made as to distribution at the conclusion of the first stage of the Barrell application in November the previous year. Both parties appeared on that occasion as litigants in person. Mr James Ewins (who had represented LS on the instruction of LMP) was permitted to attend part of the hearing in May 2015 for the purposes of informing the court about his former lay client's costs position.
10. The final mainframe order dated 19 May 2015 is complex and was drawn by me having heard from both the parties in relation to the myriad of disputes between them in relation to the drafting process. I made an order ("the distribution order") which included the sale of Property R and gave conduct of that sale to RS. The form of order which I made on that occasion in relation to the distribution of the net proceeds of sale included the following:-
"17 …….
(g) [RS] must apply the proceeds of sale as follows:-
(vi) in payment to [RS] of a lump sum equivalent to 50% of the balance, such payment to be made into an account of [his] election provided that, before payment of such sum to [him], there shall first be paid to [LS's] former solicitors (Levison Meltzer Pigott) a sum of £69,906 in full and final satisfaction of [his] obligations pursuant to the costs order in paragraph 24 below;".
11. Paragraph 24 (the substantive costs order) provided as follows:-
"24. [RS] shall pay or caused to be paid a fixed contribution to the costs of [LS] of £300,000. [RS] having already on 4 August 2014 discharged in full the Novitas loan incurred by [LS] in the sum of £230,094 (including interest), the balance of £69,906 shall be paid by him forthwith upon payment to him of the lump sum provided for in paragraph 17(g)(vi) above."
12. That is the background to the current application whereby LS seeks to set aside the judgment which LMP has obtained in default of any defence of its claim. I turn now to the chronology of this satellite litigation.
A. The debt recovery proceedings
13. Some five months after the hearing in May 2015, LMP instructed a firm of solicitors to pursue LS for its unpaid debt. On 29 October 2015, DWF LLP (DWF) sent LS a letter before action in respect of a claim for £81,015.05 (unpaid invoices) and a further £18,154.06 (interest). It is agreed that the figure of £81,015.05 included the fixed contribution of £69,906 which was due from RS on the sale of Property R. The letter was sent to LS at Property F in Maidenhead.
14. By this stage, LS had moved to Moscow. It is her case that she did not see that letter at the time it was sent.
15. On 6 November 2015 DWF sent a chasing letter which was sent to LS by email at an address which had no doubt been supplied to that firm by its professional client. LS responded by email on 9 November 2015 pointing out that she had not received the original letter before action. She denied liability for the unpaid costs stating that "… costs since 24 July 2014 is not my responsibility on the ground that [RS] agreed with the Judge, Mrs Justice Roberts, that the payment due from [RS] and only after the sale of overseas property" [sic].
16. It is accepted that DWF did not reply to that email. On 30 December 2015 the Claim Form was issued in the Queen's Bench Division of the High Court. The total sum claimed was £107,331.07. It was supported by Particulars of Claim dated 28 December 2015. LS's address was stated to be Property A in Moscow.
17. Thus it was accepted that, at the time of issue, LS was resident outside the jurisdiction (she would say temporarily). However LMP was able to ascertain that there was a further hearing listed before me in the Family Division on 12 January 2016 in relation to the enforcement application. Arrangements were made to serve LS personally when she attended at the Royal Courts of Justice for the purposes of that hearing. Service was effected outside court 33 by Jordan Roberts, a trainee solicitor working in the London office of DWF. The papers had been sent to him by Paul Seeber, the solicitor who was dealing with the claim from DWF's office in Leeds.
18. There is an issue as to precisely what documents were served on LS on that occasion. I have in the bundle a witness statement from Mr Seeber. He states that he despatched the sealed claim form, particulars of claim and a response pack to his firm's London office on 8 January 2016. Two days later, he sent an email to Mr Roberts asking him to confirm receipt of the documents which he did later the same day. (Mr Seeber has since left employment with DWF and is now resident in Florida.) It is LS's case that she was never served with a response pack. That pack would have included pro forma documents explaining how to acknowledge service and/or defend the claim. During the hearing before me on 29 November 2017, she handed in the clip of documents which she contended were the original documents which were served on 12 January 2016. The clip which was handed to me contained the original claim form clearly endorsed with an original red seal of the court, a copy of the Particulars of Claim, and various documents referred to in the Particulars set out in appendices A to D. These comprised in the main letters and invoices. There was within that clip no separate response pack.
19. Mr Roberts has made a witness statement. In that statement, he said this at paragraph 8:-
"I have read the witness statement of Paul Seeber. I agree with the parts which concern my role in personally serving the documents. I confirm that I did receive a pack of documents from Paul Seeber to serve on [LS] although I cannot recall precisely what those documents were, because this happened a long time ago. I can confirm that I did not separate the documents or remove anything from them which I had been asked to personally serve. I also did not add to them or alter them in any way."
20. I have already referred to the short exchange of emails between Mr Seeber and Mr Roberts. Despite what is said in Mr Seeber's witness statement (made over a year and a half after the event), the contemporaneous exchange of emails between the two solicitors refers only to transmission to DWF's London office of "the sealed claim form" (see emails dated 8 January 2016 (15:20) and 11 January 2016 (14:03)). There is no reference in either of Mr Seeber's emails to the inclusion of a standard response pack. On 12 January 2016 (i.e. the date upon which he effected personal service on LS) Mr Roberts completed a formal 'Statement of Service'. In terms of what he served outside court, there are three separate references to service of a sealed "Claim Form". There is no reference in that document to service of a complete pack of documents as required pursuant CPR 1998 r. 7.8(2). Further, he completed and signed a certificate of service in prescribed form N215. In the box next to the question 'What documents did you serve ?', he has listed the claim form and the particulars of claim but, again, there is no reference to any response pack.
21. On 3 March 2015 the court sealed the default judgment on DWF's application made on 28 January 2016. Judgment was entered against LS in the sum of £107,361.07 on the basis that she had not replied to the claim form.
22. On 12 May 2017, Master Fontaine sitting in the Queen's Bench Division transferred the debt recovery proceedings to the Family Division to be consolidated with the matrimonial financial remedy proceedings. She did so on the basis that the debt recovery proceedings related to a claim for unpaid legal costs in those financial remedy proceedings.
23. The matter was listed before me on 8 June 2017. In addition to directions in relation to the debt recovery proceedings, there was before me at that hearing an application by LMP to be joined as a party to the financial remedy proceedings. Mr Tim Amos QC was instructed to appear on behalf of the firm on that occasion. LS appeared in person. RS was represented by his matrimonial counsel, Mr Richard Sear. LS told me that she had been completely unaware prior to 1 June 2017, a week before, that LMP had secured a judgment in default. That was the date upon which she had been sent the application by LMP for joinder in the financial remedy proceedings. She sought my permission to make an application to set aside that judgment debt notwithstanding that she was outside the prescribed time limits for making such an application. I treated her application as deemed in the face of the court and recorded in my order the warning which I gave her about the potential costs consequences were she to fail in her set aside application. Thereafter, I consolidated the two sets of proceedings and gave directions in relation to the filing of evidence. LS was to file a statement dealing with both the delay in filing a defence to the claim and details of her substantive defence to the claim. The set aside application was to be listed for summary determination.
24. That is the application which I heard on 29 November 2017. It was the earliest listing available which was not at risk and thus there is no question of LS being responsible for any delay in the intervening period of some five and half months.
LS's defence to the claim
25. Pursuant to my directions, LS filed a witness statement. It is dated 27 June 2017. She confirms that she made her application to set aside the default judgment within seven days of becoming aware of it although she acknowledges that she was served with the claim form at court on 12 January 20164. At the time she had a potential appeal pending in respect of the distribution order. For reasons which are not entirely clear to me, the Court of Appeal did not dispose of that appeal until 16 January 2017. Permission to appeal was refused. Notwithstanding the fact that there was no operative stay in respect of my distribution order, LS has deposed to the fact that she believed there to be a moratorium in respect of the debt recovery proceedings whilst her appeal against the substantive financial remedy order was pending. Further, she relies on the absence of a response pack as a procedural defect to effective service. She submits that not only is it a breach of the requirements of CPR r 7.8(2) but also a breach of fairness in circumstances where she was then a litigant in person and in poor health. The contents of her statement together with the oral submissions she made to me at the hearing reveal the nature of her substantive defence to the claim should she succeed in her application to set aside the default judgment.
26. In essence, she relies on a revision to the contractual basis of her professional relationship with LMP. She had first dis-instructed the firm in early December 2013 when she could no longer afford to meet its fees. It is her case that, as confirmed in a letter written to her by LMP on 3 March 2014, she agreed to re-instruct the firm for the purposes of representing her at the final hearing listed in July 2014 on the basis of (i) a specific fixed fee arrangement going forward; (ii) a waiver of the interest clause in the original retainer; and (iii) deferment of LMP's entitlement to recover the outstanding element of its costs until a sale of Property R and payment out of the proceeds of his share to RS for the purposes of meeting that liability She was also proceeding from the basis of an assumption that VAT would not be payable.. In this respect she relies on the contents of my judgments and orders, transcripts of which she has produced for the purposes of this hearing. In the event I were to find against her in relation to the alleged change in her contract with LMP in relation to the interest element of the claim, she seeks orders that any interest element due to LMP is met by RS or, alternatively, that I should review the rate of interest charged and substitute one which is fair and reasonable. In paragraph 17, she says this:-
"I invite this Honourable Court to reject LMP's claim for interest. I fully accept responsibility for payment of the principal amount owing and if LMP can suggest a way now to procure a swift sale of [Property R] at a reasonable price, I would be only too delighted to co-operate." [my emphasis]
27. The LMP letter dated 3 March 2014 was written following a lengthy face to face meeting on 7 January 2014 between Mr Julian Ribet of LMP and LS. That meeting was followed up with further correspondence and a telephone conversation during the previous week. The letter records the fact that the debt owed to the firm by LS at that point in time was £47,813.20. One of the pre-conditions of the offer put forward by Mr Ribet in that letter was that this crystallised debt was acknowledged and accepted by LS as properly due and owing. Under the heading "Our costs going forward", Mr Ribet said this:-
"I have discussed the matter with my partners and have agreed to limit my firm's charges (excluding disbursements – which would be on top), as follows, notwithstanding the amount of time that we spend on the matter with effect from 1 March at the fixed rate of £7,000 per month, up to but not including the Final Hearing. The rate would be reduced pro rata for the month during which the hearing would take place."
……………. [dealing with a breakdown of the reduced charges proposed for the final hearing]
"Our total costs (excluding Counsel and any disbursements such as valuations) therefore would be:
March – June: £28,000
July to the hearing: £3,991.78
Final hearing: £12,800
Total: £44,791.78
………….. [dealing with fees quoted for counsel]
"The total costs liability therefore (for us and Counsel) for the proceedings as set out above (excluding for the avoidance of doubt any additional interlocutory hearings and/or any appeal) would be £76,491.78. On top of this has to be added our unpaid costs of £47,813.20 making a total of £124,304.98."
28. That letter provoked a series of emails in response from LS. On 4 March 2014 Mr Ribet wrote a second letter in which he asked LS to countersign the letter confirming that she was prepared to proceed on the basis of the terms set out in the 3 March letter. He said,
"Please note that in doing so, we are varying our retainer so as to proceed from now and until the trial on the basis outlined in my letter of yesterday." [my emphasis]
29. At 13:13 on 4 March 2014, LS returned a copy of that letter to LMP on which she had endorsed her signature on the final page thereby accepting the terms proposed by Mr Ribet. That LMP itself regarded that fresh contract as a "fixed fee arrangement" is borne out by a subsequent letter dated 18 July 2014. In sending to LS the week before the substantive final hearing in the financial remedies proceedings an up to date statement of account, Mr Ribet confirmed to LS that the costs of that forthcoming hearing "will be charged in accordance with our fixed fee arrangement previously detailed to you in correspondence".
30. It is common ground that LMP's letters of 3 and 4 March 2014 are silent in relation to interest. It is LS's case that they are silent for a reason. She relies on an express or implied offer from Mr Ribet (which she says she accepted) to waive all future interest charges as part of the fixed fee arrangement. Mr Ribet denies that there was any such offer. In relation to the payment of interest, he relies on the terms of his firm's original May 2013 retainer which he says were left undisturbed by the imposition on those arrangements of a separate fixed fee agreement. That subsequent agreement was designed to cap the sums which LMP was able to charge between 4 March 2014 and the conclusion of the final hearing some months later. In his witness statement Mr Ribet states that one of his professional colleagues, Mr Myles, reviewed his manuscript notes of the discussions to which LS has referred. These were sent to LS who contends that the document she was shown does not accurately reflect the totality of what was said.
31. She has since made a complaint to the Legal Ombudsman about a number of matters arising out of her course of dealings with LMP. In terms of her complaint about interest, the Ombudsman asked for some evidence to support the complaint. She replied to the Ombudsman in these terms:-
"I do not have written evidence as it was discussed verbally on the last day of [the] July 2014 hearing. Mr Ribet … verbally reassured me in the presence of his assistant, Mr Myles, that his firm's 18% interest charges would not be applied in my situation. The Judge ruled that my ex-husband should pay direct to LMP the outstanding balance of 69,905.00 pounds from cost order only after the sale of property.
On 25 July 2014 my ex solicitor and the Court knew that the property could not be sold before 1 August 2015 due to the existing tenancy agreement, but Mr Ribet failed to include his firm's interest charges into the numerous redrafts of the court order in the first instance and failed to inform my Barrister and the Court of his firm's interest charges.
The issue of LMP's demands of interest charges came to my knowledge only on 25 November 2014, whereby in the Court room Mr Ribet informed me that LMP is expecting me to pay them 18% interest charge on the remaining balance of 69,905.00 pounds.
Previously he had not mentioned that important matter and most upsetting was that he produced to me a copy of the rewritten attendant's note [sic] where there was no record of our discussion nor his agreement not to charge interest at 18%."
32. Whilst I accept that LS is not a lawyer and has no familiarity with English law as it relates to the formation of contracts, the response which she gave to the Legal Ombudsman is different from her current averment that the express agreement of Mr Ribet on behalf of LMP to waive interest was part and parcel of the negotiation which resulted in the fixed fee agreement embodied in the offer and acceptance on 3 and 4 March 2014 (although see paragraph 35 below).
33. It appears from the report produced by the Legal Ombudsman on 11 August 2015 that, in a letter dated 25 February 2015, LMP had told the Ombudsman that "neither Mr Pigott nor Mr Ribet have any recollection of us agreeing not to charge you interest on outstanding costs … We do recollect agreeing to assist you on a pro bono basis in respect of the terms of finalisation of the order …". This limb of the complaint to the Ombudsman appears to have gone no further in the absence of any evidence to support LS's case over and above her own representations as to what was said.
B. What light, if any, do the previous hearings shed on the issue of interest ?
34. My understanding that LMP had negotiated a fixed fee arrangement with LS for the purposes of concluding the distribution hearing was reflected in paragraph 24 of my distribution judgment where I said this:-
"I have already referred to the fact that the wife has an outstanding costs liability to her solicitors for £75,000. It was expressed by Mr Ewins in his original schedule as a VAT liability. That is not strictly correct since the wife's solicitors have discharged the VAT liability on the wife's account from funds they were holding to see them through to the end of this hearing. Those funds emanated from a legal services order which I made in June this year in the sum of £127,577 with costs. That sum was ordered to cover outstanding costs of £75,000 and a fixed fee arrangement of £52,000 to take her up to the end of this hearing."
35. LS contends that if the original interest provision was to have been carried over into the fixed fee agreement, LMP should have made her aware of that fact in its letters of 3 and 4 March 2014. Moreover, she relies on a specific assurance from Mr Ribet that interest would be waived on the outstanding balance of her fees. She told me during the course of making her submissions that she had raised the issue of interest again with her legal team at the conclusion of the distribution hearing in July 2014. She is, at least, consistent in that allegation since it mirrors the representations she made subsequently to the Legal Ombudsman. (The repetition does not, of course, mean that the statement is true.) She says that she asked one of her legal team to make a manuscript note to the effect that any balance due would not attract interest. She maintains that this was the common understanding of everyone in court and, were that not the case, it was for LMP to raise the issue and correct the position. In this context she relies on a passage in the court transcript of proceedings on 25 July 2014. In relation to the drafting of the order, at internal page 6 at B to C, there was this exchange between Mr Sear, counsel for RS, and me:-
"MR SEAR: …The other uncrystallised aspect of the cost liability, the £70,000 odd, remains to be paid on the sale of [Property R]. Again I did not hear your Ladyship's judgment to be attaching any interest accrual to that. It was a liquidated figure of £300,000 and ---
MRS JUSTICE ROBERTS: It is a liquidated figure, whatever arrangement. I appreciate that both sets of solicitors are going to be left, or may well be left, with a balance of unpaid costs. It simply was not possible for me to extract another £140,000 from this equation, so it seems to me an inevitable, but unavoidable consequence. It is not a matter for me whatever arrangements are made directly between the clients and their respective solicitors.
MR SEAR: No, but your Ladyship's order is £300,000.
MRS JUSTICE ROBERTS : It is a fixed sum of £300,000. It is a contribution of £300 ---
MR SEAR : Plus any interest on Novitas5 if it is not paid on time.
MRS JUSTICE ROBERTS : Plus, obviously."
36. At internal page 8 at E to G and later at page 9 at E to F, Mr Ewins, counsel for LS, referred to the issue of his client's outstanding costs:-
"MR EWINS: ….As you will appreciate, you have left a fund in the hands of [RS] to see him through to the sale of [Property R]. My client has no such funds. She has an income stream. That means that my instructing solicitor [i.e. LMP] will not be receiving payment. It is not within my client's gift to do that although it is within [RS's] gift.
MRS JUSTICE ROBERTS : I am aware of that Mr Ewins.
MR EWINS: He [i.e. Mr Ribet] is therefore in the position that he was in when we appeared before you last June with a £75,000 debt and work to be done. It is not a huge amount, one would hope, but nonetheless there is work and until [Property F in Maidenhead] is actually transferred legally, there are no UK assets upon which his firm has any security. I recognise that always when counsel makes these submissions, with both a professional and a lay client behind, one has to be careful not to drive a wedge between the two in their mutual interests. However there is a live issue in that [LS] does need continued representation to organise the implementation of this order and that in turn will require some security for costs in tis jurisdiction."
37. There then followed further submissions about the possibility of securing an equitable charge over LS's beneficial interest in Property F prior to its transfer into her sole name. When I raised the issue of the existing mortgage and pointed out that any such charge would have to rank as a second charge in any event, Mr Ewins said this:-
"Yes, effectively you have offered [RS] £777,000 of security [i.e. the equity in Property F] and we want a second charge over £75,000."
38. Following LMP's removal from the court record in 2014, LS was once again acting in person. On 20 December 2014 she sent an email to the court, care of my clerk. That email is not in the bundle which was prepared for today's hearing but to the best of my knowledge it was included in the bundles for previous hearings which related to the perfection of the final order in the financial remedy proceedings. In that email she asked me to order RS to extend the mortgage over Property F so as to release a further sum of £70,000 from the equity. That sum, she contended, should be applied to discharge his liability to pay the balance of her outstanding costs on an accelerated basis and prior to the sale of Property R in Moscow. She had been refused a bank loan to settle the debt herself and had by then received the letter before action which DWF sent on 29 October 2015. She described the demand in that letter for payment of c. £81,000 to be a "misleading presentation" insofar as it purported to include an element of interest and relied on the submissions made by her counsel, Mr Ewins, in the July 2014 hearing (see above). The fact that the court had no jurisdiction at that stage to require RS to further charge the former matrimonial home was something with which I dealt both in an email response from my clerk and at a subsequent hearing attended by LS and RS in person. The point is that, by December 2014, LS had taken steps to do what she could (a) to alert the court to the fact that she was being pursued for a debt which included an element of interest which she did not accept to be due to LMP; and (b) she was seeking to address the issue of the payment of the principal sum due to her former solicitors by asking the court to require RS to accelerate his contribution to her costs by further reducing the equity in Property F, the title to which was then in his sole name.
39. The issue of the arrangements between LS and her lawyers was the subject of further comment during the course of the hearing which related to the Barrell application on 1 May 2015. Both parties appeared in person on that occasion although I permitted Mr Ewins to attend for part of the afternoon in order that he could make representations about the drafting of the order in relation to the costs position, LMP having by then ceased to act for LS. I have a copy of the transcript of what transpired at that hearing. At internal page 4 at A to C, I said this:-
"One other point of substance [in the final drafting of the mainframe order] … in terms of paragraph 24, which is the fixed contribution to costs … I am going to have to recalibrate some of the recitals to take into account the fact that Mr S has now discharged the Novitas loan in [the sum of] £230,094.30 on 4th August. So paragraph 24 will require him to pay a fixed contribution to the costs of Mrs S in the sum of £300[,000] payable as to the discharge of the Novitas loan which has already been effected and the balance of £69,905 out of his 50% share of the [Property R] proceeds. Mrs S has asked me to attach to that figure a provision for accruing interest on that £69,000. I have declined to do so because my costs order was in the fixed sum of £300,000 and I have told her that Mr S, having discharged his primary obligation in relation to the Novitas loan, which was chalking up interest at about some 18.5%, the matter of the payment of her legal costs and any balance is entirely a matter between her and LMP…."
40. Later, at internal page 15 of the transcript, Mr Ewins alerted me to the fact there was a live issue between LS and LMP as to whether or not interest was payable on the balance of her outstanding costs. He explained that this was probably her motivation in raising the issue of interest and asking me to consider imposing any such liability for RS's account. That prompted the following exchanges in relation to LMP's position in relation to security for its outstanding costs:-
"THE JUDGE: I have every sympathy for your professional clients because the intention always was on the basis of Mrs S's representations to me that, without a break in the continuation of her occupation, for the next five or six years at the very least she was going to be in residence at [Property F]. Therefore whilst your professional clients did not have any actual security, they had a clear expectation that, should they need to enforce in due course, there would be an asset against which steps could be taken if that was necessary. But contractual arrangements which are made between a lay client and a firm of solicitors who accept instructions are a matter of contract between those two parties. In deciding whether or not to take on a case, the solicitors are going to have to accept an exposure to risk, if indeed they are exposed, and do not take funds up front, as it were. In this case, they were not in a position to do that. What they did instead was to secure their position and indeed your client's position by not one but I think two successful applications for legal services orders.
MR EWINS: In fact the first was not successful.
THE JUDGE: …. In any event, I made a legal services order which would have given them more or less complete protection but for the fact that, unbeknownst to anyone at the time, they had to pay VAT, so they lost …
MR EWINS: That is right.
THE JUDGE: As it transpires, I think I was told £70,000-worth of protection because that is what they had to pay. So, assuming Mr S pays in due course, the shortfall is about £5,000 plus any interest which is due to them. That is the reality of the position.
MR EWINS: Yes, yes.
THE JUDGE: Because I had already predetermined that I was not going to give them security in relation to the balance of the £300,000. That being the case, we are only talking about £5,000-odd plus interest and he was never to be responsible for interest, it seems to me that the exposure which they currently feel in terms of the vulnerability, or potential vulnerability, [in relation to Property F] has come about largely as a result of the unilateral action she took [in leaving the jurisdiction and moving to Moscow].
MR EWINS: Yes.
THE JUDGE: I am not prepared to go into the issue as to whether or not she told those who instruct you of her intention at the hearing on 25 July. …. I find it very difficult to believe that if that clear intention had been communicated to her team, it is almost inconceivable that I would not have been told….. So to the extent that she is the author of whatever those financial misfortunes currently appear to be, it seems to me that it would be quite wrong to penalise Mr S for those steps because he and I were proceeding in the expectation that the representations she made to me at the July hearing and that you made so persuasively on her behalf were, in fact, accurate. … So to that extent and to the extent that your solicitors now seek to secure some equitable charge on the equity in [Property F] which may very well – as a result of my determination of the Barrell application – be a property which reverts to him … would be wholly unjust and unfair when in fact this is a dispute between LMP and Mrs S in which he is, in this respect, in no way culpable."
41. These excerpts inform, to an extent, the manner in which the current dispute between LS and her solicitors has developed in relation to the costs issue.
42. Thus, I turn now to consider the law.
43. Part 12 of the Civil Procedure Rules 1998 governs the position concerning default judgments. By way of her procedural defence, LS submits that the requirements of CPR r 12.3 have not been met in this case. The rule provides as follows:-
"Conditions to be satisfied
12.3 - (1) The claimant may obtain judgment in default of an acknowledgement of service only if –
(a) the defendant has not filed an acknowledgement of service or a defence to the claim (or any part of the claim); and
(b) the relevant time for doing so has expired."
44. CPR r 7.8(1) places a requirement on a claimant to serve on a respondent the means with which to formally acknowledge service. The requirements are mandatory and are spelled out in these terms:-
"Form for defence etc. must be served with particulars of claim
7.8 – (1) When particulars of claim are served on a defendant, whether they are contained in the claim form, served with it or served subsequently, they must be accompanied by –
45. These forms together are known as "a response pack". A failure to serve a response pack with the particulars of claim is a technical error which does not justify a strike out although it can be a reason to set aside a judgment obtained in default of an acknowledgement of service, as is the case here, under CPR r 13.3(1)(b). That rule provides as follows:-
"Cases where the court may set aside or vary judgment entered under Part 12
13.3-(1) In any other case, the court may set aside or vary a judgment entered under Part 12 if –
(b) it appears to the court that there is some other good reason why-
(Rule 3.1(3) provides that the court may attach conditions when it makes an order.)
46. Thus, the court has a discretion which must be exercised in accordance with the overriding objective set out in Part 1 of the CPR and that discretion is unconditional. Its purpose is to avoid an injustice. It is now established law that a failure to serve a response pack with particulars of claim may, in appropriate circumstances, constitute "some other good reason" for the court to exercise its discretion and set aside a judgment obtained in default of an acknowledgement of service. The need to act promptly following service of a claim and the merits of the proposed defence must also be factored into the court's approach. Subject only to any assessment as to whether LS was properly served with the debt recovery proceedings on 12 January 2016, the judgment which LMP has obtained against LS is not per se an irregular judgment which engages in the court a mandatory obligation to set it aside: the conditions in CPR r 12.3(1) are satisfied and those in r.12.3(3) do not feature in this case.
47. Thus I turn to consider individually the three factors set out above.
(a) Failure to serve a response pack
48. This is an issue of fact. LS contends no such pack accompanied the documents which Mr Roberts, the trainee solicitor, served on her outside court on 12 January 2016. She relies on his omission as significant because of her status as a litigant in person who was vulnerable because of her health and the ongoing stress of these proceedings. She returned to Moscow within three days of service. Her return flight to Moscow was pre-booked and she had no English solicitors then on record as acting for her. She has shown me the clip of documents which she received on that date. With the passage of time Mr Jordan cannot now be sure what he served on 12 January 2016. The contemporaneous documentation which he prepared on the day of service (which is likely to be more reliable evidence) suggests that there was no response pack included with the claim form and the Particulars of Claim. When completing the formal Certificate of Service later the same day, Mr Roberts certified as true that those were the two documents he had served and no more. I appreciate that Mr Seeber recalls having included a response pack with the documents which were sent down to London some four days earlier by special delivery. Mr Roberts does not recall removing anything from the clip before effecting service. However, Mr Seeber's recollection is qualified. He makes it plain in his witness statement that this is his best recollection and not his clear recollection. From a distance of over eighteen months and in the context of what was probably a busy commercial practice, I do not criticise Mr Seeber at all for not having an independent recollection of what he placed in the envelope or package on that particular day. No doubt, the despatch of those documents was one small aspect of a full day's work attending to many similar cases.
49. I have had occasion in the past in this litigation to consider the reliability of LS's evidence to the court. During the currency of this long-running litigation there have been adverse findings against each of LS and RS in relation to their past dealings with various matrimonial assets. I remind myself now, as I did then, that people may inadvertently fail to recollect accurately an event or series of events; they may deliberately mislead in order to bolster a case which they seek to advance; they may have a genuine subjective belief in the representations they make to a court regardless of the effect of the passage of time on memory. In this instance, I am prepared to believe LS. I accept that the clip of documents she produced consisting of the claim form and the Particulars of Claim with its various appendices was all she was handed by Mr Roberts on 12 January 2016. That finding is not an end to the matter because the absence of a response pack merely opens the door to the exercise of the court's discretion. It can potentially constitute "some other good reason" for the court to set aside a default judgment obtained in the absence of an acknowledgement of service: see Erol v Global Fashion Links Ltd [2014] EWHC 4687. It is clear that the requirements of r. 7.8(1) are not incorporated as a specific condition for the purposes of r.12.3(1): see Rajval Construction Ltd v Bestville Properties Ltd [2010] EWCA Civ 1621.
(b) Delay: the need to act promptly following service of a claim
50. The application by LS to set aside the judgment entered on 28 January 2016 was deemed to have been made on 8 June 2017. In this context, I bear in mind that delay has to be considered both in terms of LS's action (or inaction) following service of the claim on 12 January 2016 and her action (or inaction) following her discovery that judgment had been entered on 28 January 2016.
(i) As to the former, at the time when she was served with LMP's claim form, her application for permission to appeal my distribution order remained extant. She lodged her appeal on 30 September 2015. It was not disposed of until over a year later when, on 16 January 2017, Lewison LJ refused permission on paper. Immediately on receipt of the order refusing permission to appeal, I listed the matter for further directions. My order is dated 19 January 2017. It gave rise to the substantive hearing on 8 June 2017.
(ii) As to the latter, LS has explained in her witness statement that she was unaware of the existence of the default judgment until 1 June 2017 when she received by email a copy of LMP's application for joinder in these proceedings. The default judgment appears to have been sent to an address in Moscow [Property A] in which she had not lived for over a year. I deemed the set aside application to have been made at the hearing and thus within seven days of her date of knowledge as to the existence of the judgment debt.
51. It seems to me that the particular facts of this case lend some support to LS's submission to the court that she believed there was in place some form of general moratorium in relation to the implementation/enforcement of my distribution order (including the costs order) which was the subject of that pending appeal. When she was served in the precincts of the court on 12 January 2016, she was attending a hearing before me at which both she and RS were litigants in person. That hearing related to applications for enforcement of the order for sale in relation to Property R in Moscow amongst other issues. As both parties will doubtless recall, the hearing (which I believe had been listed for two days) was ineffective because of her pending appeal which in the early stages had been held up by the absence of a proper appeal bundle. I seem to recall LS telling me on that occasion that she was lodging an appeal bundle that very day. In any event, I had made it clear to both parties that, with an application for permission to appeal pending, I could not deal with an application for enforcement of the order which was the subject of the appeal.
52. She had, of course, responded within a matter of days to DWF's letter before action, denying that this 'debt' in respect of unpaid costs and interest was hers (see her email dated 9 November 2015). I accept that she did not enter a formal acknowledgement of service or file a defence to the claim but there is no doubt that throughout 2015, LMP was aware of what her case was because they were fully engaged in responding to the professional complaint which was being processed by the Legal Ombudsman. She was resident in Moscow for part of that period and it is accepted that there was no further correspondence by email or any other means between DWF and LS prior to that firm entering judgment on 28 January 2016.
53. I accept that she only became aware that judgment had been entered against her in the week before the hearing in June 2017. She made her application to set aside the judgment promptly at that hearing and I recorded it 'deemed' for the purposes of future case management. As I say, the fact that it has taken another five months and more to list the hearing of that application is not delay of her making.
54. During the course of submissions, Mr Ilyas, who appears for LMP, took me to various authorities which deal with the issue of delay: see, for example, Erol v Global Fashion Links (referred to above) and Henriksen v Pires [2011] EWCA Civ 1720, 2011 WL 6329340.
55. In Dubai Financial Group LLC v National Private Air Transport Services Co Ltd [2016] EWCA Civ 71, a defendant who had not been served with a response pack made an application to set aside a default judgment some 15 months after it had been entered. As its title suggests, this was litigation concerning two substantial corporate entities involving a commercial claim in excess of US$10 million. The claimant secured an order permitting it to serve its Claim Form outside the jurisdiction on Saudi Arabia. The claim form, without a response pack, was served locally in Saudi Arabia on one of the company's representatives. No acknowledgement of service was received. In July 2013, the judge at first instance made an order retrospectively validating service in this manner under CPR r 6.15(2). He ordered that judgment in default be entered although the defendant was not aware that this step had been taken until a year later in July 2014.
56. The application to set aside the default judgment was issued in October 2014 and came before Flaux J in December 2014. The defendant relied principally on the failure by the claimant to effect valid service of the claim form outside the jurisdiction. The judge found that there had been valid service pursuant to r 6.15 and that, in these circumstances, the default judgment was not irregular. Further, the defendant had no arguable defence to the claim. He therefore refused to set aside the default judgment although he reduced the sum owed.
57. The defendant appealed. The Court of Appeal allowed the appeal and set aside the default judgment largely on the basis that it considered the defendant should be entitled to enter a formal defence based on the merits.
58. Whilst I fully appreciate that the need to act promptly is an important consideration, each case must turn on its own facts. In some cases the courts have been prepared to countenance significant delay where the interests of justice so require: see Barons Bridging Finance plc v Nnadiekwe QBD (Comm) September 6 2012 (unreported). In that case a judge of the Division set aside a default judgment obtained some years earlier on the basis that (i) there was a serious conflict of evidence between the parties, and (ii) the case had remained 'live' for some time after judgment had been entered.
(c) The merits of LS's proposed defence
59. The issue at the heart of the current dispute is the proper construction and legal efficacy of the 'new contractual arrangements' which were put in place in March 2014 to govern the future professional relationship between LS and LMP. There is no doubt that the original contractual terms were modified with the parties agreeing to move forward on the basis of a fixed fee agreement or arrangement. That much is agreed. The issue is the extent to which LMP's entitlement to charge interest pursuant to its May 2013 retainer was carried across into, or incorporated within, the new retainer agreed in March 2014. The point is not academic. A very significant element of the six figure sum now claimed pursuant to the default judgment is interest. LS relies on a specific or express waiver of the interest clause. She bases that defence on representations made or assurances given to her by the firm both at the beginning of 2014 whilst she was in ongoing discussions with LMP and in July 2014 at the conclusion of the substantive distribution hearing. Those representations have not, as yet, been set out in any formally pleaded case and thus LMP has not yet had an opportunity to respond.
60. The issue which I have to determine in relation to the application before me is whether, against this background and chronology, LS should be denied the opportunity to put forward a defence.
61. The impact, financially and otherwise, of denying LS the opportunity to challenge the claim for interest advanced by LMP is potentially serious. Enforcement of a judgment debt of a sum in excess of £100,000 would have far reaching consequences in terms of her future financial security. If the debt is found to be properly due and owing, then those consequences will have to be absorbed by LS to the extent that LMP chooses to enforce its debt inclusive of interest. However, if the court were to find that the new contractual arrangements agreed in March 2014 did not provide for interest and/or that the terms of the original retainer in respect of interest had been modified or waived, LS could potentially suffer a serious injustice if the judgment is allowed to stand. If LS can persuade the court that there were indeed specific discussions in or around January to March 2014 about a waiver of the interest provisions in the original retainer, she may well succeed in resisting the claim in relation to interest. It will all depend upon the court's assessment of the evidence which is presented. In this context, it may well be said that she has at least a realistic prospect of satisfying the 'real prospects of success' test for the purposes of setting aside at least part of the default judgment. That is not to anticipate or prejudge the weight which a court will attach to her evidence or the evidence relied on by LMP. I make it clear that I have not yet heard specific evidence on the point. Because of the manner in which LS's case has developed in its presentation whilst she has been conducting these proceedings in person, LMP has not yet had a proper opportunity to respond to the case which she seeks to advance by way of a formal Defence to the claim. She, in turn, must realise that, should she fail in that defence, there may well be further cost consequences which will follow.
62. However, even if I am wrong about her 'real prospects of success' for the purposes of CPR r.13.3(1)(a), I am persuaded that this is a case where there is indeed a good reason why she should be allowed the opportunity to defend the claim, at least insofar as it relates to interest. This case has a long, complex and protracted history. Whilst I have considered the issue of delay, on balance I do not consider that a sufficient basis for denying LS the relief which she seeks, at least in part.
63. Having considered matters carefully, I have reached a clear conclusion that the default judgment in the sum of £107,361.07 should be set aside for the purposes of enabling LS to defend the claim in relation to the interest element of the debt. It seems to me, however, that she has no arguable defence to the principal sum of £69,906 which was the sum outstanding in respect of her costs at the conclusion of the distribution hearing. Whilst she is entitled to look to RS for an indemnity in respect of that sum, my costs order does not, and cannot, displace the contractual liability which she has to pay that sum to LMP in respect of the professional services they provided. Subject to the enforcement of that debt, LS herself has accepted that liability (see paragraph 26 of my judgment). Mr Ilyas confirmed his instructions that LMP will not seek to enforce any judgment in that sum until the conclusion of the three day hearing in March next year (2018). That was a generous concession, albeit a realistic one.
64. By way of conclusion to this application I propose to make an order in the following terms:-
(i) The existing judgment debt in the sum of £107,361.07 will be varied and replaced with a judgment in favour of LMP in respect of a reduced sum of £69,906;
(ii) Pursuant to CPR r.40.8A, there will be a stay of execution in relation to that judgment debt until 9 March 2018 subject to any further directions made by the court at the conclusion of that hearing.
65. In terms of future case management, thought will need to be given to what further directions may be required in order to list the hearing of the claim in relation to interest in the debt recovery proceedings. The three day hearing in March next year will be absorbed almost entirely, I suspect, by issues relating to enforcement as between the former spouses and arrangements for the sale of Property R. In addition, LS has an extant application in relation to ongoing financial provision for the children. I am going to invite Mr Ilyas to give further consideration with his professional client to a draft order for further directions and the filing of any additional pleadings or evidence which may be necessary for disposing of the debt recovery proceedings. LMP is, of course, a party to the matrimonial proceedings for the limited purposes of the recovery of its debt. If matters cannot be resolved in the interim, then a listing will be needed for a separate hearing unless the court is able to accommodate an extension of the time which has been allocated to the existing hearing in March 2018. I shall give permission for a copy of my judgment and any order which flows from it to be served on RS and any legal advisers he instructs. Clearly, in the event that the hearing in March 2018 can be extended for these purposes, there will be no need for him to participate in the issue which has arisen as between LS and LMP in relation to the interest charges.
1 [2014] EWHC 175 (Fam)
2 [2014] EWFC 24
3 There was no separate judgment on that occasion which was used to perfect the terms of the final distribution order flowing from the financial remedy proceedings. The order was finally sealed on 19 May 2015.
4 She had been staying at Property F in Maidenhead over Christmas / New Year in 2015/2016 in order to attend the hearing on 12 January 2016 to which I have already referred.
5 the commercial litigation funding provider
Judgment, published: 12/03/2018
In a tweet: Solicitors' judgment debt varied so defendant can defend claim for interest owed Case note, 11/04/2018, members only